A loan against shares allows an investor to borrow funds by pledging listed equity shares as collateral, without selling the shares. The lender sanctions a loan based on a percentage of the shares’ market value, and the investor continues to hold the underlying shares subject to the pledge.
This is a market-linked form of borrowing, and investors should understand how it works, including the impact of share price movements on the loan, before pledging shares as collateral.
What is a loan against shares?
It is a secured loan where listed equity shares held in a demat account are pledged in favour of a lender. The shares are not sold; they are marked as pledged, and the investor retains ownership, including entitlement to dividends, subject to the lender’s terms.
Because share prices fluctuate, lenders typically apply a loan-to-value ratio well below the shares’ full market value, and reserve the right to request additional margin if prices fall.
What investors should know before borrowing
- The loan amount is directly tied to the market value of the pledged shares, which can change daily
- A fall in share price can reduce the loan’s cover and may trigger a margin call
- Not all listed shares are eligible; lenders maintain an approved list based on factors such as liquidity and volatility
- This is a market-linked form of collateral, so the loan carries more monitoring requirements than, for instance, a loan against fixed deposits
- It suits investors who have conviction in holding their shares long-term but need short-to-medium term liquidity
Features of loan against shares
- Available against shares on the lender’s approved list, typically well-established, liquid stocks
- Loan amount is a percentage of the current market value of eligible pledged shares
- Shares remain in the investor’s demat account, marked as pledged, not transferred
- Often structured as an overdraft facility, with interest charged only on the amount drawn
- Loan-to-value is monitored on an ongoing basis due to share price volatility
Benefits of borrowing against shares instead of selling
| Aspect | Loan against shares | Selling shares |
| Ownership | Retained, shares remain pledged not sold | Given up upon sale |
| Market participation | Continues to benefit from future price movement | Ends at the point of sale |
| Tax implication | Generally no capital gains tax on pledging | Capital gains tax may apply on sale |
| Ongoing risk | Loan cover depends on share price movement | None, once sold |
Eligibility
- Shares must be held in the applicant’s own demat account
- Shares should be part of the lender’s approved list of eligible securities
- Applicant must meet the lender’s KYC and creditworthiness requirements
- Loan amount and tenure are subject to the value and category of the shares pledged
Loan process
- Review the lender’s approved list of eligible shares and indicative loan-to-value
- Submit the application with demat account and KYC details
- Pledge the selected shares in favour of the lender through the depository
- Lender verifies the pledge and sanctions the loan based on eligible value
- Funds are disbursed, often as a running overdraft limit against the pledged shares
Loan-to-value (LTV)
LTV for shares is generally more conservative than for lower-volatility instruments like fixed deposits, given the potential for sharper price movements. LTV can also vary by individual stock, based on its liquidity and volatility profile.
While LTV determines the maximum amount that can be borrowed, the loan against shares interest rate determines the cost of financing. Investors should compare both the applicable LTV and the loan against shares interest rate across lenders before making a borrowing decision. Since these figures are reviewed periodically and vary by lender, current details should always be verified on the lender’s official website.
Interest and repayment
Where structured as an overdraft, interest is typically charged only on the utilised amount, which can make the facility efficient for investors who need funds intermittently rather than as a lump sum.
Applicable interest rates and processing fees vary and should be verified on the lender’s current rate and fee schedule before applying.
Risks and considerations
- Share prices can be volatile, and a decline can quickly reduce the loan’s collateral cover
- A margin call requires the borrower to either pledge additional shares or repay part of the loan promptly
- Failure to meet a margin call as per the loan terms can result in the lender selling pledged shares to recover dues
- This facility is best suited to investors comfortable monitoring their loan-to-value and market conditions regularly
Conclusion
A loan against shares gives investors a way to access liquidity while continuing to hold their equity investments, but it requires closer monitoring than loans backed by more stable collateral, given share price volatility.
Investors should review the eligible share list, applicable loan-to-value, and current interest rates on the lender’s official pages, and assess their comfort with market-linked risk before pledging shares.
FAQs
Can I pledge any listed share for this loan?
No, only shares on the lender’s approved list of eligible securities can typically be pledged. Eligibility is often based on factors like liquidity and volatility.
Do I continue to receive dividends on pledged shares?
Ownership is retained by the investor, so dividend entitlement generally continues, subject to the lender’s specific terms.
What is a margin call in this context?
A margin call occurs when a fall in share price reduces the loan’s collateral cover below the required level, requiring the borrower to pledge additional shares or repay part of the loan.
Is loan against shares riskier than loan against fixed deposits?
It carries more market-linked risk because share prices are more volatile than fixed deposit values, which is why lenders apply more conservative loan-to-value ratios and monitor pledged shares more closely.
How is interest calculated on a loan against shares?
If structured as an overdraft, interest is usually charged only on the amount utilised. Exact rates depend on the lender and should be checked on the current rate schedule.
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