Loan Against Shares - Copy

INTRODUCTION

Loan against shares is available in the form of an overdraft facility against the pledge of

financial securities like shares/units/bonds. After you submit the loan application with all the

share certificates and other relevant documents, a current account is opened in your name.

You can then withdraw up to the amount sanctioned and interest will be charged only for the

number of days you use the amount. The loan amount that can be sanctioned depends on two

factors: the extent of funding on a particular stock and the price (called the base price)

considered by the lender for calculating the value of the shares.

The Reserve Bank of India (RBI) allows banks to lend up to 65 per cent of the value of demat

shares and 50 per cent of the value of physical shares. However, banks can, and do, fix their

own limits with respect to the extent of funding within that range. Generally, demat shares

get you a larger loan amount, in a much faster time, at lesser rate of interest and at smaller

processing fee, than those in physical form. Every lender has an approved list of securities

that he lends against and this list varies from one lender to the other.

It is for investor in stock and mutual funds. If you want to raise money real fast and, that too,

at a cost lower than personal loan, investor can pledge yours shares to various private or

public sector banks and immediately receive a loan/overdraft facility to tide over your cash

crisis. By giving a simple lien on your shares to the bank, you can continue to let your shares

and mutual fund unit compound your investment. You don’t have to sell your shares or

redeem funds and book a profit (or a loss), especially if you are a long-term shares or unit

holder.

Among the ways in which banks offer you quick credit is through an overdraft facility on

your bank account, or a plain vanilla loan on your investment in shares and mutual fund. It is

usually the private sector banks that give you an overdraft facility. While those in the public

sector offer you a plain vanilla loan and, in some cases, even an overdraft facility.

If borrowing is the last resort to fund your need, then overdraft against shares is preferable to

personal loan as it is cheaper by around 100 to 200 basis point in return in terms of interest

cost. An overdraft against shares makes you pay interest only for the amount you utilize

which could be for lower than your drawing power. But in a loan against shares, you might

not be optimally using all the money, but would still end up bearing an interest cost the entire

sum borrowed.

When you pledge your shares or unit to the banks you can still enjoy all the dividend and

bonus shares and also get to retain the ownership. It is an also get option for meeting a

contingency, but is best avoided to meet consumption expenses. A loan against shares could

be viable option if you want to raise some money quickly.

Looking to pledge securities with a bank? You will now get only up to Rs 20 lakh loans

against shares from the entire banking system. However, these shares would have to be held

in the dematerialized form. For shares held in the physical form you would only get Rs 10

lakh. Thanks to RBI's revised guidelines on banks’ capital market exposure. These guidelines

would come into effect from April 1, 2007.

The central bank has permitted banks to extend finance to employees for purchasing shares of

their own companies under employee’s stock option (ESOP) to the extent of 90% of the

purchase price of the shares or Rs 20 lakh, whichever is lower.

To ensure compliance with prescribed ceilings the banking regulator has directed banks to

obtain a declaration from the borrower indicating details of loans availed against shares and

other securities, from any other banks.

This is an easy to use overdraft facility granted against approved shares owned either by you

(the borrower) or your immediate relatives (third party pledges). It is the ideal way to get

instant liquidity against shares without selling them.

Finance against Shares is an overdraft facility that gives you the power to buy the latest car,

acquire real estate or invest in a new rights issue without having to sell and disturb your

carefully built portfolio. The base price considered by the lender for calculating the value of

the shares will be a major determinant of how much you can borrow. The base price may be

either the last traded price or the moving average of the last 10 days. .

.

The base price may well be different from the current market price.

The loan is extended against shares of eligible companies and, in a few cases,

units of reputed open-ended mutual funds.

Generally, a maximum of 20 shares can be pledged, at a time.

Only fully paid-up shares, in the lender’s approved list of securities, are accepted.

Shares held in the name of minors, HUFs, NRIs and companies are generally not

accepted.

Loans against mutual fund units are based on their Net Asset Value NAV value.

WHAT IS MEANT BY LOAN?

A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of

financial assets over time, between the lender and the borrower. In a loan, the borrower

initially receives or borrows an amount of money, called the principal, from the lender, and is

obligated to pay back or repay an equal amount of money to the lender at a later time.

Typically, the money is paid back in regular installments, or partial repayments; in an

annuity, each installment is the same amount.

The loan is generally provided at a cost, referred to as interest on the debt, which provides an

incentive for the lender to engage in the loan. In a legal loan, each of these obligations and

restrictions is enforced by contract, which can also place the borrower under additional

restrictions known as loan covenants. Although this article focuses on monetary loans, in

practice any material object might be lent. Acting as a provider of loans is one of the

principal tasks for financial institutions. For other institutions, issuing of debt contracts such

as bonds is a typical source of funding.

TYPES OF LOAN

SECURED LOAN

A secured loan is a loan in which the borrower pledges some asset (e.g. a car or

property) as collateral for the loan.

A subsidized loan is a loan that will not gain interest before you begin to pay it. It is

known to be used at multiple colleges.

An unsubsidized loan is a loan that gains interest the day of disbursement.

A mortgage loan is a very common type of debt instrument, used by many individuals

to purchase housing. In this arrangement, the money is used to purchase the property.

The financial institution, however, is given security — a lien on the title to the house

— until the mortgage is paid off in full. If the borrower defaults on the loan, the bank

would have the legal right to repossess the house and sell it, to recover sums owing to

it.

A stock hedge loan is a special type of securities lending whereby the stock of a

borrower is hedged by the lender against loss, using options or other hedging

strategies to reduce lender risk.

TYPES OF LOAN

SECURED UNSECURED DEMAND

PERSONAL

&COMMERCIAL

MORTGAGE HOME LOAN BUSSINESS EDUCATION

LOAN AGAINST

SHARE

In some instances, a loan taken out to purchase a new or used car may be secured by

the car; in much the same way as a mortgage is secured by housing. The duration of

the loan period is considerably shorter often corresponding to the useful life of the

car. There are two types of auto loans, direct and indirect. A direct auto loan is where

a bank gives the loan directly to a consumer. An indirect auto loan is where a car

dealership acts as an intermediary between the bank or financial institution and the

consumer.

A type of loan especially used in limited partnership agreements is the recourse note.

BUSSINESS LOAN

Before starting a business, the entrepreneur should be mentally and financially prepared to

encounter the fiscal setbacks during the process. To bail the companies out from the fiscal

crunch, several banks in India offers business Loans both for meeting urgent official growth

and expenses.

UNSECURED LOAN

Unsecured loans are monetary loans that are not secured against the borrower's assets. These

may be available from financial institutions under many different guises or marketing

packages:

Credit card debt

Personal loans

Bank overdrafts

Credit facilities or lines of credit

Corporate bonds (may be secured or unsecured)

The interest rates applicable to these different forms may vary depending on the lender and

the borrower. These may or may not be regulated by law. When applied to individuals, these

may come under the Consumer Credit Act 1974.

DEMAND LOAN

Demand loans are short term loans (typically no more than 180 days) that are atypical in that

they do not have fixed dates for repayment and carry a floating interest rate which varies

according to the prime rate. They can be "called" for repayment by the lending institution at

any time. Demand loans may be unsecured or secured.

PERSONAL OR COMMERCIAL

Loans can also be subcategorized according to whether the debtor is an individual person

(consumer) or a business. Common personal loans include mortgage loans, car loans, home

equity lines of credit, credit cards, installment loans and payday loans. The credit score of the

borrower is a major component in and underwriting and interest rates (APR) of these loans.

The monthly payments of personal loans can be decreased by selecting longer payment terms,

but overall interest paid increases as well.

Loans to businesses are similar to the above, but also include commercial mortgages and

corporate bonds. Underwriting is not based upon credit score but rather credit rating.

MORTGAGE LOANS

Many banks offer mortgage loans, which permit borrowers to live in a home while paying it

off over time. A cash down payment of 5 percent to 20 percent is usually required, and the

house is seized in foreclosure if payments are not made.

HOME LOAN

To buy a dream home is the dream of every person. Home Loan has helped in changing

every Indian's dream into reality. However, the every increasing property rates and escalating

rates of interest sometimes act as an obstacle. Therefore, before opting for a home loan it is

advisable to check every prospect of the product

LOAN AGAINST SHARES

The main purpose of taking loans against shares is to preserve investment, apart from taking

care of personal needs. People also resort to such a loan to meet their contingencies and get

liquidity without actually selling the shares. It is advisable to take loan against equity (shares

& debentures) only when you are expecting a certain sum of money a few months down the

line and you need some funds in the interim. If you are reinvesting the loan amount, ensure

that the benefits you derive are more than the cost you have to incur (which includes interest

and processing fee). Carefully consider the risk involved in such a move.

Loan against shares is available in the form of an overdraft facility against the pledge of

financial securities like shares/units/bonds. After you submit the loan application with all the

share certificates and other relevant documents, a current account is opened in your name.

You can then withdraw up to the amount sanctioned and interest will be charged only for the

number of days you use the amount. The loan amount that can be sanctioned depends on two

factors: the extent of funding on a particular stock and the price (called the base price)

considered By the lender for calculating the value of the shares.

EDUCATION LOAN

Education Loans offered by various banks in India provide much required assistance to fund

your child's education when all other resources of finance get exhausted. Education Loans

are offered by almost every Indian bank thus providing ample opportunity to students to

undergo higher education both in India and abroad.

MEANING OF SHARES

According to the section 2(46) of the Company’s Act 1956, Share means capital of the

company is divided into small equal parts is and distribute to the public it is called shares. For

example :- if the company has 10,00,000 shares and the price of the share is @ Rs.10 each

then the value the company or capital of the company is Rs.1,00,00,000 In simple Words, a

share or stock is a document issued by a company, which entitles its holder to be one of the

owners of the company. A share is issued by a company or can be purchased from the stock

market.

By owning a share you can earn a portion and selling shares you get capital gain. So, your

return is the dividend plus the capital gain. However, you also run a risk of making a capital

loss if you have sold the share at a price below your buying price.

A company's stock price reflects what investors think about the stock, not necessarily what

the company is "worth." For example, companies that are growing quickly often trade at a

higher price than the company might currently be "worth." Stock prices are also affected by

all forms of company and market news. Publicly traded companies are required to report

quarterly on their financial status and earnings. Market forces and general investor opinions

can also affect share price.

Shares are the best investment available over a long period of time. The growth of share

prices comfortably out-paces inflation most years because the best share prices represent the

growth in earnings of the best companies. Although the stock market is seen as "high risk"

this depends very much on timing and the sort of shares you invest in. It is possible to invest

in shares with very little risk if you are willing to put in a great deal of effort in learning the

art of investment and doing ample research.

Shares have acquired a high-risk reputation because the majority of people only participate in

the stock market during bull markets, buying at or near historic high prices in the belief that

past returns may by a good indicator of future results. Those that buy just before a crash do

not appreciate share valuations and upside potential vs. downside risk. In fact such

considerations actually bore them and many newcomers choose to trade shares in a highly

speculative fashion, making the stock market into little more than a casino.

The rewards are great, but the penalty for laziness is also great. Those that buy on "hot tips"

and rely on the opinions of others, without any knowledge of what they are doing are often

those who suffer the greatest loss. .

A "share" is nothing more, and nothing less than a partial ownership of a business. If you

look at shares investment as the partial purchase of businesses, you are already half way to

becoming a successful investor (the other half is to get some idea of what a business is worth,

economically, and hence to be able to value a share). If you think of shares as part ownership

of businesses you have a substantial advantage over those who think of them only as abstract

pieces of paper with a randomly fluctuating price tag. .

Direct share investment is not suitable for everyone, many simply do not have the time or the

inclination to research a portfolio adequately, and will be exposed to the greatest dangers

when they do take the plunge and buy something. Managed funds are available that give

returns roughly in line with market averages (if you take into account tax and trading

expenses) and these are by far a superior investment for those that do not wish to make

investment their profession. .

Shares, as a whole, are not highly speculative investments with a low probability of success.

The chances of making money in shares over all but the shortest time frames are excellent;

however you need more than just money and a desire to succeed in order to invest

successfully. .

No one should be afraid of the stock market; it does not crash without reason at any random

time. If you choose to ignore stocks out of fear of a market downturn, you ignore the best

investment that there is.

TYPES OF SHARE

PREFERENTIAL SHARES

According to Sec 85(1), of the Companies Act, 1956, a preference share is one, which carries the following two preferential rights. .

(a) The payment of dividend at fixed rate before paying dividend to equity shareholders.

(b) The return of capital at the time of winding up of the company, before the payment to the equity shareholder. .

Both the rights must exist to make any share a preference share and should be clearly mentioned in the Articles of Association. Preference shareholders do not have any voting rights, but in the following conditions they can enjoy the voting rights:

(1) In case of cumulative preference shares, if dividend is outstanding for more than two years.

(2) In case of non-cumulative preference shares, if dividend is outstanding for more than three years.

(3) On any resolution of winding up.

(4) On any resolution of capital reduction.

TYPES OF PREFERENCE SHARES : In addition to the aforesaid two rights, a preference shares may carry some other rights. On

the basis of additional rights, preference shares can be classified as follows:-

CUMULATIVE PREFERENCE SHARES:

Types of Shares

PreferentialShare

Equity Share

Cumulative preference shares are those shares on which the amount of divided if not paid in

any year, due to loss or inadequate profits, then such unpaid divided will accumulate and will

be paid in the subsequent years before any divided is paid to the equity share holders.

Preference shares are always deemed to be cumulative unless any express provision is

mentioned in the Articles. .

NON-CUMULATIVE PREFERENCE SHARES:

Non-cumulative preference shares are those shares on which arrear of dividend do not

accumulate. Therefore if divided is not paid on these shares in any year, the right receive the

dividend lapses and as such, the arrear of divided is not paid out of the profits of the

subsequent years. .

PARTICIPATING PREFERENCE SHARES:

Participation preference shares are those shares, which, in addition to the basic preferential rights, also carry one or more of the following rights:

(a) To receive dividend, out of surplus profit left after paying the dividend to equity shareholders.

(b) To have share in surplus assets, which remains after the entire capital has been paid on winding up of the company.

NON-PARTICIPATING PREFERENCE SHARES:

Non-participation preference shares are those shares, which do not have the following rights;

(a) To receive dividend, out of surplus profit left after paying the dividend to equity

shareholders.

(b) To have share in surplus assets, which remains after the entire capital has been paid on

winding up of the company. Preference shares are always deemed to be non-participating, if

the Article of the company is silent.

CONVERTIBLE PREFERENCE SHARES:

Convertible preference shares are those shares, which can be converted into equity shares on

or after the specified date according to terms mentioned in the prospectus.

NON-CONVERTIBLE PREFERENCE SHARES:

Non-convertible preference shares, which cannot be converted into equity shares. Preference

shares are always being to be non-convertible, if the Article of the company is silent.

REDEEMABLE PREFERENCE SHARES:

Redeemable preference shares are those shares which can be redeemed by the company on or

after the certain date after giving the prescribed notice. These shares are redeemed in

accordance with the terms and sec. 80 of the Company’s Act 1956.

IRREDEEMABLE PREFERENCE SHARES:

Irredeemable preference shares are those shares, which cannot be redeemed by the company

during its life time, in other words it can be said that these shares can only be redeemed by

the company at the time of winding up. But according to the sec. 80 (5A) of the Company’s

(Amendment) Act 1988 no company can issue irredeemable preference shares.

EQUITY SHARES : According to section 85 (2), of Companies Act, 1956, Equity share can be defined as the

share, which is not preference shares. In other words equity shares are those shares, which

not have the following preferential rights:

(a) Preference of dividend over others.

(b) Preference for repayment of capital over others at the time of winding up of the company.

These shares are also known as ‘Risk Capital’, because they get dividend on the balance of

profit if any, left after payment of dividend on preference shares and also at the time of

winding up of the company, they are paid from the balance asset left after payment of other

liabilities and preference share capital. Apart from this they have to claim dividend only, if

the company in its A. G. M. declares the dividend.

DEMAT ACCOUNT

Definition:-

Demat account is a safe and convenient means of holding securities just like a bank account

is for funds. Today, practically 99.9% settlement (of shares) takes place on demat mode only.

Thus, it is advisable to have a Beneficiary Owner (BO) account to trade at the exchanges.

Demat account allows you to buy, sell and transact shares without the endless paperwork and

delays. It is also safe, secure and convenient.

In India, a demat account, the abbreviation for dematerialized account, is a type of banking

account which dematerializes paper-based physical stock shares. The dematerialized account

is used to avoid holding physical shares: the shares are bought and sold through a stock

broker.

This account is popular in India. The Securities and Exchange Board of India (SEBI)

mandates a demat account for share trading above 500 shares. As of April 2006, it became

mandatory that any person holding a demat account should possess a Permanent Account

Number (PAN), and the deadline for submission of PAN details to the depository lapsed on

January 2007.

Is a Demat Account a must?Now a day, practically all trades have to be settled in dematerialized form. Although the

market regulator, the Securities and Exchange Board of India (SEBI), has allowed trades of

up to 500 shares to be settled in physical form, nobody wants physical shares any more. So a

demat account is a must for trading and investing

Why Demat A/C?

The demat account reduces brokerage charges, makes pledging/hypothecation of shares

easier, enables quick ownership of securities on settlement resulting in increased liquidity,

avoids confusion in the ownership title of securities, and provides easy receipt if public

issue allotment.

It also helps you avoid bad deliveries caused by signature mismatch, postal delays and loss of

certificates in transit. Further, it eliminates risks associated with forgery, counterfeiting and

loss due to fire, theft or mutilation. Demat account holders can also avoid stamp duty (as

against 0.5 per cent payable on physical shares), avoid filling up of transfer deeds, and obtain

quick receipt of such benefits as stock splits and bonuses.

What is Dematerialization?

Dematerialization is the process by which physical certificates of an investor are converted to

an equivalent number of securities in electronic form and credited into the investor’s account

with his/her DP.

What is Physical share?

Physical shares are in paper form which cannot be traded online. For trading online first you

have to open a demet account with any depository then get the shares dematerialized then

only you can sell it.

First you have to open a depository account and then send the paper form of your shares to

demat form. Then only you can sell it online. Or else find some known person who purchases

from you in paper form and you will get much lower price than the market price.

BENEFITS OF DEMAT ACCOUNT

1. A safe and convenient way of holding securities (equity and debt instruments both).

2. Transactions involving physical securities are costlier than those involving dematerialized

securities (just like the transactions through a bank teller are costlier than ATM

transactions). Therefore, charges applicable to an investor are lesser for each transaction.

3. Securities can be transferred at an instruction immediately.

4. Increased liquidity, as securities can be sold at any time during the trading hours (between

9:55 AM to 3:30 PM on all working days), and payment can be received in a very short

period of time.

5. No stamp duty charges.

6. Risks like forgery, thefts, bad delivery, delays in transfer etc, associated with physical

certificates, are eliminated.

7. Pledging of securities in a short period of time.

8. Reduced paper work and transaction cost.

9. Odd-lot shares can also be traded (can be even 1 share).

10. Nomination facility available.

11. Any change in address or bank account details can be electronically intimated to all

companies in which investor holds any securities, without having to inform each of them

separately.

12. Securities are transferred by the DP itself, so no need to correspond with the companies.

13. Shares arising out of bonus, split, consolidation, merger etc. are automatically credited

into the demat account of the investor.

14. Shares allotted in public issues are directly credited into demat account of the applicants

in quick time.

BANK ACCOUNT

You have many choices concerning how you manage your money. It help you understand

your choices if you decide to put money in an account at a depository institution such as a

bank, savings and loan association, savings bank, or credit union. There are a variety of

different types of bank accounts, such as a checking account, money market account, savings

account, certificate of deposit, and more. You want to determine the bank account that is right

for you.

There are many reasons for opening a bank account. Having your money in a bank account is

safer than holding cash. A bank account may be a less expensive way to manage your

finances than alternatives such as buying money orders to pay your bills or paying a business

to cash your paycheck. A bank account may help you save money, since it is often easier not

to touch your savings if you keep them in a bank or other institution. Finally, having a bank

account may make it easier to keep track of your money and how you spend it.

Choosing a bank account to open is like choosing other products. Many different products are

available -- some plain, some fancy, some less and some more expensive than others.

Because costs and features of bank accounts vary greatly, it is important to shop around to

make sure the bank account you choose is the best one for you.

Why Demat Account is similar to Bank Account ?

Just as you have to open an a/c with a bank if you want to save your money, make cheque

payments etc, you need to open a demat a/c if you want to buy or sell stocks. So, it just like a

bank a/c where actual money replaced by shares.

Example: - Let us presume your portfolio has 100 of SATYAM, 200 of IBM and 120 of TCS

shares. All these will show in your a/c. so you don’t have to possess any physical certificate

that you own these shares. They all are held electronically in your a/c.

NECESSITIES FOR LOAN AGAINST SHARES

Necessary Conditions

The shares should be on the approved list of the bank, which would be revised

from time to time.

The shares should be fully paid up

Scripts in the name of corporate, minors, Firms, HUF, and NRIs are not eligible

for finance under this scheme

The directors or promoters of companies cannot pledge scripts of the same

company.

All shares should be strictly in their marketable lots.

FEATURES OF LOAN AGINST SHARES

Finance against Shares enables instant liquidity against shares without selling them.

It takes care of all your investment as well as personal needs, meet contingencies, subscribing to primary issues, rights issues.

Best for interim (short term) funding.

Loan amount ranges from Rs.1 lakh to Rs.10 lakh (for physical) and up to Rs.20 lakhs (for Demat)

For Demat – usually 65% of the scrip pledged is available as overdraft and 50% – if shares are physical.

Generally physical shares are accepted in market lots only.

There is a minimum and maximum number of scrip which are accepted by

banks. It ranges from 1-20 although, for few banks there is no limit to

maximum.

DOCUMENTS REQUIRED

Shares in Demat Form

Request form for transaction.

Photocopy of dividend warrants of shares and units to be pledged.

Covering letter from the company received by the shareholder at the time of

transfer.

Shares in Physical Form

Share certificates

Signed and valid transfer deeds (not more than a month old)

Photocopies of dividend warrants of shares and units to be pledged

Allotment letter for rights or bonus shares from the company, or broker contract

note specifying share certificate and distinctive numbers.

Covering letter from the company received by the shareholder at the time of

transfer.

General Information

The amount of loan that can be availed under "Loans against Shares" depends on

the form of shares - physical or demat. A minimum amount of Rs. 50,000 has to

be taken under the scheme. As for the maximum amount, it is up to Rs. 10, 00,000

for physical shares and up to Rs 20,00,000 for Demat shares.

The rate of interest that is charged on loan against shares usually ranges between

12% and 18%. An extra interest of 2% p.a. might also be charged on the amount

by which your outstanding amount exceeds the limit and for the period it is in

excess.

Apart from your own shares, you can also pledge the shares of your spouse,

children (above 18 years of age), parents, brother(s)/sister(s), in laws,

grandparents and grandchildren (above 18 years of age)

The amount of loan that you will get depends on the valuation of the security,

applicable margin, your ability to service and repay the loan and other conditions,

as applicable from time to time and from bank to bank

The charges that are levied in case of loan against shares include processing fees

(usually 1-1.5% of the loan amount) and, at times, documentation charges (varies

from bank to bank).

In case of demat shares; around 65% of the amount of scripts pledged is available

as overdraft. The percentage drops down to 50% if the shares are in physical for

PROCESS OF TAKING LOAN AGAINST SHARES

The loan against shares process starts from choosing the bank or institution you want to take

loan from. The loan against shares process then entails you to fill the required application

form and provides the required supporting documents. The lender then performs a thorough

verifications and checks to validate the authenticity of the borrower. Then on verifications, as

a last step of loan against shares process, a borrower’s account is opened and loan is

disbursed into the account for the user to withdraw. Because of the usefulness of the loan

against shares, the product has been fast catching up on the popularity.

PROCESS

REASON FOR TAKING LOAN AGAINST SHARES

Choosing Bank

Fill The Require Application Form

Providwe Required Supporting Document

Verification By Lender

Checks To Validate Authenticity Of The Borrower

Borrower A/C Open

Loan Is Disbused Into The Account For The User To

Withdrow

To prevent investment.

Taking care of personal needs.

To meet their contingencies.

To get their liquidity without swelling their shares.

To get the overdraft facility against the pledge of financial securities.

The resort to fund our needs.

LOAN WILL NOT BE SANCTIONED FOR

Speculative purposes.

Inter-corporate investments.

Acquiring controlling interest in company/companies.

BENEFITS OF LOAN AGAINST SHARES

Loan against financial instruments is a good option for short-term funds. At a time

when personal loans have become a norm, most consumers remain unaware of loans

against securities, including shares, mutual funds and other financial instruments.

Today, almost all the private banks and PSUs offer such loans in the market, with the

rate of interest varying from 12% to 15%

These loans are not only hassle-free but also offer immediate liquidity. “Unlike other

loans, you can easily avail of a loan against share and securities. But you should have

some good scripts and valued securities. Generally, it takes a day or two to get it,”

The added advantage with such loans is that there are no pre-payment charges in most

cases and an overdraft facility is also attached to them.

Another advantage, analysts point out, is that the interest is only calculated on the

amount you use. “Personal loan and loan against property are generally EMI-based

products, where interest is payable after the loan is disbursed.

In case of loan against shares, the interest is charged only on utilization of the limits

sanctioned and only for the number of days it is utilized. However, most people who

take a loan against share and securities, use it as a leverage mechanism and invest it

back into the market, which one should avoid”

Analysts also believe that loan against shares and securities are a viable option if

you’re looking for short-term liquidity. But one should always keep a check on the

amount utilized. After all, you would not like to lose your gains and end in a debt-trap.

BANKS PROVIDING LOAN AGAINST SHARES

State Bank of India (SBI)

Industrial Credit and Investment Corporation of India (ICICI)

Citibank

Housing Development Finance corporation (HDFC )

Axis Bank

Standard Chartered

Industrial Development Bank of India (IDBI)

Corporation Bank

RESEARCH METHODOLOGY

Research methodology is the way to systematically solve the research problem. Research

methodology just does not deal with research methods but also consider the logic behind the

methods. It may be understood as the science of studying how research is done scientifically

and systematically.

The steps followed by the researcher in this project are as follows:

In the first phase study was undertaken for Loan against share.

Suitable Banks were selected which provide loan against shares.

Schedules were made and bank visits was done to get information.

Other data related to LAS procedure and document requirement and interest rate

according to amount was collected.

The pattern of LAS was deeply observed.

Questionnaire:

A questionnaire was prepared and was filled up by Investors & Bank Employees. The

questionnaire was spread over with questions related to investing strategies used and the

procedure for the same.

A copy of questionnaire is attached herewith as Annexure.

LIMITATIONS OF STUDY

There was limited scope of gathering confidential information.

The psychological condition varies from place to place because in many places

respondents were not supportive.

Lack of awareness amongst bank employee.

DATA COLLECTION

The task of data collection begins after a research problem has been defined and research

design chalked out. While deciding about the method of data collection to be used for the

study, there is requirement of two types of data;

1. Primary Data

2. Secondary Data

PRIMARY DATA

The primary data are those which are collected afresh and for the first time, and thus happen

to be original in character. Primary data do not exist in record and publication. The researcher

would have to decide which sort of data he would be using for his study and accordingly he

will have to one or the other method of data collection. The method of collecting primary and

secondary data differ since primary data are to be originally collected, data the nature of data

work is merely that of compilation. The data was collected through:

1. Observation Method, and

2. Questionnaires

SECONDARY DATA

The data referred to those which had gathered for some other purpose and already available in the firms initial record and commercial, trade or sources of secondary data.

1. Internet

2. Published secondary data

3. Books

A vast amount of Primary data was collected through interviews and secondary data was

collected through various books, journals and Internet sites appreciated in Bibliography.

An exploratory research was conducted in order the study the consumer perception about

various banks offering retail products and the banks they opt for.

OBJECTIVES OF THE STUDY

To understand the procedure & process of LAS.

Costing involved in LAS.

To study the client segmentation & Profile of LAS.

To analyze the interest procedure.

To cross check the documents required for opening an account.

To check the awareness among the people.

DATA ANALYSIS AND INTERPRETATION

COMPARATIVE STUDY OF BANKS

Citi bank & ICICI bank

PRODUCT NAME Citi Bank Stock Power ICICI bank Loan against

Securities

BANK NAME CITIBANK ICICI

INTEREST RATE Most competitive rates levied

on reducing balance method

NA

PROCESSING FEES NA 2000 on a/c opening and

1500 at renewal end of the

year

MAXIMUM LOAN AMT

Get up to 50% of the market

value of securities as your

overdraft limit. Approx. 375

approved equity shares and

mutual funds

Minimum 1 lakhs

Maximum 20 lakhs

MARGIN NA 50% value of shares pledged

SECURITY No security need except

shares pledged

No security need except

shares pledged

Bonus/dividends Enjoyed by the owner of the

shares

Enjoyed by the owner of the

shares

IDBI & SBI

PRODUCT NAME IDBI LOAN AGAINST

SHARES

SBI LOAN AGAINST

SHARES/DEBENTURES

INTEREST RATE NA 14.50%

PROCESSING FEES

NA NA

MAXIMUM LOAN

AMOUNT

Rs 20 Lakhs

You can avail of loans up to

Rs 20.00 lakhs against your

shares/debentures.

MARGIN Margin is 50% of the value

of the securities pledged

You will need to provide a

margin amount of 50% of the

prevailing market prices of

the shares/ non-convertible

debentures being offered as

security. (The market prices

refer to the prices in the

Stock Exchanges as reported

in the Economic Times.)

SECUTRITY Pledged shares Pledge of the demat

shares/debentures against

which overdraft is granted.

BONUS/DIVIDENDS Earned by owner For owner of the shares

HDFC & CORPORATION BANK

PRODUCT NAME HDFC Loan against

securities

Loan against

shares

Corp Cash demat-

Share Loan

INTEREST RATE HDFC AXIS Corporation bank

PROCESSING FEES Up to 2% of the

overdraft limit with

minimum of Rs.1250/-

at the time of setting

up the limit or

enhancement or

1% processing fees

no other charges

0.50% of the limit

sanctioned, subject to

a minimum of Rs.

500/- and maximum

of Rs. 5000/-

annual renewal. (In

case of mid-term

enhancement of limits,

processing fees will be

charged only on a pro-

rata basis)

MAXIMUM LOAN

AMT

overdraft of up to 50%

of the market value of

your Demat shares, in

amounts ranging from

Rs. 50,000/- to Rs.

20,00,000/-.

1 lakh to 20 lakhs Minimum Rs.

50,000/- ; Maximum

Rs. 20.00 lakh

[ A declaration from

the borrower

indicating aggregate

of loans against

shares availed by

him/her from our

Bank / Financial

Institutions should be

obtained]

PRODUCT NAME HDFC Loan against

securities

Loan against

shares

Corp Cash demat-

Share Loan

MARGIN 50% of the market

value of the shares

50% of the value of

the total shares

pledged

Minimum 50% of the

market value of

shares pledged

SECURITY No security needed

other than the pledged

shares

Only pledged shares Pledge of fully paid

up Equity Shares of

approved companies,

which are mandated

for compulsory

trading in Demat

form loan.

DIVIDNED/BONUS Enjoyed by the owner

of the shares

Enjoyed by the

owner of the shares

Enjoyed by

shareholders

Bank Account v/s Demat Account

S.

No.

Basis Of

DifferentiationBank Account Demat Account

1.Form of

Holdings/Deposits Funds Securities

2. Used for Safekeeping of money Safekeeping of shares

3. Facilitates

Transfer of money

(without actually

handling money)

Transfer of shares

(without actually

handling shares)

4. Where to open A bank of choiceA DP of choice (can be a

bank)

5.Requirement of

PAN NumberNot Mandatory

Mandatory (effective

from April 01, 2006)

6.Interest accrual

on holdings

Interest income is subject

to the applicable rate of

interest

No interest accruals on

securities held in demat

account

7.Minimum balance

requirement

AQB* maintenance is

specified for certain bank

accounts

No such requirement

8.Either or Survivor

facilityAvailable Not available

*AQB - Average Quarterly Balance

DIFFERENCE BETWEEN PERSONAL LOAN AND LOAN AGAINST

SHARE

Personal loan Loan against Security/shares

It is an unsecured loan It is a secured loan.

The interest rate. It is high The rates are from 12 to 15%

The rates start at 12% and go up to 28%. Your shares and debentures are the security for

your loan.

Normally, when a loan is given, there is

some security expected from you, the

borrower. So you end up pledging your

home, car, securities or gold.

You can borrow around 40-60 percent of the

value of the shares, with an upper cap of Rs 20

lakh if the security is equity shares.

If you cannot pay back the loan, the lender

can take any of the items you pledged. He

just is protecting himself.

Lower rate of interest

Guarantor is needed Does not require guarantor or security

How much an Investor can avail under this scheme?

The amounts an investor can avail of under "Loans against Shares" depend on whether you

have physical or demat shares. Now you can get an overdraft of minimum Rs. 50,000 and

maximum Rs. 1,000,000 for physical shares held by you, and up to Rs 2,000,000 for Demat

shares held by you.

The base price considered by the lender for calculating the value of the shares will be a major

determinant of how much you can borrow. The base price may be either the last traded price

or the moving average of the last 10 days. .

The base price may well be different from the current market price.

In the form of Demat Shares, Banks Sanction Maximum 60% to

80%Loan

Let us take an example to explain how much Mr. X can borrow. .

If Mr. X has 200 demat shares of Satyam and the base price taken is Rs 550.Let us suppose

the bank gives 60% funding against Satyam demat shares, the loan amount would be 60% of

(550*200) = 66,000Rs.

Formula of Loan against Shares

Loanamount=QuantityOf Shares∗Per Unit PriceOf Shares❑

Loanamount= 200∗550❑

Loanamount= 1 ,10 ,000❑

Loan amount will be sanction by banks in the form of Demat shares Rs.

66,000

In the form of Physical Shares, Banks Sanction Maximum 50% Loan

If Mr. X has 200 physical shares of Satyam and the base price taken is Rs 550.Let us suppose

the bank gives 50% funding against Satyam demat shares, the loan amount would be 50% of

(550*200) =55,000Rs.

% of Loan

60 %

60 %

Loan Amount = Rs. 66,000

Formula of Loan against Shares

Loanamount=QuantityOf Shares∗Per Unit PriceOf Shares❑

Loanamount=200∗550❑

Loanamount=1 ,10 ,000❑

Loan amount will be sanction by banks in the form of physical shares Rs.

55,000

Ranking of Banks

SBI

AXISICICI

IDBIHDFC

CORPORATION

CITIBANK

STD CHARTE

D0

1

2

3

4

5

RANKING

RANKING

% of Loan

50 %

50 %

Loan Amount = Rs. 55,000

As per the findings and survey SBI declares to be the topers in providing loan against

shares.

Axis bank and ICICI bank has the lowest interest rate applicable for loan still stands

out to be in the 3rd position

Banks rate of interest for loan against shares in Percentage

Rate of Interest

SBI AXIS ICICI IDBI HDFC CORPORATION CITIBANK STD CHARTED02468

1012141618

14.5 15 15 15.5 1615

1617

14 14.5 14.5 15 15.5 14.75 15.516.5

0-10lakhs 10-20lakhs

SBIs rate of interest is 14.50% for shares, debentures and bonds.

Axis rates fluctuates as per the market changes its lending rate is 15% for loan

ranging between 1-10 lakhs and 14.50% for 10-20 lakhs

Corporation bank has a lending rate of 15.00 % p.a with EMI

Awareness in Customers for Loan Against Shares In %

Customer Awareness Chart

SBI AXIS ICICI IDBI HDFC0

10

20

30

40

50

60

40

25 25

0 0

60

50 50

25 25 lowesthighest

SBI states that 40% to 60% of its customers are aware of loan against shares

Axis and ICICI say 25% to 50% of it customers are aware of loan against shares

IDBI and HDFC 0 to 25% of customers aware of loan against shares

TYPE OF PEOPLE WHO BUY SHARES

Profession Shares in%

Businessman 35

Government Employee 25

Employee Working 20

Professional 20

35%

25%

20%

20%

Shares in %

BusinessmanGovernment EmployeeEmployee WorkingProfessional

Most of the shares purchased shares by Businessman i.e. 35 %.

The second number for purchased shares Government Employee i.e. 25%.

The third and fourth number for purchased shares Employee Working and

Professionals

i.e. 20 % .

NUMBER OF SHAREHOLDER

Sr. No.

NUMBER OF SHARES HOLDER

SHARES IN %

1 Shares Holder 60

2 Non Share Holder 40

60%

40%

NUMBER OF SHAREHOLDER

Shares HolderNon Share Holder

In the survey I found 60% customer are shareholders.

The other i.e. 40% customer don’t have shares.

TAKING LOAN AGAINST SHARES

LOAN TAKING ON SHARES SHARES IN %

SHARES 83

LOAN TAKER ON SHARES 17

83%

17%

LOAN TAKING ON SHARES

SHARESLOAN TAKER ON SHARES

According to the study conducted, 60% of the respondents are in possession of

shares. So the pie chart represents 60 % of the respondents. (For this representation,

we have considered 60

% as 100 %.) Amongst them, 17 % respondents have taken loan against shares

PERCENTAGE OF CUTOMERS FOR LOAN AGAINST SHARES OUT ON TOTAL

LOANS

SBI states 5% of its customers are for loan against shares because most of its customers are

industrial loans. Axis bank holds 20% to 25% of its customers, HDFC and Corporation bank

are not even awre of the customers they hold for loan against shares out of total 100% loan

borrowers, IDBI has a lesser digit of customers for same.

MARKETING SRATEGIES

SBI has a huge network so marketing is done via publicity.Neither of the banks go for

marketing of such loan they have leads through demat accounts and very less walkins.

RECOVERY

The overdraft if not rcovered after a specific tenure than the bank sells of the scripts at the prevailing

market price for recovery.

LOAN TENURE

SBI To be liquidated in maximum period of 30 months

through a suitable reducing DP programmed.

In case of a default or if the outstanding is over

Rs.20.00 lakhs, the shares/debentures will be

transferred in the name of the Bank.

ICICI The initial tenure is for a year. At the end of the

year, it will automatically be renewed for another

year unless we receive intimation in writing from

you not to do so.

HDFC A year

IDBI Facility will be renewed after every 12 months

depending on the performance of the account.

AXIS BANK Renewed after a year

CORPORATION BANK Facility will be renewed after every 12 months

depending on the performance of the account.

STANDARD CHARTED NA

CITIBANK Subject to renewal after a year

LOAN AMOUNT GRANTED

ICICI Minimum loan amount is 1 lakh

Maximum loan amount is 20 lakh

The loan is applicable for a year and subject to renewal at the end of each year

SBI You can avail of loans up to Rs 20.00 lakh against your shares/debentures.

HDFC Minimum loan amount: Rs. 50,000/-

Maximum loan amount is 20 lakhs in case of shares and bonds.

IDBI Minimum loan amount is Rs 25,000

Maximum of Rs 20 Lakhs (subject) to Loan against shares/Equity based mutual fund.

AXIS Minimum loan amount is 1 lakh

Maximum loan amount is 20 lakhs

CITIBANK Get 50% of the market value of the shares or bonds approx 375 approved equity

. shares and mutual funds.

STANDARD CHARTED An individual can avail a maximum limit of Rs.20 Lakhs against the security of

Shares / Equity Mutual Funds. This limit is higher for other securities.

Corporation Bank Minimum amount 50000

Maximum amount 20 lakhs

CUSTOMER REVIEW

I had taken a loan against my equity shares from IDBI Bank, Dharampeth branch, Nagpur

last year. Now, since the value of the shares was slipping, I wanted to sell some shares and

close the loan. My share was quoting at Rs.623 when I told them at 2.55 pm, a full 35

minutes before close of market hours, to sell the shares, but they did not sell the shares, citing

lack of enough time to carry out the transaction. This by itself was not acceptable. Next day, I

decided to see the rate and then confirm to them to sell the shares, which I did at about 10.30

am.  However, despite my repeated attempts to find out when and at what rate they sold the

shares, they did not inform me on phone or email about the sale.  Then, at about 5 pm, they

informed that they have sale orders from all over the country and hence could not sell the

shares till market closure time.  I was understandably, quite upset about the whole thing, as

my experience with any other bank was not like this.  Normally, they would take about 5 to

10 minutes to get your order executed.  Then, surprisingly, the same staff called me and

informed that the shares were sold at market closure time, at about Rs.599 per share, whereas

in the morning and even later on during the day, the same shares were selling at about Rs.620

per share.  Further, when they sent me the scanned contract note, it transpired that their

internal subsidiary was the broker firm, whereas they had informed me earlier that they

themselves handled the transaction.  When I tried to verify the contract on NSE’s site, I could

not do so, as the number of digits given by them in the contract note was much lesser than the

number of digits required by NSE, as per law.  Despite asking them for the same by

telephone, email and also complaining to the email address found on their website under

CITIZEN’S CHARTER, till date, i.e. after about a week, I am yet to get the required details.  

Since I cannot verify on the NSE site after 5 days of the transaction, it means I cannot verify

the details now, unless I go through some other, tougher process.

Mr. Sandip Deshmukh

CONCLUSION

According to the study on loan against shares it can be concluded that it is the easiest

and simplest method to acquire funds for business or personal use with less time

incurred and quick sanction period.

It improves liquidity.

There is no EMI levied making it hassle free

Much better option than personal loans

Helps in securing the shares converting it in electronic form by way of demat account

SBI declares to be the bank providing the lowest rate of interest per as per the findings

AXIS BANK has comparatively pleasing rate of interest

It is approved within a short period of time not much paper work required.

Basic purpose of this report is to create an awareness of loan against shares because

the staff member themselves of particular banks are not aware of product in their

bank.

SUGGESTIONS

Banks should make loan against share available in major retail branches of the bank.

Banks should make the staff aware that loan against share exits in the market as staff

member themselves are not aware of loan against share is provided by their banks.

Rate of interest is not disclosed by either of the banks.

Nationalized bank like SBI manger is not even briefed with loan against shares

general information so they should be trained in all the segments with some amount

of information.

BIBLIOGRAPHY

WEBSITES:

www.moneycontrol.com

www.sbi.com

www.icici.com

www.idbi.com

www.hdfcbank.com

www.axisbank.com

www.standardchartered.co.in

www.corporationbank.com

www.citibank.co.in

BOOKS:

Prasanna Chandra, Investment Analysis & Portfolio Management (2008), Third Edition, Tata McGraw- Hill Publishing Company limited.

Dr. K. Natarajan & E. Gordon, Financial Market and Services (2009), 5th

Edition, Himalaya Publishing House.

I.M. Pandey, Financial Management (2008), 9th Edition Vikas Publication House Pvt.Ltd

C.R. Kothari Research Methodology (2004), 2nd Revised Edition New Age International (P) Ltd Publishers

MAGAZINES:

Outlook Money

Economic times

Business Standard

REFERENCES:

State Bank Of India (SBI)

Ms. Roshani Borade (Branch Manager)

Industrial Development Bank Of India (IDBI)

Mr. Vikas Rai (Branch Manager)

Annexure

Questionnaire

Name :___________________________________

Gender : Male Female

Age : _______

Education

Professional Businessman

Government Employee Employees Working

Q. 1. Are you aware about loan against share?

Yes No

Q.2. Do you possess shares of any listed company?

Yes No

Q.3. Have you taken loan against the shares held?

Yes No

Q.4. If yes, from which bank?

---------------------------------------

Q.5. According to you which bank charge lower interest rate?

---------------------------------------------

Q.6. Are you satisfied with the overall service provided by Bank?

Yes No

Q.7. Did you face any difficulty while taking Loan Against Shares?

Yes No

Thank you for your valuable time.