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Loan Agreement with Pledge of Shares as Security and Interest

This updated sample format is designed for a secured loan or inter-corporate lending transaction in India where shares are pledged as collateral. It covers the loan amount, interest, tenure, margin maintenance, pledge creation, default, enforcement, repayment and release of security.

Important: This is a general drafting template, not a substitute for transaction-specific legal, tax, securities or stamp-duty advice. Corporate parties should verify their authority and approvals under the Companies Act, 2013 and other applicable laws. Where shares are held in dematerialised form, the pledge should be created and recorded through the relevant depository system in accordance with applicable law and SEBI requirements.

Applicable Legal Framework in India

A share-pledge loan may involve several statutes and regulatory requirements depending on the parties, the nature of the securities and the transaction. Key provisions commonly relevant to this format include:

Official references: Indian Contract Act, 1872 - India Code | Depositories Act, 1996 - India Code | Companies Act, 2013 - MCA | SEBI Depositories and Participants Regulations

SAMPLE LOAN AGREEMENT

This Loan Agreement ("Agreement") is made at ________________ on this ____ day of __________, 20__.

BETWEEN

____________________________ LIMITED, a company incorporated under the Companies Act, 2013 and having its registered office at ______________________________ ("Lender"), which expression shall, unless repugnant to the context, include its successors and permitted assigns;

AND

____________________________ LIMITED, a company incorporated under the Companies Act, 2013 and having its registered office at ______________________________ ("Borrower"), which expression shall, unless repugnant to the context, include its successors and permitted assigns;

AND

____________________________ LIMITED, a company incorporated under the Companies Act, 2013 and having its registered office at ______________________________ ("Pledgor"), which expression shall, unless repugnant to the context, include its successors and permitted assigns.

The Lender, Borrower and Pledgor are individually a "Party" and collectively the "Parties".

RECITALS

A. The Borrower has requested the Lender to grant a secured loan/inter-corporate loan of ₹____________ (Rupees __________________________ only) for a period of ______ days/months from the date of disbursement.

B. Subject to its internal approvals and applicable law, the Lender has agreed to provide the loan on the terms set out in this Agreement.

C. As continuing security for repayment of the loan, interest and other secured amounts, the Pledgor has agreed to create a pledge over the securities described in Annexure I.

NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:

1. Loan and Disbursement. The Lender agrees to lend to the Borrower, and the Borrower agrees to borrow, ₹____________ (Rupees __________________ only) ("Loan"). The Loan shall be disbursed on _____________ by bank transfer or such other lawful mode as the Parties may agree in writing.

2. Tenure and Repayment. The Loan shall remain outstanding for ______ days/months from the date of disbursement and shall be repaid on or before _____________ ("Due Date"), together with accrued interest and other amounts payable under this Agreement. Any prepayment terms or charges shall be: __________________________.

3. Interest. The Loan shall carry interest at ______% per annum, calculated on __________________ basis and payable __________________. Any default or additional interest shall be charged only to the extent valid and enforceable under applicable law and shall be ______% per annum above the contractual rate.

4. Creation of Pledge. As security for all amounts due under this Agreement, the Pledgor shall create in favour of the Lender a pledge over the fully paid-up securities specified in Annexure I ("Pledged Securities"). Where the Pledged Securities are held in dematerialised form, the Parties shall complete the pledge through the applicable depository/depository participant mechanism and comply with the Depositories Act, 1996, applicable SEBI regulations, depository bye-laws and operational procedures.

5. Security Cover and Margin. The Parties agree to maintain a security cover/margin of ______%. The value of the Pledged Securities shall be determined on the basis of __________________. If the agreed cover falls below the required level, the Lender may issue a written margin notice requiring the Borrower/Pledgor, within ______ business days, to provide additional acceptable security or reduce the outstanding Loan.

6. Representations of the Pledgor. The Pledgor represents that it is the lawful beneficial owner of the Pledged Securities, has authority to create the pledge, and that the securities are free from any prior pledge, lien, charge or encumbrance except as expressly disclosed in writing to and accepted by the Lender.

7. Corporate Actions and Accretions. Subject to applicable law and the rights attached to the securities, bonus securities, rights entitlements, distributions or other accretions relating to the Pledged Securities shall be dealt with in the manner agreed by the Parties and, where required, appropriately brought within the security package through the depository system or further documentation.

8. Events of Default. Each of the following shall constitute an Event of Default: (a) failure to pay principal, interest or another amount when due; (b) failure to cure a margin shortfall within the agreed period; (c) breach of a material representation, covenant or undertaking; (d) invalidity or material impairment of the pledge; (e) insolvency, winding-up or similar proceedings affecting the Borrower or Pledgor, subject to applicable law; or (f) any other event expressly agreed here: __________________.

9. Enforcement of Pledge. Upon an Event of Default, the Lender may exercise the rights available to a pawnee/pledgee under the Indian Contract Act, 1872 and other applicable law. Any sale of pledged property under Section 176 shall be preceded by reasonable notice to the pawnor as required by law. For dematerialised securities, invocation, transfer and any subsequent dealing shall also comply with the Depositories Act, 1996, applicable SEBI regulations, depository rules, bye-laws and procedures. Net realisation shall be appropriated towards lawful enforcement costs and secured amounts, with any surplus dealt with in accordance with law.

10. Right to Redeem. The Pledgor's right to redeem the pledged property shall be governed by applicable law, including Section 177 of the Indian Contract Act, 1872.

11. Demand Promissory Note and Further Documents. If agreed, the Borrower shall execute a demand promissory note and such lawful ancillary documents as are reasonably required to give effect to this Agreement and the security created under it.

12. Costs, Taxes and Stamp Duty. Stamp duty, filing fees, depository charges and other transaction costs shall be borne by __________________, subject to applicable law. The Parties shall ensure that this Agreement and related security documents are duly stamped as required by the law applicable at the place of execution and/or the relevant transaction.

13. Notices. Notices under this Agreement shall be in writing and delivered by hand, recognised courier, registered post or electronic mail to the addresses notified by each Party. A Party shall promptly notify any change in its notice details.

14. Assignment. No Party may assign its rights or obligations except as permitted by this Agreement and applicable law. The Lender may assign or transfer its rights only in accordance with applicable contractual and legal requirements.

15. Amendments and Waiver. Any amendment shall be in writing and signed by the Parties. Failure or delay in exercising a right shall not by itself operate as a waiver.

16. Severability. If any provision is held invalid or unenforceable, the remaining provisions shall continue to the extent legally permissible, and the Parties shall replace the affected provision with a lawful provision that most closely reflects the original commercial intent.

17. Governing Law and Jurisdiction. This Agreement shall be governed by the laws of India. Subject to any valid arbitration clause agreed below, courts at __________________ shall have jurisdiction, subject to applicable law.

18. Dispute Resolution / Arbitration (Optional). Any dispute arising out of or in connection with this Agreement shall be resolved by __________________. If arbitration is chosen, the arbitration clause should specify the seat, venue, number of arbitrators, appointment mechanism and language, consistently with the Arbitration and Conciliation Act, 1996.

IN WITNESS WHEREOF, the Parties, acting through their duly authorised signatories, have executed this Agreement on the date and place first written above.

For the Borrower
Name:
Designation:
Authorised Signatory:
For the Pledgor
Name:
Designation:
Authorised Signatory:
For the Lender
Name:
Designation:
Authorised Signatory:

Witnesses

Witness 1
Name:
Address:
Signature:
Witness 2
Name:
Address:
Signature:

Annexure I - Details of Pledged Securities

Issuer ISIN Type/Class Quantity DP ID / Client ID Reference Value
____________ ____________ ____________ ____________ ____________ ₹____________

Pledge under the Indian Contract Act, 1872

Section 172 defines a pledge as the bailment of goods as security for payment of a debt or performance of a promise; the bailor is called the pawnor and the bailee the pawnee. Sections 173 to 175 address the pawnee's right of retainer and extraordinary expenses.

Section 176 deals with the pawnee's remedies where the pawnor defaults. In broad terms, the pawnee may sue on the debt while retaining the pledged goods as collateral or may sell the pledged goods after giving reasonable notice of the sale. Section 177 preserves the defaulting pawnor's right to redeem at any subsequent time before the actual sale, subject to payment of the debt and expenses arising from the default.

For securities held with a depository, Section 12 of the Depositories Act, 1996 specifically recognises creation of a pledge or hypothecation through a depository and the recording of that security interest in depository records.

Practical Checklist Before Signing

Frequently Asked Questions

Which law governs a pledge of shares in India?

A pledge is principally governed by Sections 172 to 179 of the Indian Contract Act, 1872. For securities held in dematerialised form, the Depositories Act, 1996 and applicable SEBI depository regulations and procedures are also relevant.

Can pledged shares be sold immediately after default?

Enforcement must follow the pledge document and applicable law. Section 176 of the Indian Contract Act, 1872 contemplates reasonable notice before sale by the pawnee. Dematerialised securities must also be dealt with through the applicable depository and SEBI framework.

Does a company need approvals before granting an inter-corporate loan?

Potentially yes. The lender should examine the Companies Act, 2013, including Sections 179, 185 and 186, applicable rules and exemptions, its articles of association and required board or shareholder approvals.