Taking a loan against shares (LAS) is a way to access liquidity without selling valuable shares. This enables investors to leverage their equity portfolio to meet immediate financial needs, such as business expansion or personal expenses.
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How LAS works
Under LAS, investors may pledge their shares as collateral to secure a loan. Banks and non-banking financial companies (NBFCs) offer this service, with the loan amount usually capped at 50% of the market value of the pledged shares. The borrower can continue to retain ownership of the shares, enjoy dividends and voting rights. However, the shares are held in a demat account, with a pledge marked in favour of the lender until the loan is repaid. The loan can be structured as a lump sum or an overdraft facility, giving flexibility to the borrower.
Eligibility
Borrowers must hold shares in listed companies approved by the lender. In addition to shares, some institutions allow securities like mutual funds or bonds to be pledged.
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Documentation
To be able to process the LAS request, the bank or NBFC may ask for the following documents:
- KYC documents (PAN, Aadhaar).
- Proof of ownership of shares or securities (demat account statements).
- Proof of income (bank statements, salary slips, IT returns).
Loan terms
One of the benefits of LAS is that interest rates tend to be lower than those for unsecured loans like personal loans. The tenure for such loans varies, often between one and three years. Lenders typically offer flexible repayment options, allowing borrowers to pay monthly interest and repay the principal at the end of the tenure.
Points to note
- If the market value of the pledged shares falls significantly, the lender might ask for additional collateral or partial repayment, which is termed as a margin call.
- The loan amount is limited to a percentage of the portfolio’s current market value.
