Span of Welspun: Is pledge/unpledge a trade under PIT?
– Payal Agarwal, Partner | corplaw@vinodkothari.com
An August 2025 Informal Guidance by SEBI for Welspun Corp Limited sought to clarify the applicability of contra trade on release of pledge. However, it goes on to say that: “…in case of creation of pledge/ revocation, the beneficial ownership does not change till pledge is invoked”. While the IG was specific to revocation of pledge, this seems to be creating a confusion on the contra trade restrictions on creation of pledge. In this article, we discuss the nature of pledge as a trade, and applicability of trading related restrictions on various stages of pledge. Also see a detailed article on treatment of various stages of pledge as trading under PIT Regulations.
Is pledge a trade?
- Answer is yes
- Trading means dealing in securities in any form [Reg 2(1)(l) of PIT Regulations]
- Explanation to the definition expressly includes “pledging”
- Creation of pledge may be considered equivalent to disposal/ intent to dispose the shares
Is release of pledge a trade?
- Technically, a release (or so-called revocation) of a pledge is also a trade. However, given there is no change in beneficial ownership, there is no concern, at least from a contra trade perspective
- There is no actual acquisition or intent to acquire shares, it is mere restoring back the position as it was prior to the creation of pledge
- The shares are coming back to the person who was the beneficial owner of such shares previously.
Is invocation of pledge a trade?
- No, since invocation of pledge is not at the discretion of the holder of shares
- Invocation results in actual disposal of shares, however, related compliances w.r.t. such shares are undertaken at the stage of creation of pledge itself
Examples to understand contra-trade on pledge
Any opposite trade within 6 months of a prior trade attracts violation of contra-trade, except in case of specific waiver for a bona fide purpose. We discuss various combinations of trades within a span of 6 months to understand whether such trades attract contra-trade restrictions.
| Transaction 1 | Transaction 2 | Is it contra-trade? | Can a waiver be granted by CO? |
| Purchase of shares (Buy) | Creation of pledge (Sell) | Yes, opposite trades within 6 months | Yes, if the DP is able to demonstrate the urgency and bona fide nature of such transaction |
| Creation of pledge (Sell) | Purchase of shares (Buy) | Yes, opposite trades within 6 months | In such a case, it is very difficult to prove bona fide of the subsequent trades of purchase of shares after creation of pledge. |
| Creation of pledge (Sell) | Release of pledge | No, since the release of pledge does not result in an opposite trade per se, it is incidental to the primary trade of pledge creation and only restores back the position as it was prior to creation of pledge. | NA |
| Release of pledge | Creation of pledge with another person (Sell) | No | Yes, if the DP is able to demonstrate the urgency and bona fide nature of the underlying transaction for which the pledge is to be created |
| Purchase of shares (Buy) | Invocation of pledge (Sell) | No, since the invocation of pledge is not at the discretion of the shareholder. The relevant act of disposal of shares is taken into account as a “trade” upon creation of pledge itself, and hence, not considered as “trade” again, upon such invocation. | NA |
| Invocation of pledge (Sell) | Purchase of shares (Buy) | NA |
What is a bonafide purpose in the case of a pledge?
How does the Compliance officer verify/ensure that the purpose of the pledge is bonafide?
There cannot be any sure or one-size-fits-all response to this. Pledge is not for its own sake; pledge for an underlying transaction, which may be margin trading facility, borrowing, etc. The Compliance Officer should see whether that underlying transaction is within the regular business or activity of the pledgor. Whether the pledge is limited to the shares of the listed entity or has other securities? Whether the pledgee is an entity which is engaged in providing similar facilities to several unrelated entities? Whether the timing of the pledge is not indicating the advantage of a price spurt, etc.
Compliances applicable to various stages of pledge
The applicability of contra trade restrictions on the various stages of pledge are tabulated hereunder:
| Stage of pledge | Nature of trade (Acquisition/ Disposal) | Pre-clearance required? | TWC applicable? | Contra-trade restrictions applicable? | Remarks |
| Creation of pledge | Disposal | Yes | No, if the trade is bona fide | Yes | While creation of pledge amounts to trade, exemptions from TWC and contra trade may be availed if the trade is for bona fide purpose. |
| Release of pledge | Acquisition | No | No | No | No change in beneficial ownership, and no actual acquisition/ disposal – mere restoration of the position prior to creation of pledge |
| Notice of invocation of pledge | NA | NA | NA | NA | No dealing in securities, mere notice specifying intent |
| Invocation of pledge | Disposal, however, continuation of the prior action of creation of pledge | No | NA | No | Invocation of pledge is done by the pledgee upon default. Once a pledge is created, the pledgor has no control over the invocation of such pledge upon default. Further, since creation of pledge is itself considered as ‘disposal’, the same shares cannot be considered to have been ‘disposed’ again, upon invocation. |
| Sale of pledged securities | Disposal, however, continuation of the prior action of creation of pledge | No (however, intimation to CO post sale, if not covered by System Driven Disclosure) | NA | No | Sale of pledged securities is done by the pledgee, and is not under the control of the pledgor. Further, since creation of pledge is itself considered as ‘disposal’, the same shares cannot be considered to have been ‘disposed’ again, upon sale. |
Though creation is treated equivalent as sell, actual sale realization is happening only at the time of invocation. Hence in my view pledge creation cannot by itself treated sell for the purpose of contra trade restriction, as there is no intent on the part of pledgor to sell at the time of creation. Even from understanding perspective, pledge creation happens at price on the date of pledge but invocation can only happen at the price at the time of invocation which cannot be controlled by the pledgor, hence a pledgor cannot typically manipulate the stock market by pledging and buying again within 6 months. Would like to hear thoughts on this.
is there any guidance from SEBI to clarify Pledge creation & subsequent buy is contra?