In our last column we explained some of the non-financial transactions that investors would have to deal with, with regard to their mutual funds.

This week, we take you through certain other transactions; namely lien on mutual fund units, the process to avail a loan and also the method of redemption.

What is a lien and a pledge?

A lien is a hold on the units that are pledged. Pledging is the process of providing a security to borrow money. For example, when an investor approaches a lender for a loan, he may be required to provide a security to get the loan. There are many such securities that can be accepted depending on the amount and tenure of the loan. Common securities are: gold, shares, units of a mutual fund, land/building, or any other redeemable asset.

The investor can approach a bank, or any of the financial institution to avail of a loan. Each financial institution (FI) has a defined process; normally there are standard forms to be filled in with all particulars and importantly what is the amount of loan that is required.

The FI studies the proposal, analyses the security, and sanctions the loan based on the set criteria; normally the FIs keep some margin when they grant loans.

How is a lien marked?

The FIs send a letter to the Registrar and Transfer Agency (R&T) marking a lien in the books; and the R&T will block the units of the investor and confirm to the FI in writing.

They will not redeem the units until the revocation instruction from the FI. The R&T will get a letter from the investor.

What happens when a Fund house declares dividends?

Dividends can be paid to the investor or to the FI depending on the agreement between the FI and the investor. Reinvested units can be free of lien or come under lien again based on the agreement between the lender and borrower. The R&T must take cognisance of these aspects and act accordingly as per the terms and conditions of the agreement.

Can the investor pledge the same units in two different FIs?

An investor can pledge the units in two different FIs but for different units.

Added to this, the investor can pledge units of different schemes or schemes of different fund houses to avail a single loan.

What happens when the investor does not repay the loan?

The FI has the right to invoke the lien and ask for the redemption of the units; the R&T will release the amount after getting a ‘no objection' from the investor; in favour of the FI.

What happens when the investor repays the loan?

Again the FI sends the request to cancel the lien and the R&T confirms that the lien is released. The units then become available for redemption.

The investor can redeem or choose to remain invested in the scheme.

Can the investor pledge the same units again?

Yes the investor can pledge the units if they are free of lien.

(The author is CEO, Sundaram BNP Paribas Fund Services.)

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