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Khaitan & Co. Update
The Supreme Court held that the Indian Contract Act, 1872, which is a substantive and general law relating to contracts, and the Depositories Act,1996 which is primarily a law relating to securities, are to be read together and interpreted harmoniously.
The court held that section 12 of the DP Act - pertaining to creation of pledge over dematerialised shares - is not ex facie inconsistent with the obligations of a pawnor and a pawnee under the Contract Act.
The provisions of contract law governing pledge shall continue to be applicable even in the case of pledge over dematerialised shares and are not overridden or diluted by the DP Act.
In view of the above, the SC examined the issues before it by placing reliance on ICA and DP Framework.
With pledge over dematerialised shares being extremely common as a collateral in debt transactions, the SC’s clarification is of significance in case of enforcement of pledged shares in demat form and is likely to have a far-reaching impact on lending transactions in India.
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