Investors can pledge their units as security to financiers like banks, financial institutions and borrow against their mutual fund units.

To do so, a lien has to be marked against the units. Lien refers to the right of the financier to take and hold or sell the property/asset of a debtor as security or payment for a debt.

We discuss the process of marking a lien on mutual fund units.

Marking a Lien

An investor can approach a financier / banker and can get a loan or overdraft facility sanctioned by pledging his mutual fund units as security. He should then send a letter to the mutual fund / Registrar requesting the fund to mark a “lien” on the units in favour of the financier.

The letter should:

Clearly state the name of the investor which should match with the name in the mutual fund records

State the folio number, scheme and the number of units for which lien is to be marked.

Be signed by the Unit Holders as per the mode of holding i.e. by all holders if the mode of holding is Joint

Be accompanied by a letter from the financier stating the above.

It should be noted that a lien is marked on units and the request to mark lien will be rejected if only the amount is mentioned in the letter.

The fund/scheme/ number of units mentioned in the letter from the financier should tally with that of the investor.

The number of clear units available for marking lien (i.e units not locked due to being tax saving schemes etc.) should be equal to or more than the number of units pledged. The Registrar will mark the lien and a letter is sent to the financier with a copy to the investor confirming the marking of a lien on the units.

Removal of Lien

The financier (lender) can ask for the removal of the Lien and send a request letter to the fund house.

This request should clearly state the name of the investor, fund, folio number, scheme and the number of units for which the lien should be removed.

A financier can also request for a partial removal of lien in which case, lien on some of the units will be removed and these units become ‘free' units.

This can happen when financiers receive part payments.

Normal and Dynamic

If the financier in his letter of request for marking a lien mentions only the number of units on which the lien is to be marked, it is a Normal Lien. This would mean that any dividends reinvested or any future accrual in the scheme would be free and not under lien.

However, if the request specifically states that future accruals to the existing investment like dividend reinvestment are to be marked under lien, then it is called Dynamic Lien.

Enforcement of Lien

If the borrower defaults in making payment, the financer can enforce the lien i.e. send a signed request to the mutual fund to redeem the units and the mutual fund will send the proceeds / cheque to the financier.

(Contributed by Investor Education Team of CAMS. The views are general practices in the mutual fund industry and may vary, case-to-case.)

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