Negative deposit clauses help bondholders protect their investments. Where a bond includes a negative deposit clause, it prevents the issuer from borrowing future debt that may affect its ability to meet obligations to existing bondholders. As noted above, promoters may mortgage their shares in order to meet various business or personal requirements. A negative deposit clause also limits the likelihood that a given asset will be mortgaged more than once and thus prevents conflicts with the lending institution that is entitled to the asset in the event of default by the borrower. In the case of real estate mortgages, many credit agreements contain terminology that prevents the borrower from using the mortgaged property as collateral for a new loan, except in the case of refinancing. When a financial institution grants an unsecured loan to a natural or legal person, it may include in the contract a negative deposit clause to protect itself. A negative deposit clause is a kind of negative covenant that prevents a borrower from mortgaging assets if it would compromise the security of the lender. This type of clause can be part of traditional bonds and credit structures. In credit agreements, the guarantee is the pledging of real estate given by a borrower to a lender in order to ensure the repayment of a loan.   Collateral serves as a lender`s protection against a borrower`s default and may be used for loan offsetting if the borrower does not pay the principal and interest satisfactorily in accordance with the terms of the credit agreement. On the other hand, the violation of a negative deposit clause can cause a default of the loan, although a technical default. Lenders usually give an assigned time interval, for example. B 30 days, to repair a Covenant breach before proceeding with the failure procedures.
This is due to the fact that the seizure of shares is a sign of poor cash flow, a low-solvency company with high debt and the inability to meet short-term requirements. (If the promoters have mortgaged a high percentage of shares, then it`s still worth finding out why.) A decrease in stock foreclosure over time is a good sign for investors. On the other hand, increasing stock seizures can be dangerous for both promoters and shareholders. Quality companies can also be victims if the seizure of shares is not reduced over time. Mortgages sometimes contain negative deposit clauses. You can find the mortgaged share as a percentage of the total sharing shares on most major financial sites like Moneycontrol, Screener, etc. In the worst case, if the promoters do not make up the difference, the lender can sell the mortgaged shares on the open market to get their money back. This minimum guarantee value is agreed in the contract between the lenders and the promoters. Therefore, the lender has the right to sell the mortgaged shares of the value if the value is less than the minimum value. In addition, stock seizure can lead to disaster if the share price continues to fall. This is because promoters must systematically mortgage more shares to cover the difference in the value of the guarantee. The reduction in the value of the security right is the main risk for the guarantee of loans with marketable assets.
Financial institutions shall closely monitor the market value of financial assets held as collateral and shall take appropriate action when the value is subsequently below the maximum loan ratio set in advance. . . .