If the lender of money (pledgee) has unilateral right (without reference to borrower) to appropriate the securities to his A/c if the borrower of money (pledgor) defaults or otherwise, then the transaction is called a pledge.
If the lender needs concurrence of the borrower (pledgor) for appropriating securities to his A/c, then the transaction is called hypothecation.
Ownership of the pledged/hypothecated securities remains with the pledgor until the pledge/hypothecation is invoked.
The pledge/hypothecation created can either be closed on repayment of loan or invoked if there is a default. After the pledgor has repaid the loan to the pledgee, the pledgor initiates the closure of pledge/hypothecation through its DP and the pledgee instructs its DP to confirm the closure of the pledge/hypothecation.
If the pledgor defaults in discharging his obligation under the agreement, the pledgee may invoke the pledge/ hypothecation. This has to be done after taking the necessary steps under the terms of the agreement with the pledgor and as stated in the Bye-Laws of the depository and rules and regulations framed by SEBI.
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