A vehicle loan
The borrower drives the car, while the bank holds a charge over it until the loan is repaid.
Net Worth & Solvency Glossary · Net Worth Mechanics
Hypothecation in Indian Lending and Net Worth Proof
noun · a "hypothecation loan" is one secured this way; a "hypothecation charge" is the lender's claim over the assets
Definition
Hypothecation is a charge a borrower creates over movable property, such as a vehicle, stock or receivables, as security for a loan, without handing the property over to the lender.
The borrower keeps and uses the asset. The lender's protection lies in the charge document and its registration.
Who holds what
The split the definition turns on. Nothing changes hands; only the paperwork does.
Stays with the borrowerThe asset, in use
Driven, sold, collected and replaced as the business needs.
Held by the lenderThe charge document and its registration
Its claim over the asset until the loan is repaid.
Movable property commonly hypothecated
- A vehicle
- Stock that turns over
- Receivables
Meaning
01Hypothecation defined: a charge without handing over the goods
In banking, a hypothecation loan is one secured this way.
Assets in daily use
Businesses hypothecate machinery in use, stock that turns over and receivables that are collected and replaced. A "hypothecation charge" is the lender's claim over those assets.
Why it works
This is what makes hypothecation workable for assets a business needs every day. Nothing leaves the borrower's hands.
Why it is easy to forget
Hypothecated assets look unencumbered to anyone relying on inspection alone. Only the paperwork shows the charge.
On a certified statement
02Disclosing hypothecated vehicles, stock and receivables to the certifying CA
A hypothecated asset still belongs to the borrower, so it appears on a statement of assets at its value. In substance, though, it is encumbered.
The correct presentation shows four things together
- The assetat its value
- The charge over itnoted against the asset
- The amount outstandingunder the facility
- The lenderwho holds the charge
The reader can then see the net position without having to find the charge in their own search.
Common cases
A vehicle under a running loan
The registration certificate is in the borrower's name, and the loan sits in a separate account.
Stock and receivables charged to a working capital facility
Shown as assets, with the facility shown as a liability and the charge noted.
A repaid loan whose charge was never released
An unsatisfied charge on the record is a question a lender will raise even though nothing is owed.
A CA preparing a net worth certificate signed by a CA asks about each vehicle and each stock or receivables facility specifically. Clients answer accurately about a specific asset and vaguely about "borrowings" in general.
Cross-checks
03CERSAI filings, RC book endorsements and MCA Form CHG-1 in Indian practice
India has a good record trail for hypothecation, and a CA uses it as a cross-check rather than taking the client's word.
Company charges on the public record
Company charges are filed with the Registrar of Companies and appear on the Ministry of Corporate Affairs public record. Form CHG-1 is the form used to file them.
Under section 77 of the Companies Act, 2013, the company must register the charge with the Registrar "within thirty days of its creation", in the words of the section; the Registrar may allow a further sixty days on payment of additional fees. A charge left unregistered is not taken into account by a liquidator or any other creditor.
CERSAI
CERSAI, India's central record of securitisation, asset reconstruction and security interest, holds registrations of security interests, and lenders search it before sanctioning a loan.
The vehicle registration certificate (RC book)
The RC book carries the financier's name endorsed on it, visible to anyone who looks.
Between these records, a charge left out of a certificate is likely to surface before the file is decided. Where the register and the client's account disagree, the register governs, and the difference is raised rather than reconciled quietly.
Written by Subham Jhunjhunwala · Reviewed by CA Sundram Gupta
This entry describes Indian practice in general terms and is not legal advice on a particular charge.
Need help with a certificate that uses hypothecation? See our Net Worth Certificate.A certified statement that shows each charged asset with the charge, the amount outstanding and the lender.