What Is Hypothecation?
Hypothecation is a charge created over movable property — such as raw materials, finished stock, machinery, vehicles, or book debts — where the property stays in the borrower's possession instead of being handed over to the lender. It is the standard security structure behind working-capital loans, because it lets a business keep using its inventory and collecting its receivables while a bank or NBFC holds a registered claim over them.
The term is defined in Indian law at section 2(1)(n) of the SARFAESI Act, 2002 (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, Act No. 54 of 2002): hypothecation "means a charge in or upon any movable property, existing or future, created by a borrower in favour of a secured creditor without delivery of possession of the movable property to such creditor, as a security for financial assistance and includes floating charge and crystallization of such charge into fixed charge on movable property." Three things follow from this wording: the property can be existing or future (so a lender can take a charge over stock that has not yet been manufactured or purchased), possession never moves to the lender, and the charge can start as a "floating" charge over a changing pool of stock and later crystallise into a fixed charge on a specific set of assets — typically on default.
Hypothecation vs. Pledge vs. Mortgage
Foreign investors setting up an Indian subsidiary often confuse the three main forms of Indian security over property, because English-language finance documents use them almost interchangeably. Under Indian law they are distinct:
- Pledge — the borrower (pawnor) delivers actual or constructive possession of movable property (gold, shares, warehouse receipts) to the lender (pawnee). Possession is the defining feature.
- Hypothecation — a charge over movable property (stock-in-trade, raw materials, receivables, vehicles, plant and machinery) without any transfer of possession. The borrower keeps operating the asset.
- Mortgage — a charge over immovable property (land and buildings), created with or without transfer of possession depending on the type of mortgage.
A single working-capital facility commonly combines all three: a hypothecation charge over stock and book debts, a pledge of some marketable securities as additional collateral, and a mortgage over the company's factory land — each governed by different registration and stamping rules.
Registering a Hypothecation Charge — Section 77 of the Companies Act, 2013
When the borrower is a company, creating a hypothecation charge is only half the transaction. Section 77 of the Companies Act, 2013 makes it "the duty of every company creating a charge... on its property or assets or any of its undertakings, whether tangible or otherwise" to register the particulars of that charge with the Registrar of Companies (ROC), together with the instrument creating it, on the prescribed charge-registration e-form, Form CHG-1.
Deadlines and Fees
The registration timeline for a charge created by a company currently works as follows, under the provisos to section 77(1) as substituted by the Companies (Amendment) Act, 2019:
| Stage | Deadline | Fee |
|---|---|---|
| Normal registration | Within 30 days of creating the charge | Normal ROC filing fee |
| First extension | Within a further period, up to 60 days of creation, on application to the Registrar | Additional fee |
| Second extension | A further period, up to 120 days of creation, on application to the Registrar | Ad valorem fee |
If the charge is still not registered after that window, the company (or a creditor) must apply for condonation of delay before the ROC can accept the filing. Once the charge is registered, section 77(2) requires the Registrar to issue a certificate of registration of the charge to the company and to the person in whose favour the charge is created. If a company fails to register at all, section 77(3) provides that no charge "shall be taken into account by the liquidator... or any other creditor" — an unregistered charge does not bind a liquidator or a later secured lender, even though it can still be enforced against the borrower personally.
Stamp Duty on Hypothecation Deeds
A hypothecation agreement is also a stampable instrument, and stamp duty in India is a state subject — the rate is set by each state's own Stamp Act, not by a single national schedule, so the duty on the same loan can differ from state to state. In Gujarat, for example, a hypothecation agreement currently attracts a fixed duty rather than a duty calculated as a percentage of the loan amount, following a 2025 amendment to the state's stamp schedule; other states levy the duty ad valorem on the sum secured. Foreign investors negotiating a facility that will be executed in a particular state should confirm that state's current stamp schedule (or ask their bank's panel counsel to confirm it) before signing, rather than assuming the rate quoted for one state applies nationally.
Why Hypothecation Matters for a Foreign Company or Investor
For a foreign-owned Indian subsidiary, hypothecation is usually the fastest route to working-capital finance:
- No loss of operating assets. A trading or manufacturing subsidiary can borrow against its stock-in-trade and receivables while continuing to sell that stock and collect those receivables in the ordinary course of business — unlike a pledge, which would take the goods out of circulation.
- Standard bank product. Cash-credit and overdraft facilities from Indian banks and NBFCs are routinely secured by a hypothecation of inventory and book debts, alongside a personal or corporate guarantee and sometimes a collateral mortgage.
- Due-diligence relevance. A foreign acquirer buying an existing Indian company must check the target's charge register at the ROC (the CHG filings) before completing the deal, since an existing hypothecation charge over stock or receivables can restrict what the target can offer as fresh security, and an improperly released charge can leave a "phantom" encumbrance on the company's public record.
- Interaction with trade finance. Hypothecation of inventory and receivables is frequently used alongside letters of credit and bank guarantees to fund import and export cycles, and lenders sometimes route disbursement through an escrow account tied to the hypothecated receivables.
Practical Example
An Indian private limited subsidiary of a European manufacturer takes a INR 5 crore cash-credit facility from an Indian bank to fund raw-material purchases. The bank takes a hypothecation charge over the company's raw materials, work-in-progress, and finished stock, plus its book debts, under a hypothecation deed. The company's finance team must: (1) have the board approve creation of the charge; (2) execute the hypothecation deed and pay the applicable state stamp duty; (3) file Form CHG-1 with the ROC within 30 days of execution, attaching the deed; and (4) submit periodic stock and book-debt statements to the bank so the lender can monitor whether the security value still covers the outstanding facility. If the finance team misses the 30-day ROC deadline — a common slip when a deed is signed just before a holiday period — the company can still register within a further 60 days of creation on an additional fee, and, failing that, within 120 days on an ad valorem fee, before condonation of delay becomes necessary.
Common Mistakes
- Treating hypothecation and pledge as interchangeable. Loan documents drafted for a foreign parent sometimes use "pledge" loosely to describe a charge on inventory; only a genuine pledge involves handing over possession, and using the wrong term in Indian-law documents can create ambiguity about which regime — and which registration requirement — applies.
- Missing the Form CHG-1 deadline. Many companies treat charge registration as a back-office task and miss the 30-day window, forcing an avoidable additional or ad valorem fee, or a formal condonation application.
- Assuming one state's stamp rate applies everywhere. Stamp duty on hypothecation deeds is fixed by each state, and a rate confirmed for one state (or by a previous financing round) cannot be assumed to apply when the deed is executed in a different state.
- Ignoring the ROC charge register in due diligence. Buyers of an Indian target sometimes rely only on the seller's representations about existing security, instead of independently checking the company's CHG filings at the ROC.
Frequently Asked Questions
What is the difference between hypothecation and a pledge?
In a pledge, the borrower delivers physical or constructive possession of the movable property — such as gold or shares — to the lender as security. In hypothecation, the borrower keeps possession and keeps using the asset commercially, such as raw materials, finished stock, or book debts, while the lender holds only a registered charge over it under section 2(1)(n) of the SARFAESI Act, 2002. This makes hypothecation the standard structure for working-capital loans against inventory.
Is a hypothecation charge valid if it is not registered with the Registrar of Companies?
The charge remains valid as a contract between the borrower and lender, but under section 77 of the Companies Act, 2013 an unregistered charge cannot be taken into account by a liquidator or any other creditor of the company. Registration on Form CHG-1 within the statutory window is therefore essential for the lender's priority, not just a compliance formality.
How long does a company have to register a hypothecation charge, and what happens if it misses the deadline?
Section 77 of the Companies Act, 2013 requires registration within 30 days of creating the charge. If that window is missed, the Registrar may allow registration within a further period, up to 60 days of creation, on payment of an additional fee, and — if even that lapses — up to 120 days of creation on payment of an ad valorem fee, under the provisos inserted by the Companies (Amendment) Act, 2019. Beyond that, the company must apply for condonation of delay.
Does stamp duty apply to a hypothecation deed, and is the rate the same across India?
Yes, stamp duty applies, and the rate is state-specific rather than uniform nationally, since stamp duty is levied under each state's own Stamp Act. Gujarat, for example, currently charges a fixed duty on a hypothecation agreement rather than an ad valorem rate; other states may charge ad valorem duty on the loan amount. Confirm the specific state's current schedule before executing the deed.
Can an Indian subsidiary of a foreign company hypothecate its stock and receivables to an Indian bank?
Yes — this is the most common way Indian subsidiaries of foreign companies raise working-capital finance from Indian banks and NBFCs, since inventory and book debts can be offered as security while the subsidiary keeps using them in day-to-day operations. The bank takes a hypothecation charge, registers it on Form CHG-1 with the ROC within the statutory deadline, and typically also requires periodic stock and debtor statements to monitor the security cover.
See also: Trade Finance, NBFC, and Escrow Account.