Regulator Says Pledging by Clients Will Not Be Treated as Borrowing by Portfolio Managers

The Securities and Exchange Board of India (Sebi) has clarified that clients using Non-Discretionary Portfolio Management Services (ND-PMS) are permitted to pledge securities held in their demat accounts for obtaining loans, provided the decision is made independently by the client and solely for their own benefit.

The clarification brings greater operational flexibility for investors using PMS structures and addresses concerns around the interpretation of borrowing restrictions under Sebi’s Portfolio Managers Regulations, 2020.

Sebi Issues Clarification Through Informal Guidance

The market regulator issued the clarification in response to an interpretive guidance request submitted by Geojit Financial Services. The company had approached Sebi after a prospective client sought clarity on whether securities purchased under the ND-PMS framework could be pledged to lenders without the involvement of the portfolio manager.

In its response, Sebi stated that such pledging would not violate Regulation 23(8) of the PMS Regulations, which restricts portfolio managers from borrowing funds on behalf of clients.

According to Sebi, the restriction applies only to borrowing undertaken by the portfolio manager and does not prevent clients from independently using their own securities as collateral for loans.

Client Retains Full Ownership Rights

Sebi emphasized that under the ND-PMS model, the beneficial ownership of securities remains entirely with the client. The securities are held in the client’s own demat account and not in the name of the portfolio manager.

As a result, the client retains the legal right to pledge those securities for financing arrangements directly with banks or lending institutions. The regulator clarified that the final decision regarding pledging must rest solely with the investor and should not be influenced or initiated by the portfolio manager.

The clarification is expected to provide greater confidence to high-net-worth individuals and sophisticated investors who use PMS products while seeking liquidity against their investment portfolios.

How the ND-PMS Structure Works

Under the Non-Discretionary PMS framework, investment decisions are generally executed only after receiving approval or instructions from the client. Clients maintain designated bank and demat accounts with approved custodians, while transactions are executed through authorised brokers.

Unlike discretionary PMS, where portfolio managers independently take investment decisions on behalf of clients, ND-PMS offers investors greater control over portfolio activity and ownership of assets.

Sebi’s latest guidance reinforces that the securities under such arrangements continue to remain the client’s personal assets even while being managed within the PMS structure.

Pledged Securities Still Count Towards AUM

In another important clarification, Sebi stated that securities pledged by ND-PMS clients can continue to be included in the portfolio manager’s Assets Under Management (AUM) until the pledge is formally invoked by the lender.

This is because the beneficial ownership of the securities does not change merely due to pledging. The securities remain part of the investor’s portfolio unless the lender exercises its right under the pledge agreement.

Industry experts believe this clarification will help PMS firms avoid ambiguity in AUM calculations while also improving transparency in reporting practices.

Positive Development for Wealth Management Industry

Market participants view Sebi’s clarification as a positive step for India’s growing wealth management and PMS industry. The move is expected to improve flexibility for investors looking to unlock liquidity without liquidating long-term investments.

Financial experts believe the decision could particularly benefit entrepreneurs, business owners, and affluent investors who often use market-linked assets as collateral for funding requirements while continuing to participate in equity markets.

The clarification also strengthens regulatory certainty for PMS providers and investors by clearly distinguishing client-driven pledging from prohibited borrowing activities by portfolio managers.