The Securities and Exchange Board of India (SEBI) has clarified that clients using non-discretionary portfolio management services (ND-PMS) may pledge securities in their demat accounts for personal borrowing without contravening portfolio management regulations. This clarification was made in an informal guidance letter issued to Geojit Financial Services.
On May 18, SEBI responded to Geojit’s request about whether securities acquired under the ND-PMS could be pledged by clients while still classified as part of the portfolio manager’s assets under management (AUM). In its letter, SEBI indicated that limitations under Regulation 23(8) of the SEBI (Portfolio Managers) Regulations, 2020, which prohibit portfolio managers from borrowing funds or securities on behalf of clients, do not prevent ND-PMS clients from independently pledging their securities.
SEBI underscored that in a non-discretionary PMS framework, investment decisions are made based on the client’s directives, with the ultimate control residing with the client. Consequently, since clients maintain beneficial ownership of the securities, they are entitled to use them as collateral for loans.
Geojit sought SEBI’s guidance following an inquiry from a prospective client about the possibility of pledging securities under the ND-PMS arrangement, either directly or through instructions sent via the portfolio manager to the custodian. Questions were also raised about whether this would be considered borrowing by the portfolio manager on behalf of the client.
SEBI emphasized that pledged securities can remain included in the portfolio manager’s AUM and regulatory reporting until the pledge is invoked. It clarified that a pledge does not change beneficial ownership unless the lender enforces the pledge and takes possession of the securities.
However, SEBI refrained from offering specific guidance on disclosures, risk warnings, and additional precautions requested by Geojit, stating that these queries were general in nature and did not reference applicable legal provisions.
Regarding the need for SEBI or custodians to be notified about such pledging arrangements, SEBI advised portfolio managers to adhere to existing PMS regulations and relevant circulars. This clarification is anticipated to enhance operational flexibility for PMS clients seeking liquidity against their managed securities, while ensuring regulatory adherence for portfolio managers and custodians.
Published on May 19, 2026.
