The Securities and Exchange Board of India (SEBI) has clarified that investors using non-discretionary portfolio management services (ND-PMS) can pledge shares held in their demat accounts to take loans.
However, the regulator has made it clear that the decision to pledge shares must be taken entirely by the client and not by the portfolio manager.
The clarification came after financial services company Geojit Financial Services sought guidance from SEBI on the matter.
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What SEBI Said
According to SEBI, ND-PMS clients are free to use their own securities as collateral for loans if they choose to do so.
The regulator explained that this will not be treated as borrowing by the portfolio manager, which is restricted under existing PMS regulations.
SEBI stated that as long as:
The pledge is initiated by the client
The decision is taken at the client’s discretion
The pledge benefits the client directly
…it will be allowed under the rules.
Why the Clarification Was Needed
The issue came up after one of Geojit Financial’s clients asked whether shares purchased under an ND-PMS arrangement could be pledged for borrowing purposes.
In non-discretionary PMS, investment decisions are generally made by the client, while the portfolio manager mainly provides execution and advisory support.
Because of this structure, SEBI clarified that the client still retains ownership and control over the assets.
SEBI also clarified an important point regarding pledged securities.
Even after shares are pledged for a loan, they will continue to be counted as part of the portfolio manager’s Assets Under Management (AUM) until the pledge is actually invoked.
This means the market value of pledged securities will still appear in regulatory reporting and PMS asset calculations during that period.
Why This Matters for Investors
The clarification gives more flexibility to ND-PMS clients who may want to raise funds without selling their investments.
By allowing pledging of securities:
Investors can access loans while retaining market exposure
Portfolio assets can continue generating returns
Clients gain greater financial flexibility
At the same time, SEBI has ensured that portfolio managers cannot misuse client assets or borrow on behalf of investors without their consent.
The move is expected to bring more clarity for wealth management firms, lenders, and high-net-worth investors using portfolio management services in India.