Non-discretionary PMS clients can pledge securities held in demat: Sebi

The market regulator said clients of non-discretionary portfolio management services may pledge securities for loans if the decision is taken independently and for their own benefit

The Securities and Exchange Board of India (Sebi) has clarified that clients of non-discretionary portfolio management services (ND-PMS) can pledge securities held in their demat accounts for availing loans, provided the pledge is initiated solely at the client’s discretion and for the client’s own benefit.

 

In an informal guidance letter issued to Geojit Financial Services on May 18, the regulator said such pledging would not amount to borrowing by the portfolio manager on behalf of the client, which is barred under Sebi’s Portfolio Managers Regulations, 2020.

 

“Restrictions with respect to borrowing of funds under Regulation 23(8) of the PMS Regulations does not prevent ND-PMS clients from initiating pledge, provided the pledge is initiated solely by or at the client’s discretion,” said Sebi.

 

Geojit had sought Sebi’s interpretive guidance after a prospective client asked whether securities purchased under the ND-PMS framework could be pledged for borrowing arrangements directly between the client and lender, without involving the portfolio manager.

 

Under the ND-PMS structure, clients open designated bank and demat accounts with approved custodians, while trading activities are carried out through empanelled brokers. The securities remain in the beneficial ownership of the client and are held in the client’s name.

 

Responding to the queries, Sebi said that as the beneficial owner of the securities, the client has the right to use its own assets, including those under PMS, as pledge for loans. The regulator added that the final decision rests entirely with the client.

 

Sebi also said that pledged securities can continue to be counted as part of the portfolio manager’s assets under management (AUM) until the pledge is invoked, since the beneficial ownership remains with the client.