Sebi Clarifies Pledging Under Non-Discretionary PMS Does Not Violate Borrowing Rules

The market regulator Securities and Exchange Board of India (Sebi) clarified that clients investing through Non-Discretionary Portfolio Management Services (ND-PMS) can pledge securities held in their demat accounts to avail loans, provided the pledge is initiated by the client and not by the portfolio manager.

Sebi issued the informal guidance letter on May 18, 2026, in response to a request from Geojit Financial Services. Geojit had sought clarity on whether securities purchased under the ND-PMS framework could be pledged by clients without violating Sebi’s Portfolio Managers Regulations, 2020.

What Was The Issue

Under the ND-PMS model, investment decisions are taken by clients, while portfolio managers execute transactions based on client instructions. The securities purchased remain in the client’s name and beneficial ownership.

Geojit told SebiI that one of its prospective clients wanted to pledge securities held under ND-PMS to secure a loan, where the borrowing arrangement would be directly between the client and lender, without involving the portfolio manager.

The company sought Sebi’s interpretation on six issues, including whether such pledging would amount to borrowing by the portfolio manager, whether pledged securities could still be counted under assets under management (AUM), and whether additional disclosures would be needed.

Sebi’s Key Clarifications

Sebi clarified that the restriction on borrowing under PMS regulations applies to portfolio managers and not to clients pledging their own securities.

In its letter, the regulator said, “the client, as the beneficial owner of the securities, has the right to use its own assets, including those under PMS, as pledge for loans.”

Sebi further clarified that, “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.”

This means clients can use securities held under ND-PMS as collateral for loans without breaching Sebi norms, as long as the borrowing is not undertaken by the portfolio manager on the client’s behalf.

Sebi also clarified that pledged securities can continue to be included in the portfolio manager’s AUM calculations unless the pledge is invoked.

The regulator noted, “Pledge does not change the beneficial ownership from client (pledger) to lender (pledgee) unless such pledge is invoked.”

It added that “the market value of securities pledged by the client shall continue to be included in the Portfolio Manager’s Asset Under Management until the invocation of pledge.”

No Specific Guidance On Disclosures

On queries related to additional disclosures, risk warnings and precautions, Sebi did not provide specific guidance.

The regulator said the questions were “general in nature” and did not cite applicable legal provisions, and therefore responses were not being provided under the Informal Guidance Scheme.

However, Sebi advised portfolio managers to continue following PMS regulations and relevant circulars issued from time to time.

Why This Matters

The clarification gives more clarity to portfolio managers and investors using the Non-Discretionary PMS route. It confirms that clients still fully own the securities held in their accounts and can use them as collateral to take loans.

This could make ND-PMS investments more flexible for high-net-worth investors, as they may be able to raise funds against their investments without having to sell their holdings.

Frequently Asked Questions

Q1. Can ND-PMS clients use their securities as collateral for loans?

Yes. Sebi said clients can use securities held under the ND-PMS framework as collateral to raise loans because the securities remain under the client’s beneficial ownership.

Q2. Does pledging securities under ND-PMS violate Sebi borrowing rules?

No. Sebi clarified that such pledging does not violate Regulation 23(8) of the PMS Regulations, provided the borrowing is not undertaken by the portfolio manager on behalf of the client.

Q3. Will pledged securities continue to be counted in PMS AUM?

Yes. Sebi clarified that pledged securities can continue to be included in the portfolio manager’s Assets Under Management (AUM) until the pledge is invoked.