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, there is one important condition — the decision to pledge shares must be taken entirely by the client and not by the portfolio manager.
The clarification came after Geojit Financial Services sought guidance from SEBI regarding how such pledging arrangements should be treated under existing PMS rules.
What Is Non-Discretionary PMS?
In a non-discretionary PMS setup, the portfolio manager can advise the client, but the final investment decisions are taken by the investor.
This means the client maintains direct control over:
Buying shares
Selling investments
Using securities as collateral
SEBI has now confirmed that clients can also choose to pledge these securities for loans if they wish.
SEBI Says This Does Not Break PMS Rules
SEBI explained that existing PMS regulations prohibit portfolio managers from borrowing money on behalf of clients.
But the regulator clarified that this restriction does not stop clients from independently pledging their own shares.
According to SEBI:
The pledge must be initiated only by the client
The decision must be fully at the client’s discretion
The loan arrangement should be between the client and the lender
In simple terms, investors are free to use their own assets for borrowing purposes as long as the portfolio manager is not making that decision for them.
Why the Clarification Was Needed
Geojit Financial approached SEBI after one of its clients asked whether shares purchased under ND-PMS could be pledged for loans without involving the portfolio manager.
The question became important because PMS regulations contain strict restrictions regarding borrowing activities.
SEBI’s response now provides more clarity for both investors and financial service companies handling ND-PMS accounts.
What Happens to Pledged Shares?
SEBI also clarified that pledged shares will continue to remain part of the portfolio manager’s Assets Under Management (AUM) until the pledge is actually invoked.
This means:
The shares will still be counted in PMS reporting
Their market value will continue to be reflected in regulatory filings
They remain part of the client’s portfolio unless the lender takes control due to default
Why This Matters for Investors
The clarification gives ND-PMS clients more flexibility in managing their investments and finances.
Investors can now use shares held under PMS accounts as collateral for loans while still maintaining ownership and portfolio visibility.
For high-net-worth investors and active market participants, this could create additional liquidity options without needing to sell investments immediately.
