SEBI Clarifies Non-Discretionary PMS Clients to Pledge Demat Securities

Securities and Exchange Board of India (SEBI) has clarified that clients using Non-Discretionary Portfolio Management Services can pledge securities held in their demat accounts for personal borrowing purposes, provided the pledge decision remains entirely under the client’s control. 

Clarification Issued Through Informal Guidance 

The market regulator issued the clarification through an informal guidance letter dated May 18, 2026, in response to a request submitted by Geojit Financial Services Limited under SEBI’s Informal Guidance mechanism. 

Geojit had sought regulatory clarity on whether securities acquired under the ND-PMS framework and held with an approved custodian could be pledged either directly by clients or through instructions routed by portfolio managers to custodians. 

The company had also requested clarification on whether such pledging arrangements could be interpreted as borrowing by the portfolio manager under existing PMS regulations. 

SEBI Explains Client Ownership Rights 

Referring to Regulation 23(1) of the PMS Regulations, SEBI said non-discretionary portfolio managers are required to operate according to client instructions. 

The regulator clarified that clients remain the beneficial owners of securities held under ND-PMS arrangements and therefore retain the right to use those securities as collateral for loans. 

SEBI further stated that restrictions under Regulation 23(8), which prohibit portfolio managers from borrowing funds or securities, do not apply when the borrowing arrangement exists solely between the client and the lender. 

According to the regulator, such pledges remain permissible as long as they are initiated directly by clients or executed entirely at the client’s discretion. 

AUM Treatment Also Clarified 

SEBI additionally clarified that pledged securities may continue to remain part of the portfolio manager’s Assets Under Management and regulatory reporting until the pledge is invoked. 

The regulator noted that beneficial ownership remains with the client unless invocation of the pledge takes place. 

Read More: SEBI Proposes Relaxation in Call Recording Rules for Research Analysts! 

Conclusion 

The clarification provides operational clarity for portfolio managers and ND-PMS clients regarding pledging arrangements, ownership treatment and AUM reporting under the PMS regulatory framework. 

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