The clarification came through an informal guidance letter issued by Sebi to Geojit Financial Services Limited in response to queries regarding the permissibility of pledging securities purchased under the ND-PMS framework.
The brokerage had sought clarity on whether such pledges would violate provisions of the SEBI (Portfolio Managers) Regulations, 2020, particularly restrictions relating to borrowing on behalf of clients.
Non-discretionary portfolio management services (ND-PMS) allow investors to access expert investment research and execution while retaining full control over their portfolios. The portfolio manager provides tailored, data-driven recommendations, but no trades are executed without the investor’s explicit consent.
In its response, Sebi said that under ND-PMS arrangements, portfolio managers operate strictly according to client instructions, with the final investment decision resting entirely with the client. Since the securities remain under the beneficial ownership of the client, the regulator said clients are free to use those securities as collateral for loans.
Sebi further clarified that such pledging would not be construed as borrowing of funds or securities by the portfolio manager under Regulation 23(8) of the PMS Regulations, as long as the borrowing arrangement is directly between the client and the lender.
The market regulator also addressed concerns regarding regulatory reporting and assets under management (AUM) calculations. It said pledged securities can continue to be included in the portfolio manager’s AUM and regulatory disclosures until the pledge is actually invoked, since beneficial ownership remains with the client until that stage.
The clarification is expected to provide operational flexibility for portfolio managers and clients using ND-PMS structures, particularly high-net-worth investors seeking liquidity against their investment portfolios without liquidating holdings.
Sebi, however, noted that the guidance was issued based on the facts presented in the application and does not constitute a formal board decision or override any other applicable legal or regulatory requirements.
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