The Securities and Exchange Board of India (SEBI) has clarified that clients under non-discretionary portfolio management services (ND‑PMS) can pledge their shares to raise loans, offering a key regulatory comfort to the industry and opening up a new avenue for credit against managed portfolios.
The clarification came in response to a request from Geojit Financial Services, a SEBI‑registered portfolio manager, which sought guidance on whether clients could pledge shares held within PMS accounts to avail loans without violating existing rules.
PMS, or Portfolio Management Services, is an investment service where professionals manage a client's stock portfolio. Under the non‑discretionary model, the client takes all investment decisions, while the manager merely executes trades on their behalf.
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SEBI has now stated that since the shares remain in the client's name and ownership, investors are free to use them as collateral to borrow funds, as long as the decision to pledge is entirely theirs. The regulator also clarified that such pledging will not be treated as borrowing by the portfolio manager, which is otherwise prohibited under PMS regulations.
In another important clarification, SEBI allowed portfolio managers to continue counting these pledged shares as part of their assets under management (AUM), provided the pledge has not been invoked. This ensures that reported AUM figures remain unaffected by such client-level borrowing.
However, the regulator maintained a clear boundary: portfolio managers cannot be involved in the borrowing transaction, and the pledge must be initiated solely at the client's discretion.
The move is seen as positive for the wealth management and PMS industry, as it enables clients to unlock liquidity without exiting their investments. It also creates opportunities for lenders to expand loan-against-shares products targeted at PMS clients.
At the same time, the clarification underscores risks for investors, as lenders retain the right to sell pledged shares in case of default, which could also have implications for market volatility during periods of stress.
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