The Securities and Exchange Board of India(“SEBI”) issued aninterpretive letter dated May 18, 2026, bearing Issue No. I/11825/2026, underthe Securities and Exchange Board of India (Informal Guidance) Scheme, 2025 (“Informal Guidance Scheme”), inresponse to an application dated March 17, 2026 by Geojit Financial ServicesLimited (“Geojit”), aSEBI-registered Portfolio Manager, seeking clarification on the permissibilityof pledging securities purchased under Non-Discretionary Portfolio ManagementServices (“ND-PMS”) (“GeojitIG”).
Background
In terms of its ND-PMS, activities /offerings, Geojit’s clients open designated bank and demat accounts with theapproved custodian, and all trading activities are executed through empanelledbrokers. Further, the clients grant power of attorney to Geojit to facilitatetransactions expressly consented to by them. Pertinently, in line with the applicable regulatoryframework, the securities purchased under ND-PMSremain in the client’s beneficial ownership and are held in the client’s name.
In this context, a prospective client of Geojitqueried whether securities held in the client's demat account under ND-PMScould be pledged by the client to a third party..
Accordingly, Geojit sought guidance from SEBI on sixqueries:
(i) whether a Portfolio Manager may permit a client to pledgesecurities held in the client’s demat account under the ND-PMS framework,either directly or through an instruction routed via the Portfolio Manager tothe custodian, where the pledge is initiated solely at the client’s discretionfor the client’s own benefit;
(ii) whether such pledge would be construed as borrowing of fundsor securities by the portfolio manager on behalf of the client under Regulation23(8) of the Securities and Exchange Board of India (Portfolio Managers)Regulations, 2020 (“PMS Regulations”);
(iii) whether the market value of pledged securities may continueto be included in the Portfolio Manager’s Assets Under Management (“AUM”) and reflected inregulatory reporting;
(iv) whether any specific disclosure or risk warnings are requiredto be provided to the client regarding risks associated with pledging,including the risk of invocation of pledge and loss of securities;
(v) whether the Portfolio Manager is required to intimate SEBI orthe custodian regarding such pledging arrangements; and (vi) any otherprecautions required to be compliant with SEBI Regulations.
Key Clarifications in theInterpretive Letter
I. Client-initiated pledges are valid and do not amount toborrowing of funds by Portfolio Manager
TheGeojit IG clarifies that Regulation 23(1) of the PMS Regulations provides thata Non-Discretionary Portfolio Manager shall manage the funds in accordance withthe directions of the client. Thus, the final decision rests entirely with theclient, who, as the beneficial owner of the securities, has the right to useits own assets, including those under PMS, as pledge for loans.
Itwas further clarified that restrictions with respect to borrowing of fundsunder Regulation 23(8) of the PMS Regulations do not prevent ND-PMS clientsfrom initiating pledge, provided the pledge is initiated solely by or at theclient's discretion.
II. Pledged securities would continue to form part of PortfolioManager's AUM
Secondly, the Geojit IG confirms that a pledge does not changethe beneficial ownership from client (pledgor) to lender (pledgee) unless suchpledge is invoked. As the pledged securities remain with the client, the marketvalue of securities pledged by the client must be included in the PortfolioManager's AUM until the invocation of pledge and reflected in regulatoryreporting.
III. Disclosures, Risk Warnings,Intimation and Other Precaution
SEBI declined to respond to Queries 4and 6 as they were general in nature and did not cite applicable legalprovisions, and directed the Portfolio Manager to the PMS Regulations andapplicable circulars on Query 5. However, our views on these queries areaddressed in the paragraphs below.
Our View
TheGeojit IG fairly clarifies that the restriction on portfolio managers fromborrowing funds on behalf of their clients does not apply in a ND-PMSstructure, since the borrowing is being done by the client on its own volitionand discretion. The clarification on AUM follows the same principle. A pledgedoes not by itself result in any change in the AUM of the portfolio manager,unless such pledge is invoked.
Ondisclosures and risk warnings, the PMS agreement and disclosure documents mayrecord the risks borne by the client, in particular the risk of invocation andconsequent loss of securities, the potential change in portfolio compositionupon invocation, and the consequences of the portfolio value falling below theminimum threshold of Rs. 50 lakhs prescribed under the PMS Regulations. In thelatter scenario, the client would be required to make an infusion to continueunder the PMS arrangement, failing which the Portfolio Manager stands to losethe client. On intimation, while no specific obligation has been prescribed forintimating SEBI, the custodian is in any event involved in giving effect to thepledge and would have visibility over the arrangement.
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