SEBI issued an informal guidance letter to Share India Securities Limited, clarifying that clients of discretionary portfolio management services (D‑PMS) can pledge securities held in their demat accounts to obtain loans for their own use. The pledge must be initiated solely at the client’s discretion.
The letter addressed questions about whether securities bought under D‑PMS could be pledged by clients. SEBI clarified that the restriction in the PMS Regulations, 2020, which stops a portfolio manager from borrowing on behalf of a client, does not prevent a client from pledging securities for a personal loan.
SEBI stated, "the client is the beneficial owner of the securities in the portfolio and has the right to use their own assets, including those under PMS by way of pledge for availing loans they avail personally." This confirms the client’s control over the securities.
Securities acquired under D‑PMS remain in the client’s beneficial ownership and are held in a demat account in the client’s name with an approved custodian. Share India sought clarity on whether these securities could be pledged directly or through instructions routed via the portfolio manager.
SEBI clarified that pledging securities does not change their beneficial ownership by itself. Ownership transfers to the lender only if the pledge is invoked.
Because of this, the market value of securities pledged by the client may continue to be counted in the portfolio manager’s assets under management (AUM) and shown in regulatory reports until the pledge is invoked.
Under the PMS framework, a discretionary portfolio manager manages each client’s funds independently, but the client remains the beneficial owner of the securities in the portfolio.
SEBI did not answer specific questions about additional disclosures, risk warnings, or other precautions. It said those queries were general and did not cite any particular legal provisions. Regarding whether the portfolio manager must inform SEBI or the custodian about such pledges, SEBI said the manager may follow PMS regulations and any circulars issued from time to time.