The Securities and Exchange Board of India (SEBI) on Tuesday clarified that clients of non-discretionary portfolio management services (ND-PMS) can pledge securities held in their demat accounts for loans. This is on the condition that the pledge is initiated solely at the client’s discretion as well as benefit.
The clarification was given in an informal guidance to queries raised by Geojit Financial Services on Monday and the regulator added that such pledging will not amount to borrowing by the portfolio manager on behalf of the client as it is barred under Sebi’s PMS regulations.
“Restrictions with respect to borrowing of funds under Regulation 23(8) of the PMS Regulations does not prevent ND-PMS clients from initiating pledge, provided the pledge is initiated solely by or at the client’s discretion,” Sebi said in its response to Geojit Financial.
Geojit Financial had sought Sebi’s guidance after one of its clients asked the financial services company that whether securities purchased under the ND-PMS mechanism, without involving the portfolio manager, can be pledged for borrowing arrangements between the client and the lender.
Sebi said that the client has the right to use its own assets as pledge for loans and that the final decision can be made by the client. The regulator further said that pledged shares will remain to be counted as a part of the PMS asset under management until the pledge is invoked.
“Since the pledged securities remain with the client, the market value of securities pledged by the client shall continue to be included in the Portfolio Manager’s Asset Under Management until the invocation of pledge and reflected in the regulatory reporting.”