SEBI Authorizes Pledging of Securities in Non-Discretionary PMS Framework with New Safeguards.

The Securities and Exchange Board of India (Sebi) has issued a significant clarification regarding the pledging of securities held in demat accounts under the non-discretionary portfolio management services (ND-PMS) framework. The clarification, communicated through an informal guidance letter to Geojit Financial Services Limited, confirms that clients can pledge their securities at their own discretion and for personal benefit without contravening the SEBI (Portfolio Managers) Regulations, 2020. This comes in response to concerns raised about whether such actions could compromise the regulations surrounding the sector, especially regarding borrowing provisions. ND-PMS allows investors to receive expert management while retaining full control over their portfolios, thereby emphasizing the necessity for clear regulatory guidance on financial maneuvers like pledging securities.

Sebi’s guidance highlights that portfolio managers in an ND-PMS arrangement are obliged to operate strictly according to their clients’ instructions, with investment decisions remaining solely in the hands of the clients. The regulators affirmed that since the beneficial ownership of the securities lies with the client, pledging these securities for loans is permitted, provided the agreement is exclusively between the client and the lender. This clarification alleviates concerns regarding potential misinterpretations of borrowing activities by portfolio managers, thus reinforcing the autonomy of clients in managing their investments while still utilizing available financial resources effectively.

Furthermore, Sebi clarified how pledging securities impacts regulatory reporting and assets under management (AUM) calculations. Specifically, pledged securities can remain as part of the portfolio manager’s AUM and regulatory disclosures until the pledge is activated. This facet is particularly advantageous for high-net-worth investors looking to access liquidity without having to liquidate their investment holdings. While Sebi’s guidance provides necessary operational flexibility, it is essential to note that this is based on the specifics of the application submitted and does not replace existing legal or regulatory frameworks. Stakeholders are encouraged to proceed with caution and consult relevant legal resources to ensure compliance.

Source: The Economic Times

(Expert Note: This report was prepared by the Wealthova team.)