SEBI has confirmed that discretionary portfolio management services (D-PMS) clients can pledge their demat-held securities to access personal loans. This move allows investors to obtain liquidity without selling their long-term investments. The pledge must be initiated at the client's discretion, and the assets will continue to be counted under the portfolio manager's Assets Under Management (AUM) until the pledge is invoked.
The Securities and Exchange Board of India (SEBI) has issued informal guidance allowing clients of discretionary portfolio management services (D-PMS) to pledge their securities to secure personal loans. This development is expected to provide greater financial flexibility for high-net-worth investors, as it enables them to meet immediate funding needs without the requirement to liquidate their existing stock portfolios.
The clarification came in response to a request from Share India Securities Limited, which sought guidance on whether securities held under a D-PMS account could be used as collateral for borrowing. SEBI confirmed that the restriction on portfolio managers borrowing funds or securities on behalf of a client under the PMS Regulations, 2020, does not prevent a client from independently deciding to pledge their own assets.
Key to this ruling is the principle of beneficial ownership. Since the securities are held in the client’s own demat account with an approved custodian, the client retains the right to use them as collateral. SEBI clarified that as long as the pledge is initiated solely at the client's discretion for their own benefit, it is not treated as borrowing by the portfolio manager.
From a regulatory and reporting standpoint, the assets will continue to be reflected in the portfolio manager's Assets Under Management (AUM) as long as the pledge remains active. Beneficial ownership of the securities will only transfer to the lender if the pledge is invoked due to a default or margin call. This ensures that the portfolio manager's reporting remains consistent during the tenure of the loan.
While this decision offers a new avenue for liquidity, investors should consider the associated risks. The ability to pledge securities is subject to the liquidity of the underlying assets. If a client pledges volatile or less liquid stocks and the market value drops significantly, they may face margin calls, requiring them to provide additional cash or collateral to maintain the loan. Furthermore, investors should ensure they have complete clarity on the documentation and process between the portfolio manager, the custodian, and the lender to avoid any operational confusion. As this is an informal guidance, investors and portfolio managers are expected to continue following all existing PMS regulations and disclosure norms.