Aniket PujariThe Securities and Exchange Board of India (Sebi) is planning a revamp of its ‘fit and proper’ framework for market intermediaries as some of the rules may be too rigid and risk penalizing individuals and firms before wrongdoing is established.
In a consultation paper issued on Wednesday, the markets regulator said experience gained from enforcing the rules over the past five years, as well as global best practices, warrant a review of Schedule II of the Intermediaries Regulations. The move follows representations from market participants, who flagged onerous compliance requirements and the risk of irreparable harm arising from premature disqualifications.
The draft paper proposes a rethink of provisions that trigger disqualification at an early stage of legal proceedings. Under the current framework, an applicant or intermediary can fail the ‘fit and proper’ test if it is the subject of a pending criminal complaint by Sebi, or a charge sheet by an enforcement agency for an economic offence. Sebi said such rule-based triggers operating at a preliminary stage of the criminal process may run counter to the principle that a person is presumed innocent until proven guilty.
The regulator noted that its other regulations, including those governing stock exchanges and depositories, do not impose disqualification merely on the filing of a complaint or charge sheet, and that international standards such as those laid down by the International Organization of Securities Commissions focus on convictions rather than pending cases. Domestic regulators such as the Reserve Bank of India follow a similar approach, relying on convictions under a rule-based test while treating pending proceedings as a factor under broader, principle-based assessments.
Sebi has therefore proposed doing away with automatic disqualifications linked to pending criminal complaints and charge sheets, and instead relying on principle-based criteria such as integrity, reputation and conduct. The regulator said it would retain the discretion to act in serious or egregious cases, potentially through guidelines that identify when pending proceedings are severe enough to warrant regulatory action.
Grounds for disqualification
While easing rules for those facing pending charges, Sebi proposed broadening its disqualification criteria to include anyone convicted of economic crimes or stock market violations, bringing these rules in line with its other major regulations.
The consultation paper also addressed concerns around insolvency-related disqualifications. Currently, a legal entity can be disqualified as soon as winding-up proceedings are initiated. Sebi said this threshold may be too low, given that proceedings under the Insolvency and Bankruptcy Code can result in a successful resolution rather than liquidation. It has proposed limiting disqualification to cases where a winding-up order has actually been passed.
Another area under review is the default five-year prohibition that applies when Sebi declares a person not ‘fit and proper’ but does not specify the duration of the ban. The regulator said this automatic consequence can operate as a one-size-fits-all penalty and may not reflect the gravity of the violation or Sebi’s intent. It has proposed removing the default period, with prohibitions applying only when explicitly specified.
Sebi has also suggested procedural changes to reduce ambiguity. These include explicitly stating that a reasonable opportunity of hearing will be provided before declaring a person not ‘fit and proper’, and requiring intermediaries to promptly disclose events that could trigger disqualification for key management personnel or persons in control.
Finally, the regulator proposed narrowing and shortening the restriction that applies when a show-cause notice is issued at the time of registration. It plans to limit the freeze to cases involving serious regulatory directions and reduce the waiting period from one year to six months.
