Sebi proposes easing 'fit and proper' norms for market intermediaries

Move aims to remove automatic disqualifications triggered by criminal complaints

The Securities and Exchange Board of India (Sebi) has proposed an overhaul of the ‘fit and proper person’ criteria for market intermediaries such as stock brokers, a move aimed at easing compliance burdens and reducing regulatory uncertainty, particularly for entities facing preliminary legal proceedings.

 

In a consultation paper issued on Wednesday, Sebi proposed doing away with automatic disqualifications arising solely from the filing of criminal complaints, FIRs, or charge sheets in cases involving economic offences.

 

The market regulator noted that these actions represent only the initial stages of criminal proceedings and that treating them as rule-based disqualifications may run counter to the principle of “innocent until proven guilty”.

 

 

The proposed changes are expected to prevent intermediaries, key managerial personnel, and controlling shareholders from facing punitive consequences before a final judicial outcome.

 

The ‘fit and proper’ criteria are intended to ensure that only entities with integrity, fairness, and sound character are permitted to operate in the securities market. Under certain regulatory provisions, triggering a disqualification can result in the replacement of key officials and divestment by persons in control.

 

Sebi highlighted the need to introduce a new clause mandating disclosure of any event that may potentially lead to disqualification. It also proposed that a person should be declared not fit and proper only after being given a reasonable opportunity to be heard.

 

Separately, Sebi proposed that the initiation of winding-up proceedings under the Insolvency and Bankruptcy Code should not automatically result in disqualification unless a winding-up order is actually passed. This could provide relief to entities undergoing insolvency resolution where revival remains a possibility.

 

The consultation paper also suggested reducing the cooling-off period for fresh registration applications following a show-cause notice from one year to six months, and removing the default five-year prohibition in cases where Sebi does not specify a time bar.