Sebi Proposes Major Overhaul of Fit and Proper Person Framework for Market Intermediaries

Consultation Paper Seeks Greater Clarity, Fairness, and Reduced Regulatory Uncertainty​

Markets regulator Securities and Exchange Board of India on Wednesday proposed a comprehensive revamp of the Fit and Proper Person framework governing market intermediaries, aiming to strengthen procedural clarity, fairness, and predictability in regulatory assessments.

In a consultation paper, the regulator suggested amendments to Schedule II of the Intermediaries Regulations, 2008, which define the Fit and Proper Person criteria applicable to intermediaries, their key management personnel, and persons in control. The proposed changes focus on codifying procedural rights, refining disqualification triggers, and reducing uncertainty for applicants and registered entities.

Right to Hearing to Be Explicitly Codified​

A key proposal involves explicitly incorporating the right to a hearing within the regulations. While the practice of granting a reasonable opportunity to be heard already exists, the regulator aims to formally state this right to remove any procedural ambiguity.

Under a newly proposed clause, applicants and intermediaries would be required to inform the regulator within seven days if any disqualifying event occurs. Further, an individual can be declared not fit and proper only after being given a reasonable opportunity of being heard.

The obligation to report such events relating to key management personnel or persons in control would rest with the applicant or intermediary, given their role as certificate holders.

Winding Up Proceedings and Ineligibility Periods Revised​

The regulator has proposed removing the reference to initiation of winding up proceedings as a disqualification criterion. Going forward, only a final winding up order would be considered while assessing fitness and propriety, ensuring that mere initiation of proceedings does not trigger disqualification.

Additionally, the default five year ineligibility period for applying for registration, where no time period is specified in a regulatory order, is proposed to be removed. Under the revised framework, ineligibility would apply only for the duration explicitly mentioned in the order.

Reduced Uncertainty for Applicants Facing Show Cause Notices​

To further reduce prolonged uncertainty, the regulator has proposed cutting the period during which a registration application is kept in abeyance after issuance of a show cause notice from one year to six months.

Changes to Rules on Group Entities and Persons in Control​

Proposed amendments to Clause 6 clarify that disqualifications of associates, group entities, or persons in control would impact an intermediary only if such persons are formally declared not fit and proper by the regulator.

Intermediaries would also be required to replace disqualified key management personnel within 30 days of such a declaration.

Voting Rights Curbs to Replace Mandatory Divestment​

In a significant shift, the regulator has suggested removing the mandatory requirement for divestment of shareholding by persons in control who are declared not fit and proper. Instead, such individuals would be restricted from exercising voting rights while retaining their economic ownership.

This change is intended to prevent irreversible financial loss in situations where individuals are subsequently cleared of wrongdoing.

Public Feedback Invited Till February 25​

The regulator has invited public comments on the proposed amendments, with feedback open until February 25.