SEBI proposes amendments to revamp ‘fit and proper person’ norms governing intermediaries

SEBI proposes amendments to revamp ‘fit and proper person’ norms governing intermediaries

The Securities and Exchange Board of India (SEBI) has suggested amendments to Schedule II of the SEBI (Intermediaries) Regulations, 2008, dealing with the 'Fit and Proper Person' criteria, governing market intermediaries, their key management personnel (KMPs), and persons in control.

It said that the purpose was to bring greater procedural clarity and fairness to the regulatory process.

In its consultation paper, SEBI stated that under the proposed comprehensive overhaul, it would clearly codify the right to a hearing, refine the scope of disqualifying events, and reduce regulatory uncertainty for applicants and intermediaries.

Although the practice of an opportunity of being heard already exists, SEBI has proposed that it be clearly stated in the rules to remove any procedural ambiguity.

The market regulator recommended abolishing the reference to initiation of winding-up proceedings as a disqualification to ensure that only a final winding-up order, and not an initiation of proceedings, should be considered while assessing whether a person was ‘fit and proper’.

Accordingly, a new clause has been proposed, which requires intermediaries or applicants to inform the market regulator within seven days if any disqualifying event occurs, and clarify that a person can be declared 'not fit and proper' only after being given an opportunity to be heard.

It stated, "The obligation to inform SEBI about the occurrence of any event regarding KMPs or ‘persons in control’ shall also be with the applicant or intermediary as they are applying or holding the registration certificate.”

Additionally, SEBI recommended removing the default five-year ineligibility period for applying for registration when no specified timeline is mentioned in its order. Thus, the ineligibility will apply only for the period mentioned in the order.

Also, the timeframe during which a registration application is not considered after issuance of a show-cause notice (SCN) would be reduced from one year to six months. This was being done to avoid prolonged uncertainty for applicants.

Furthermore, the regulator suggested changes to Clause 6 relating to associates, group entities, and persons in control.

The amendments clarified that disqualifications of group entities would affect an intermediary only if SEBI formally declared such persons as ‘not fit and proper’. Thus, the intermediaries must replace disqualified KMPs within 30 days of the declaration.

The consultation paper also mentioned removing the mandatory requirement for divestment of shareholding by persons in control who were declared ‘not fit and proper’. They would, instead, be restricted only from exercising voting rights, while retaining their economic ownership.

The proposals are meant to prevent irreversible financial loss in matters where individuals are later cleared of misconduct.