I have a piece with Manas Dhagat and Pragya Garg in today's Financial Express on the proposed amendment to 'Fit and Proper' norms of SEBI. The proposal is a welcome reform which removes the 'beheading before trial' approach of disqualifying people even though they are not found to have (yet) committed an offence merely because an FIR, Chargesheet or other civil proceedings are initiated:
The securities market operates on public funds and is exposed to systemic risk. Regulators therefore apply a “fit and proper” criterion to assess integrity, competence, reputation, and financial soundness before granting market access. This protects investors and sustains market trust and stability. The Securities and Exchange Board of India (“SEBI”) through a Consultation Paper, proposed amendments to the ‘fit and proper’ framework under the SEBI (Intermediaries) Regulations, 2008 (“Intermediaries Regulations”), reflecting a nuanced attempt to contemporise regulatory standards.
At the heart of SEBI’s proposals is a selective relaxation of certain automatic, rule-based triggers for disqualification in favour of greater reliance on the existing principle-based criteria under the Intermediaries Regulations that aligns more closely with global norms and jurisprudential fairness. This recalibration is not merely semantic. It signals a subtle but important maturing of regulatory philosophy, one that recognises that the presumption of innocence and proportionality are essential to sustaining confidence in India’s capital markets.
Under the existing framework, the mere filing of a criminal complaint or FIR by SEBI, or a charge sheet by any enforcement agency in an economic offence matter, leads to immediate disqualification of intermediaries and their associated individuals, even while the case is still pending. This has often led to reputational and commercial consequences that far outstrip proven misconduct. The proposed amendments remove such automatic rule-based disqualifications and instead anchor the specific rule-based trigger for disqualification at the stage of conviction. However, SEBI retains discretion under the principle-based criteria to consider the pendency of criminal proceedings of a severe nature on a case-to-case basis, and may lay down guidelines regarding cases where such pendency is egregious enough to incur disqualification.
This recalibration produces two salutary effects. First, it reaffirms the fundamental tenet of criminal justice that mere allegations do not amount to guilt. Regulatory intervention at the pre-conviction stage has, at times, risked blurring this essential boundary and undermining the presumption of innocence. Second, it brings greater coherence to the regulatory architecture by harmonising the intermediaries framework with other SEBI regulations, including those applicable to stock exchanges and depositories, which already adopt conviction-based thresholds for specified disqualifications.
While the regulator must remain alive to serious wrongdoing, calibrating thresholds to proven conduct helps avoid premature regulatory penalties that may be disproportionate to the underlying facts.
Another noteworthy proposal in the Consultation Paper is the introduction of express provisions codifying procedural safeguards, specifically the requirement to notify SEBI of events that could affect fitness and to provide the concerned party a reasonable opportunity to be heard before any determination of unfitness is recorded.
Embedding these rights directly into the regulations (rather than relying on administrative practice) brings greater clarity and predictability. While the opportunity of being heard is already afforded in practice, expressly codifying it in the regulations removes procedural ambiguity, a principle that has underpinned fair administrative action in multiple legal contexts.
SEBI’s proposals also target the incidental consequences of unfitness findings. Presently, where a regulatory order declaring a person unfit is silent on the duration of the prohibition on new registration applications, a default five-year bar applies. The amendments seek to remove this automatic consequence, thereby making prohibition periods an outcome of conscious regulatory determination rather than a mechanical consequence of statutory silence.
Further, the ambit of proceedings that trigger registration restrictions, currently including both directions and penalties, is proposed to be confined to actions under Section 11B(1) of the SEBI Act, 1992, which primarily relates to directions. The time period for non-consideration of registration applications upon issuance of a show cause notice is also proposed to be reduced from one year to six months.
Perhaps the most commercially significant proposal is the removal of mandatory divestment for persons in control declared not fit and proper. Instead, the intermediary would be required to ensure that such a person does not exercise voting rights within seven days of such declaration.
This represents a calibrated regulatory response: it neutralises the governance influence of a disqualified person, the core regulatory concern, without mandating the irreversible step of divestment. From a policy perspective, this strikes a better balance between protecting public interest and preserving economic rights given the concerns around irreversible financial loss, particularly in cases where the person may later be acquitted or found not guilty in the proceedings pursuant to which the disqualification was incurred.
The Consultation Paper also proposes a refinement in how insolvency proceedings impact ‘fit and proper’ assessments. Under the existing framework, the initiation of winding-up proceedings could lead to disqualification. Recognising that insolvency processes (especially under the Insolvency and Bankruptcy Code) are inherently resolution-oriented, SEBI proposes that disqualification ought to arise only upon the actual passing of a winding-up order, not at the threshold of initiation.
This is not merely technical tinkering. It acknowledges the commercial reality that many insolvency proceedings result in successful resolution plans and revival, and that penalising entities at the point of process commencement could unjustifiably constrict market participation.
SEBI’s proposal is commendable for seeking to balance regulatory rigour with procedural fairness, ensuring that disqualification mechanisms remain principled and proportionate. If adopted, the changes would help prevent irreversible financial and reputational harm in cases where an individual is later acquitted, while introducing greater procedural clarity and a more calibrated balance between rule-based and principle-based criteria. At the same time, SEBI’s discretion to act on serious concerns on a case-to-case basis would remain intact.
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