Background
The Securities and Exchange Board of India (“SEBI”) recently issued a Consultation Paper inviting public comments and stakeholder inputs on proposed amendments to the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 (“Intermediaries Regulations”) (“Consultation Paper”).
Brief overview of the Proposed Amendments
Criminal complaints filed by SEBI and chargesheets filed in relation to economic offences would not result in automatic disqualification
The proposed amendments seek to recalibrate the disqualification framework under Schedule II of the Intermediaries Regulations in three key respects:
First, the amendment proposes to omit Clause 3(b)(i) of Schedule II of the Intermediaries Regulations, which currently treats the mere filing of a criminal complaint or FIR by SEBI as a ground for disqualification. Going forward, the initiation of criminal proceedings by SEBI will not, by itself, trigger disqualification of an intermediary or its key personnel.
Second, the omission of Clause 3(b)(ii) of Schedule II of the Intermediaries Regulations addresses chargesheets filed by enforcement agencies in relation to economic offences. Under the existing framework, the filing of such a chargesheet is sufficient to attract disqualification, a threshold that the amendment proposes to do away with entirely.
Third, and relatedly, the amendment shifts the operative trigger for disqualification from the filing of complaints or chargesheets to the stage of conviction. Clause 3(b)(v) of Schedule II of the Intermediaries Regulations is proposed to be expanded so that, in addition to offences involving moral turpitude, convictions for economic offences or offences under securities laws would also attract disqualification. In effect, the amendments collectively move the disqualification threshold downstream, from the commencement of proceedings to a final finding of guilt, thereby ensuring that intermediaries are not penalised at a pre-conviction stage.
Hearing opportunity before disqualification
Two new provisions are proposed to be introduced into Schedule II of the Intermediaries Regulations, together establishing a procedural framework that affords intermediaries an opportunity to be heard before a finding of disqualification is recorded against them.
Under the proposed Clause 3A of Schedule II of the Intermediaries Regulations, where any person to whom the fit and proper criteria apply becomes subject to an event-based disqualification, the applicant or intermediary is required to notify SEBI of the occurrence of such event within seven (7) days. This obligation ensures that SEBI is promptly apprised of any development that may bear on the fit and proper status of the concerned person, while also setting the stage for a structured engagement between the regulator and the intermediary before any adverse determination is made.
Complementing this, the proposed Clause 3B of Schedule II of the Intermediaries Regulations stipulates that such person must be afforded a reasonable opportunity of being heard before SEBI declares them as not fit and proper. Read together, these provisions introduce a meaningful safeguard into the disqualification process, the mere occurrence of a triggering event will not, by itself, result in disqualification. Instead, the intermediary will have the opportunity to place its case before SEBI, demonstrate that it continues to meet the fit and proper standard notwithstanding the event in question, and seek to displace any presumption of disqualification that might otherwise arise.
Rationalization of period of debarment
The proposed amendment seeks to omit the default five-year prohibition that currently operates in cases where SEBI declares a person as not fit and proper without specifying a period of ineligibility in its order. Under the existing framework, the absence of an express prohibition period in SEBI's order does not spare the concerned person, a blanket five-year bar on applying for registration kicks in automatically. The amendment proposes to do away with this default, so that a prohibition period would apply only where it is expressly stipulated in the order passed by SEBI. In effect, the duration of ineligibility would henceforth be a matter of conscious regulatory determination rather than an automatic consequence, bringing greater specificity and proportionality to the disqualification regime.
Orders in which only a penalty is levied and no directions are passed, would not result in disqualification
The proposed amendment to Clause 5 of Schedule II of the Intermediaries Regulations seeks to narrow the scope of proceedings that trigger restrictions on new registration applications in two respects.
First, the existing reference to proceedings under Section 11B of the SEBI Act, 1992 is proposed to be limited specifically to proceedings under Section 11B(1), which empowers SEBI to issue directions. By confining the trigger to Section 11B(1), the amendment carves out proceedings under Section 11B(2), which relates to the imposition of penalties. The practical effect is that an order passed against a person under which only a monetary penalty is levied, with no directions issued, would not, by itself, attract the bar on consideration of registration applications. Disqualification in this context would thus be confined to cases where SEBI has exercised its power to issue substantive directions against the concerned person.
Second, the period during which an application for registration shall not be considered upon issuance of a show cause notice under Clause 5 of Schedule II of the Intermediaries Regulations is proposed to be reduced from one year to six months, moderating the interim consequence that attaches to the issuance of a show cause notice pending the conclusion of proceedings.
Requirement to divest in case of change in status may be done away with
The proposed amendment to the second proviso to Clause 6 of Schedule II of the Intermediaries Regulations seeks to modify the consequences that follow where a promoter or person in control is declared not ‘fit and proper’. Under the existing framework, such a declaration triggers a mandatory divestment requirement, compelling the concerned person to divest their shareholding or interest in the intermediary. The amendment proposes to do away with this requirement entirely.
In its place, the intermediary would be required to ensure that the concerned person does not exercise any voting rights within seven (7) days from the date of such declaration. The consequence, therefore, is no longer the forced unwinding of a proprietary interest, but rather the suspension of the governance rights that flow from it. This represents a calibrated shift in approach, rather than compelling divestment, the framework would focus on neutralising the influence that a person found to be not ‘fit and proper’ could otherwise exercise over the intermediary’s affairs.
In case of insolvency, disqualification to be endured upon passing of order of winding up, and not upon initiation of insolvency proceedings.
The proposed amendment to Clause 3(b)(vi) of Schedule II seeks to narrow the point at which a legal entity incurs a disqualification in the context of insolvency proceedings. Under the existing provision, disqualification is attracted at the threshold of initiation of winding up proceedings, a stage that, under the framework of the Insolvency and Bankruptcy Code, 2016, does not necessarily culminate in liquidation. The corporate insolvency resolution process, once initiated, may equally result in the approval of a resolution plan and the successful revival of the corporate debtor. Treating the mere commencement of such proceedings as a disqualifying event therefore risks penalising entities at a stage where the outcome remains uncertain and where revival remains a live possibility.
The amendment proposes to align Clause 3(b)(vi) of Schedule II of the Intermediaries Regulations with the position under the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018 (“SECC”) and SEBI (Depositories and Participant) Regulations, 2018 (“DP Regulations”), both of which confine the disqualification to cases where a formal order of winding up has actually been passed. The practical effect is that an intermediary or other person covered under Clause 2 of Schedule II would incur the disqualification only upon the passing of a winding up order by the relevant adjudicating authority, and not at the anterior stage of initiation of insolvency proceedings.
Our Views
The proposed amendments in the Consultation Paper seek to simplify and rationalise the “fit and proper person” criteria by balancing regulatory safeguards with ease of doing business, without compromising investor protection or market integrity.
The existing rule-based disqualification at the FIR/charge sheet stage creates a punitive consequence without adjudication. This runs counter to the presumption of innocence and can cause irreversible reputational and commercial harm to individuals who may ultimately be acquitted.
Similarly, treatment of initiation of corporate insolvency resolution process as equivalent to an order of winding up conflates two distinct stages with materially different consequences. The Insolvency and Bankruptcy Code is resolution-oriented and not punitive. The SECC and DP Regulations, already limit the disqualification to cases where an order of winding up has been passed. Aligning the Intermediaries Regulations with this threshold eliminates a regulatory inconsistency and reduces the compliance burden on intermediaries without compromising investor protection.
The introduction of Clauses 3A and 3B to Schedule II of the Intermediaries Regulations further strengthens procedural fairness. The current framework lacks an express mechanism for intermediaries to disclose disqualifying events or for affected persons to be heard before consequences are triggered. This has led to procedural uncertainty and, in certain cases, punitive outcomes without due process. Clause 3A of Schedule II of the Intermediaries Regulations ensures timely disclosure to SEBI, while Clause 3B guarantees an opportunity of being heard before a person is declared not “fit and proper.” Together, these provisions promote transparency and procedural discipline.
The removal of the automatic five-year prohibition where SEBI’s order is silent on the period of ineligibility also reflects a move towards proportionality. The existing five-year default creates a cliff-edge consequence that does not distinguish between serious misconduct and relatively minor or technical violations. Removing the automatic default does not reduce SEBI’s enforcement powers, it merely ensures that a prohibition period, when imposed, is a conscious regulatory decision tied to the facts of the case. This is consistent with the principle of proportionality in administrative action.
The amendment to Clause 5 of Schedule II of the Intermediaries Regulations follows the same principle. By confining its scope to proceedings under Section 11B (1) from 11(B) of the SEBI Act, 1992, ensures the restriction is targeted at proceedings with substantive bearing on market integrity. The reduction from 1 year to 6 months, also acknowledges the practical reality that show cause notice issuance to conclusion can take considerable time, often through no fault of the applicant. A prolonged bar on registration imposes significant commercial costs and may deter legitimate market participants. This amendment brings proportionality to the registration process without compromising SEBI’s ability to deny registration in genuinely problematic cases.
The mandatory divestment provision was conceived as a protective measure, but in practice it has operated as a punitive one, by imposing irreversible consequences at a stage where guilt has not been established. The separation of economic and governance rights is a well-recognized concept in corporate law. Restricting voting rights achieves the regulatory objective of insulating the intermediary from the influence of a disqualified person, while preserving the person’s economic interest pending final adjudication.
This amendment is consistent with the broader theme of the Consultation Paper: ensuring that the “fit and proper” framework is proportionate, reversible where appropriate, and does not impose irreparable harm at preliminary stages. Overall, the amendments represent a balanced and measured refinement of the existing framework.
You can mail us your queries and comments at Pragya Garg.
