SDG 8: Decent Work and Economic Growth | SDG 16: Peace, Justice and Strong Institutions
Securities and Exchange Board of India (SEBI) | Ministry of Finance
The SEBI consultation paper on proposed amendments to Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 aims to appropriately balance the ease of compliance with the regulatory objective of ensuring market integrity.
The paper proposes a transition from a strictly formulaic approach to one that better integrates principle-based and rule-based criteria. The proposed changes reflect learnings from the past five years and aim to align India’s securities framework with global norms such as the IOSCO Principles.
Comprehensive Revisions to ‘Fit and Proper’ Criteria
The amendments target several critical areas of the “Fit and Proper Person” framework to ensure that participants with integrity, honesty, and ethical behavior operate in the market:
Decoupling Preliminary Legal Steps: SEBI proposes to omit Clauses 3(b)(i) and 3(b)(ii), which previously triggered disqualification upon the mere filing of a criminal complaint or charge sheet. Such events will now be evaluated under the principle-based criteria of integrity and reputation.
Alignment on Economic Offenses: Clause 3(b)(v) will be expanded to include convictions for economic offenses or securities law violations, bringing the regulations in line with SECC and DP Regulations.
Winding-Up Thresholds: Disqualification for corporate entities under Clause 3(b)(vi) will now only be triggered when a final order for winding up has been passed, rather than at the stage of initiation.
Institutionalizing Natural Justice: New Clauses 3A and 3B are proposed to institutionalize a reasonable opportunity of being heard before any person is declared as not ‘fit and proper’.
What is the “Fit and Proper Person” criteria in the context of SEBI regulations? The ‘fit and proper person’ criteria is a statutory requirement that individuals and entities—including principal officers, directors, and KMPs—must fulfill to operate as intermediaries in the Indian securities market. It evaluates candidates based on two parallel tracks: principle-based criteria, which assess subjective qualities like integrity and fairness; and rule-based criteria, which identify objective disqualifiers like prior convictions, insolvency, or being declared a willful defaulter. The 2026 proposed amendments seek to ensure that this ‘integrity test’ does not create unintended exclusions at preliminary stages of legal proceedings, thereby supporting the ease of doing business for the common man and professional intermediaries alike.
Who are Market Intermediaries? Market intermediaries in the Indian securities market are specialized entities or individuals registered with the Securities and Exchange Board of India (SEBI) that act as vital conduits between investors and issuers. They facilitate the efficient flow of capital and information, ensuring that market transactions are executed smoothly, transparently, and in compliance with regulatory standards. Key roles and examples include Stock Brokers, Merchant Bankers, Portfolio Managers, Registrars (RTA) and Underwriters.
Policy Relevance
The proposed SEBI amendments represent a strategic shift from procedural barriers to substantive market integrity. This rebalancing ensures that the ‘Fit and Proper’ standard acts as a shield for the common man’s investments by ensuring only ethical professionals manage public wealth.
Strategic Impact:
Protecting Retail Investors: By refining the “Fit and Proper” test, SEBI ensures that stock-brokers and portfolio managers are held to high ethical standards, preventing “bad actors” from misusing public money.
Promoting Economic Fairness: Removing automatic disqualifications for pending charge sheets prevents irreparable financial loss for professionals who may later be cleared, maintaining the principle of “innocent until proven guilty”.
Market Stability for Common Man: Shifting from mandated divestment of holdings to a restriction on voting rights for “Persons in Control” prevents sudden asset liquidations that could cause market volatility, thereby protecting the value of average savings portfolios.
Efficiency in Financial Services: Reducing the non-consideration period for show cause notices (SCN) from one year to six months ensures that access to registration is not unduly deferred, allowing for faster delivery of financial services to the public.
Relevant Question for Policy Stakeholders: How can SEBI establish clear guidelines to ensure that the ‘principle-based’ evaluation of integrity remains objective and consistent across different intermediary categories to avoid discretionary bias by 2027?
Follow the full news here: SEBI Consultation Paper on Fit and Proper Criteria | SEBI