Context:
The Securities and Exchange Board of India (SEBI) informed the Bombay High Court that it will review a controversial provision in its ‘fit and proper person’ criteria that disqualifies key managerial personnel (KMPs) and directors at market intermediaries merely for having a chargesheet filed against them.
This development follows petitions filed in 2023 by leading brokerage firms, including Motilal Oswal Financial Services and Anand Rathi Shares and Stock Brokers, challenging the rule as unconstitutional.
About the ‘Fit and Proper Person’ Criteria
- The rule determines eligibility and integrity standards for entities and individuals associated with SEBI-regulated intermediaries such as brokers, mutual funds, investment advisers, and rating agencies.
- It ensures that those managing or controlling intermediaries are of sound reputation, integrity, and competence.
Background
- The ‘fit and proper person’ framework was first introduced in 2004, and later subsumed under the SEBI (Intermediaries) Regulations, 2008.
- In November 2021, SEBI amended the regulations, introducing automatic trigger-based disqualifications in place of case-by-case assessments.
- Under the new clause (Clause 6, Schedule II), any individual named in a chargesheet or accused of an economic offence is automatically deemed “not fit and proper”.
The Controversial Clause
- Presently, filing of a chargesheet — even without conviction — can automatically disqualify an individual from being considered fit and proper.
- This has raised concerns about fairness and due process, as it penalises individuals before judicial determination of guilt.
SEBI’s Stand
- SEBI told the court that it will re-examine and review the provision to ensure it aligns with principles of natural justice and proportionality.
- The review will balance market integrity with individual rights, preventing misuse while maintaining investor confidence.
