Markets regulator Securities and Exchange Board of India (Sebi) on Wednesday proposed a comprehensive overhaul of the ‘fit and proper person’ framework governing market intermediaries, aiming to bring greater procedural clarity and fairness to the regulatory process.
In a consultation paper, Sebi suggested amendments to Schedule II of the Intermediaries Regulations, 2008, which deals with the ‘Fit and Proper Person’ criteria applicable to intermediaries, their key management personnel (KMPs), and persons in control.
Under the proposal, the regulator has sought to clearly codify the right to a hearing, refine the scope of disqualifying events, and reduce regulatory uncertainty for applicants and intermediaries.
1 January 2026
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Sebi recommended abolishing the reference to the initiation of winding-up proceedings as a disqualification, proposing that only a final winding-up order — and not the mere initiation of proceedings — be considered while assessing whether a person is fit and proper.
The regulator is also looking to explicitly include the right to a hearing in the regulations. While the practice of granting a reasonable opportunity of being heard already exists, Sebi has proposed clearly stating this in the rules to remove procedural ambiguity.
Accordingly, a new clause has been proposed requiring intermediaries or applicants to inform Sebi within seven days if any disqualifying event occurs. It also clarifies that a person can be declared ‘not fit and proper’ only after being given a reasonable opportunity of being heard.
“The obligation to inform Sebi about the occurrence of any event in respect of KMPs or persons in control shall also rest with the applicant or intermediary, as they are applying for or holding the certificate of registration with Sebi,” the regulator said.
Sebi has further recommended removing the default five-year ineligibility period for applying for registration in cases where no specific time period is mentioned in its order. Going forward, ineligibility would apply only for the period specified in the order.
In addition, the period during which a registration application is not considered following the issuance of a show-cause notice (SCN) is proposed to be reduced from one year to six months, to avoid prolonged uncertainty for applicants.
The regulator has also proposed changes to Clause 6 relating to associates, group entities, and persons in control. The amendments clarify that disqualifications of group entities will impact an intermediary only if Sebi formally declares such persons as not fit and proper.
Further, intermediaries would be required to replace disqualified KMPs within 30 days of such a declaration.
Sebi has suggested removing the mandatory requirement for divestment of shareholding by persons in control who are declared not fit and proper. Instead, such persons would be restricted from exercising voting rights, while retaining economic ownership — a move aimed at preventing irreversible financial loss in cases where individuals are later cleared of wrongdoing.
The regulator has sought public comments on the proposals until February 25.
