SEBI Updates 'Fit and Proper' Criteria, Removes Automatic Disqualification for Brokers Following FIR Registration

SEBI Approves Key Changes to 'Fit and Proper' Criteria for Intermediaries

Key Takeaways:

• The Securities and Exchange Board of India's (SEBI) board has approved changes to the 'fit and proper' criteria for brokers and market intermediaries.
• Automatic disqualification based solely on the filing of a First Information Report (FIR) or charge sheet has been removed.

New Framework:

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• Brokers and market intermediaries will no longer face disqualification due to the initiation of criminal proceedings by agencies such as the police, CBI, ED, SFIO, or MCA.
• SEBI will adopt a principle-based approach, assessing factors such as integrity, honesty, reputation, and conduct on a case-by-case basis.
• Disqualification triggers will primarily arise upon conviction for economic offences, securities law violations, or offences involving moral turpitude.

Changes to Disqualification Triggers:

• Mandatory divestment requirements for persons declared not 'fit and proper' have been done away with.
• Only voting rights will be restricted, allowing such individuals to retain economic ownership of their holdings.
• The threshold for disqualification in insolvency cases has been raised, with legal entities now being disqualified only upon a winding-up order.

Procedural Fairness:

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• Individuals must be given a reasonable opportunity of being heard before being declared not 'fit and proper'.
• Intermediaries are required to disclose any disqualifying event involving their Key Managerial Personnel (KMPs) or persons in control within seven days.

Penalties:

• The default five-year prohibition on fresh registration has been removed.
• The cooling-off period triggered by a show-cause notice has been reduced from one year to six months and will apply only to cases involving serious regulatory directions.

Impact on Group Entities:

• Disqualification of group entities will not automatically impact intermediaries unless specifically declared by the regulator.