From proposals of removing FIR-based automatic disqualifications to restricting voting rights instead of forced divestments, India’s securities regulator has proposed major amendments to the ‘fit and proper criteria’ in schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.
Currently, SEBI regulates thousands of intermediaries across categories, stockbrokers, portfolio managers, investment advisers, merchant bankers, and depository participants, all subject to ‘fit and proper person’ criteria.
Presumption of Innocence
SEBI‘s current framework triggers automatic disqualification when a criminal complaint or FIR is filed by SEBI under Section 154 of the Code of Criminal Procedure or when any enforcement agency files a charge sheet concerning economic offences. The consultation paper proposes to eliminate both these rule-based triggers and shift to principle based assessment.”The 2021 amendments marked a departure from the traditional holistic assessment by converting specified events, most notably the filing of a criminal charge-sheet, into hard-wired triggers for automatic disqualification,” explains Alay Razvi, managing partner at Accord Juris.
“In grave cases, SEBI would still have discretion to disqualify applicants under Clause 3(a) of Schedule II, for breach of integrity, honesty, ethical behaviour, reputation, fairness and character. SEBI can also stipulate guidelines for exercise of such discretion, as proposed in the consultation paper,” said Vanya Singh, partner at Cyril Amarchand Mangaldas.
“Given that a clear majority of economic offence trials in India ultimately end in acquittal or discharge, automatic disqualification at preliminary stages created a system of punishment without adjudication,” says B. Shravanth Shanker, managing partner at B. Shanker Advocates LLP. “The proposed shift to a conviction-based trigger restores proportionality and aligns regulatory consequences with established wrongdoing rather than allegations.”
Under the proposed amendments, Clause 3(b)(v) would be expanded to include conviction by a court for any economic offence or securities law violation, in addition to the existing trigger for offences involving moral turpitude. This harmonises the Intermediaries Regulations with the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018, and the Depositories and Participants Regulations, 2018, which already employ conviction-based thresholds.
The consultation paper proposes new Clauses 3A and 3B that would formalise disclosure requirements and right to hearing. Under proposed Clause 3A, intermediaries must inform SEBI within seven days when any person subject to the criteria experiences a disqualifying event. Proposed Clause 3B mandates that “a person shall be declared as not ‘fit and proper person’ by the Board, after giving such person a reasonable opportunity of being heard”.
Revival Over Liquidation
One of the consultation paper’s proposals addresses the intersection between SEBI regulations and the Insolvency and Bankruptcy Code, 2016. Currently, Clause 3(b)(vi) triggers disqualification when “any winding up proceedings have been initiated or an order for winding up has been passed” against an intermediary. SEBI proposes to omit the initiation trigger and limit disqualification to cases where an actual winding-up order has been passed.
“In practice, winding-up petitions are often filed by operational creditors as a pressure tactic and are frequently settled before reaching final adjudication. Treating such preliminary proceedings as grounds for disqualification would be disproportionate,” said Natasha Treasurywala, partner at Desai and Diwanji.
“If an intermediary loses its registration at the moment CIRP begins, it cannot operate, generate revenue or attract resolution applicants, making revival practically impossible,” argues Shankar.
According to the Economic Survey 2025-26, as of September 2025, 57 percent of closed Corporate Insolvency Resolution Process (CIRP) cases resulted in going-concern rescue, with the resolution-to-liquidation ratio improving from 20 percent in FY18 to 91 percent in FY25.
“Linking disqualification to actual winding-up orders aligns this regime with the revival-oriented intent of the IBC,” said Vaibhav Kakkar, senior partner at Saraf and Partners.
Voting Rights Versus Forced Divestment
A significant relief for promoters and investors comes through amendments to Clause 6 second proviso. Under current provisions, if Persons in Control fail to satisfy the ‘fit and proper person’ criteria, the intermediary must ensure such persons divest their holdings within six months.
The consultation paper proposes eliminating the mandatory divestment requirement, instead restricting only voting rights of persons declared unfit.
“Concerns have been expressed stating that Clause 3(b)(i) and Clause 3(b)(ii) read with this provision creates a scenario where a Person in Control is mandated to divest their holdings without a definite finding of guilt,” notes the consultation paper.
“The proposed framework improves certainty and could revive investor interest in regulated market intermediaries. That said, there does exist some risk of individuals facing serious economic offence proceedings remaining in control for a longer timeframe, but SEBI appears to be addressing this through enhanced disclosure and continuous oversight,” said Kakkar.
To address compliance friction, the consultation paper proposes several technical refinements also, including reducing the cooling-off period for applications where a show cause notice has been issued from one year to six months and limiting this bar only to proceedings that may result in directions under Section 11B(1), removing the default five-year prohibition on registration where SEBI has declared a person unfit without specifying any duration so that the period is entirely determined case by case.
SEBI has invited public comments on consultations by February 25, 2026. Legal experts broadly view the consultation paper as striking a more sophisticated balance between investor protection and regulatory proportionality than the 2021 framework achieved.
