Brokers uneasy with ‘Fit and Proper’ norms, raise concerns with Sebi

Brokers Once Again Raise ‘Fit and Proper’ Concerns with SEBI

In a recent meeting with capital market regulator Sebi, market intermediaries once again flagged off concerns over the controversial ‘Fit and Proper’ criteria, and while it remains unclear whether Chairman Tuhin Kanta Pandey offered any concrete assurance of a review, the matter appears to be a growing source of unease among brokers.

The concerns stem from a Sebi notification issued on November 17, 2021 which outlines stringent standards for individuals in key managerial roles. Beyond integrity, honesty, ethical conduct and reputation, the criteria specify that a person must not be facing a criminal complaint or FIR filed by Sebi, nor be charge-sheeted by any law enforcement agency in connection with economic offences. This includes agencies such as the Police Economic Offences Wing (EoW), Central Bureau of Investigation (CBI), Serious Fraud Investigation Office (SFIO), and the Enforcement Directorate (ED). Brokers are specifically urging Sebi to reconsider these two provisions.

These conditions, they argue, create compliance hurdles and disrupt continuity in roles such as principal officers, directors, managing partners, compliance officers, and other key management personnel. According to the notification, individuals who fail to meet the criteria - either due to a pending Sebi complaint or chargesheet - must be replaced within 30 days of disqualification.

The regulations also impact promoters and controlling shareholders of a company, as failing to meet the ‘Fit and Proper’ standard implies they are barred from exercising voting rights and must divest their stake within six months. Non-compliance could lead to the criteria being invoked against the intermediary entity itself.

Brokers claim the rules undermine an individual’s fundamental right to livelihood, especially since disqualification can occur before a court has established guilt. They are also warn of potential misuse, where malicious actors could file frivolous complaints or FIRs to destabilize brokerage firms. Often, charge sheets are filed, but individuals are acquitted later during trial, making the mere filing of a charge sheet an unreliable basis for regulatory action, they argue.

The requirement to quickly restructure an organization’s leadership is another major concern. Sudden changes could disrupt operations, impact regulatory compliance in overseas jurisdictions, and threaten business continuity, espcially for brokers with cross-border operations.

Also Read: Merchant bankers are gearing up for a ‘beauty parade’ in anticipation of NSE’s IPO

There are also practical challenges with the mandated divestment of stake. Brokers point out that enforcement agencies may not allow a charge-sheeted individual to divest their holdings, making the regulation unworkable in such scenarios.

In listed entities, any stake sale or change in control could trigger an open offer, which becomes unfeasible if the stakeholder in question is under legal scrutiny, as buyers are unlikely to step forward. Even inter-se transfers, brokers say, may require substantial capital, often difficult to mobilize. Lock-in periods and heavy tax liabilities further complicate matters, making compliance nearly impossible in some cases.

Also Read: Sebi nod for Jane Street’s trading comeback still awaited

While discussions are ongoing, brokers are hoping for a more pragmatic framework that balances regulatory oversight with business realities and the fundamental rights of individuals.

An email seeking comments from Sebi did not elicit any response till the time of publishing the story.

As per regulatory sources, these amendments in ‘Fit and Proper’ provisions were made after the NSEL scam so that brokers who are not in compliance can be deterred from the market.