Brokers urge SEBI to reconsider ‘fit and proper’ rules

The rules, introduced through a SEBI notification in 2021, lay down high standards for people in key roles such as directors, managing partners, compliance officers, principal officers and other management personnel. 
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HEMANSHI KAMANI

Stockbrokers have raised concerns over SEBI’s ‘Fit and Proper’ criteria, saying the current rules are too strict and hurt both individuals and businesses. The issue came up again during a recent meeting between market intermediaries and the capital markets regulator.

The rules, introduced through a SEBI notification in 2021, lay down high standards for people in key roles such as directors, managing partners, compliance officers, principal officers and other management personnel.

One of the key issues is the criteria restricting a person from holding a senior position if they are facing a criminal complaint or have been charge-sheeted by any enforcement agency, including SEBI, the Police Economic Offences Wing, the Central Bureau of Investigation (CBI), Serious Fraud Investigation Office (SFIO), and the Enforcement Directorate (ED)

Forced exits

Brokers have requested the regulator to rethink this condition as it can lead to unfair disqualification even before a person is proven guilty in court, disrupts operations and violates rights, according to sources aware of the discussions.

If any individual doesn’t meet this‘fit and proper’ criteria, they must be replaced within 30 days. Promoters and controlling stakeholders will lose their voting rights and will be required to sell their stake within six months. In case of non-compliance, SEBI may take action against the firm.

“These rules go against basic rights of livelihood and disrupt businesses, particularly when the people involved are cleared of charges later in court. These rules can also be misused to hurt competition by simply filing a false complaint or FIR,” an industry source said.

Practical difficulties

There are also practical issues. If a promoter has to sell their stake due to a charge sheet, they may not be allowed to do so by agencies investigating them. This makes it impossible to comply with SEBI’s rule. For listed companies, such a sale could trigger an open offer, which is unlikely to go through if the seller is under legal scrutiny.

Even transferring shares to family or others is not easy as it often needs large amounts of capital and comes with tax costs and lock-in periods. Another worry is that sudden leadership changes can disrupt operations, especially firms operating across borders. Such changes can create compliance issues with foreign regulators as well and affect business continuity, a senior broking official said.

Sources said that the regulator has been open to hearing their concerns and brokers are hopeful that SEBI will resolve some of these concerns through a balanced approach–one that ensures good governance without disrupting businesses or punishing individuals before a fair trial.

The ‘fit and proper’ criteria aims to uphold market integrity by ensuring that only individuals and entities with a clean track record and sound financial standing can operate as intermediaries. Some of the other conditions assess an individual’s ethical conduct, including financial integrity, good reputation, and honesty. It also factors in the competence, efficiency, financial stability and solvency of the applicant or intermediary, including capital adequacy and net worth.

An email sent to SEBI seeking comment did not elicit a response.

Published on August 3, 2025