SEBI revamps 'Fit and Proper' criteria for market intermediaries

Priyanka Dixit Sibal and Suyash Sarvankar

Market intermediaries such as stockbrokers, fund managers, merchant bankers and credit rating agencies must qualify as ‘fit and proper’ persons to obtain registration from the Securities and Exchange Board of India (SEBI). Last month, SEBI introduced the SEBI (Intermediaries) (Amendment) Regulations, 2026 to revise the 'fit and proper' framework, with a view to (i) balance the regulatory objective of a principles based criteria in that, only persons with integrity, honesty, ethical behaviour, reputation, fairness and character operate in the securities market, and (ii) ensure ease of doing business by market participants.

Key changes effected by the amendment are as follows:

1. Pending proceedings no longer trigger disqualification: One can no longer be disqualified based on pending FIRs and charge sheets. Similarly, mere initiation of winding up proceedings will not lead to a disqualification. Previously, such proceedings could hamper the intermediary's registration, require the relevant party be replaced from its position as the intermediary, or require divestment in the case of a promoter. Now, determination of a person as not ‘fit and proper’ will be made only after SEBI provides a hearing.

2. Expanded conviction based disqualification: Conviction for economic offences and securities law violations have been added, alongside offences involving moral turpitude as grounds for disqualification.

3. The five-year bar is no longer automatic: Previously, a SEBI order declaring a person not ‘fit and proper’ resulted in a blanket five-year prohibition (in the absence of a specified period), regardless of the severity of the conduct. Moving forward, SEBI orders must clearly specify and justify the restriction period.

4. Show Cause Notice Consequences: Earlier, if SEBI issued a show cause notice or direction to any intermediary, such intermediary’s application for registration would not be considered for a period of 12 months. This period has now been reduced to 6 months.

5. Divestment requirement stays as is: A person is required to divest her holding in the intermediary, within 6 months of such person being declared not ‘fit and proper’. This stipulation remains unamended despite a proposal to merely restrict voting rights of the persons in control instead.

6. Reporting: An intermediary is now required to proactively inform SEBI about any events involving itself, its key managerial personnel, or persons in control regarding any trigger events, within 15 working days of occurrence. Intermediaries should reassess their current reporting checklists.

   
   

The amendments are prospective. SEBI has clarified that with respect to pending cases, administrative steps may be taken, wherever required, to withdraw such show cause notices/cases, if such matters would not warrant issuance of show cause notices under the amended provisions.

Taken together, the amendments reflect an overall shift from a prescriptive approach to a more principles based framework, aligned with global market norms. While rationalising some aspects of the fit and proper criteria, SEBI has reserved to itself a subjective determination of ‘fit and proper’, with the stated aim to promote fairness and ethical conduct among market participants.