SEBI Plans to Relax Strict Rules for Market Intermediaries

SEBI Plans to Relax Strict Rules for Market Intermediaries

India's securities regulator is planning major changes to make its "fit and proper person" rules more fair and practical for market intermediaries. The Securities and Exchange Board of India (SEBI) released a consultation paper this week proposing to ease several strict requirements that currently govern who can operate in the country's financial markets. These rules affect brokers, investment advisors, and other market professionals. 

The Current Problem 

Right now, market intermediaries can be automatically disqualified if they face certain legal issues, even before any wrongdoing is proven. For instance, just filing a criminal complaint or charge sheet against someone can trigger their disqualification. SEBI believes this approach is too harsh. The regulator explained that such automatic disqualifications go against a basic principle of criminal law - that everyone is innocent until proven guilty. These preliminary legal steps don't mean someone has actually done anything wrong, yet they can destroy careers and businesses. 

What SEBI Wants to Change 

First, SEBI wants to stop automatic disqualifications based on pending criminal complaints or charge sheets. Instead of immediately barring someone from the industry, the regulator would look at each case individually. They would consider factors like the person's integrity, reputation, and overall conduct. However, SEBI would still keep the power to act quickly in serious cases where the allegations are particularly severe. The regulator plans to create guidelines explaining when pending cases are serious enough to justify immediate action. Second, the current rules treat companies facing insolvency proceedings very strictly. As soon as winding-up proceedings begin, a company can be disqualified. But SEBI points out that many companies going through insolvency proceedings actually recover successfully rather than shutting down. The new proposal would only disqualify companies after a final winding-up order is passed, not when proceedings merely start. Third, SEBI wants to remove an automatic five-year ban that kicks in when someone is declared "not fit and proper" but no specific time period is mentioned in the order. This blanket penalty doesn't consider whether the violation was minor or major. Under the new system, bans would only apply for the duration specifically mentioned in SEBI's order. 

New Protections Being Added 

SEBI is proposing several procedural improvements to make the system fairer. The most important is clearly writing into the regulations that people must be given a proper hearing before being declared "not fit and proper." While this already happens in practice, putting it explicitly in the rules removes any doubt. The regulator also wants market intermediaries to promptly report any events that could potentially disqualify their key managers or controlling persons. They would have seven days to inform SEBI about such developments. Another significant change involves shareholders who control market intermediaries. Currently, if controlling shareholders are declared unfit, they must sell their holdings entirely. SEBI now proposes letting them keep their shares and economic ownership but blocking them from exercising voting rights. This prevents permanent financial losses if the person is later cleared. The proposal also clarifies that problems with associated companies or group entities will only affect an intermediary if SEBI formally declares those entities unfit. Additionally, if a key manager is disqualified, the intermediary would have 30 days to replace them. 

Why These Changes Matter 

Market participants have been complaining that the current rules are too rigid and create unnecessary hardships. Being disqualified early in legal proceedings, before any conviction, can cause irreparable damage to businesses and careers. Legal experts have welcomed the proposed changes. Pulkit Sukhramani from JSA Advocates & Solicitors called the revamp "progressive," noting it gives SEBI flexibility to be strict when necessary while being more lenient when circumstances favor the intermediary. 

Balancing Act 

While relaxing rules around pending charges, SEBI is simultaneously tightening some other criteria. The regulator proposes broadening grounds for disqualification to include anyone convicted of economic crimes or stock market violations, bringing these rules in line with its other major regulations. SEBI studied how other regulators handle similar issues. The Reserve Bank of India, for example, relies on actual convictions rather than pending cases when making black-and-white determinations. International bodies like the International Organization of Securities Commissions also focus on convictions rather than mere accusations. The regulator developed these proposals based on five years of experience enforcing the current rules, feedback from market participants, and global best practices. 

Next Steps 

SEBI has invited public comments on these proposals until February 25, 2026. After reviewing the feedback, the regulator will finalize the new framework. These changes represent a significant shift toward a more balanced approach - one that protects market integrity while respecting the rights of individuals and businesses facing allegations. The goal is creating rules that are tough on actual wrongdoing but fair to those who haven't been proven guilty.