Brokers raise concerns over SEBIs fit and proper rules, seek relaxation

Stockbrokers have raised concerns over SEBI’s ‘fit and proper’ criteria, saying the current rules are too strict, hurting 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 ethical and integrity 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 the individuaal is facing a criminal complaint or has been charge-sheeted by any enforcement agency, including SEBI, the Economic Offences Wing, the Central Bureau of Investigation (CBI), Serious Fraud Investigation Office (SFIO), and the Enforcement Directorate.

 

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, disrupt operations and violate rights, according to sources aware of the discussions. “These rules go against basic rights of livelihood, 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. Last year in November, Embassy REIT CEO Arvind Maiyya was asked to step down under this criteria until an order passed by the National Financial Reporting Authority was stayed or set aside.

 

Also, if a promoter stake has to be sold due to a chargesheet, the investigating agency may not allow it. 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 for firms operating across borders as it can create compliance issues with foreign regulators 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. An email sent to SEBI seeking comment did not elicit a response.