Fit and Proper person criteria: SEBI 2021 Amendment

Author: Noyonika Nair is a graduate from NLU Jodhpur. She specialises in Corporate Laws. She had worked with Khaitan & Co, Mumbai in the past.

The concept of ‘fit and proper’ in corporate laws are just as alluding as the qualifying authority of ‘reasonableness’ in constitutional and administrative laws. The phrase ‘fit and proper’ as an epithet has been employed across commercial laws to provide regulatory oversight and assessment criteria for evaluating inter alia directors and key managerial personnel to ensure that such persons are capable to run the company.

In India this criterion has been an object of proliferate use by regulatory authorities like Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI). The key idea behind such criteria application is to increase corporate governance standards, and thereby investor protection and economy preservation.

One of the key regulations of SEBI which deploy this criterion are Securities and Exchange Board of India (Intermediaries) Regulations 2021 (Intermediaries Regulation). This regulation aims to governs all middlemen in the capital market.

Recently, SEBI issued a notification amending the vide Securities and Exchange Board of India (Intermediaries) (Third Amendment) Regulations 2021 (“Notification”). The Notification is effective from the date of its publication in the Official Gazette.

Key Changes

Key changes introduced to the Intermediaries Regulations are as follows:

• Application of ‘fit and proper person’ criteria: The ‘fit and proper person’ criteria shall apply to the applicant or the intermediary, principal officer, directors or managing partner, compliance officer and key managerial persons, promoter or persons holding controlling interest or persons exercising control over the applicant or intermediary, directly or indirectly.

• Principle based criteria for determining a ‘fit and proper person’: In addition to principle based criteria of integrity, reputation, character, absence of convictions/ restraint orders, the Notification has added additional criteria of honesty, ethical behaviour and fairness, as well as no order of conviction involving moral turpitude.

• Financial soundness attributes for determining a ‘fit and proper person’: In addition to financial soundness attributes of competence including financial solvency and net worth and absence of categorisation as a wilful defaulter, the Notification requires that the person should not be declared a fugitive economic offender, subject to recovery proceedings and should not have any charge sheet in any matter concerning economic offences, or order of restraint, prohibition or debarment in any securities laws or financial markets.

• Other additional disqualifications criteria for determining a ‘fit and proper person’: The Notification has added the following disqualifications as negative criteria for determination as a ‘fit and proper person’:

1. criminal complaint or information under section 154 of the Code of Criminal Procedure 1973 has been filed against such person by the Board and which is pending;
2. winding up proceedings have been initiated or passed;
3. unsoundness of mind; and
4. any other disqualification as may be specified by SEBI from time to time.

• Consequence of being declared as not ‘fit and proper person’: A declaration of such nature shall be effective for a period stated in the order or for a period of five years from the date of effect of the order, if no period is specified. Also disqualification of an associate or group entity, shall not have any bearing on the criteria for applicant/ intermediary, unless the applicant/ intermediary had incurred the same disqualification.