SEBI mulls over overhaul of 'fit and proper person' framework governing market intermediaries

Markets regulator Securities and Exchange Board of India (SEBI) on Wednesday (February 4, 2026) proposed a comprehensive overhaul of the ‘fit and proper person’ framework governing market intermediaries, aiming to bring greater procedural clarity and fairness to the regulatory process.

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In its consultation paper, SEBI has suggested amendments to Schedule II of the Intermediaries Regulations, 2008, which deal with the ‘Fit and Proper Person’ criteria applicable to intermediaries, their key management personnel (KMPs), and persons in control.

Under this, the regulator has proposed to clearly codify the right to a hearing, refine the scope of disqualifying events, and reduce regulatory uncertainty for applicants and intermediaries.

The regulator has recommended to abolish the reference to initiation of winding-up proceedings as a disqualification in a bid to ensure that only a final winding-up order, and not mere initiation of proceedings, is considered while assessing whether a person is fit and proper.

Also, SEBI is looking to explicitly include the right to a hearing in the regulations. Although the practice of giving a reasonable opportunity of being heard already exists, it has been proposed to be clearly stated in the rules to remove any procedural ambiguity.

Accordingly, a new clause has been proposed, which requires intermediaries or applicants to inform SEBI within seven days if any disqualifying event occurs, and clarify that a person can be declared ‘not fit and proper’ only after being given a reasonable opportunity of being heard.

“The obligation to inform SEBI about the occurrence of any event in respect of KMPs or the Persons in Control shall also be with the applicant or intermediary as they are applying or holding the certificate of registration with SEBI,” the regulator proposed.

The regulator has recommended to remove the default five-year ineligibility period for applying for registration when no time period is specified in SEBI’s order. Going forward, the ineligibility will apply only for the period mentioned in the order.

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In addition, the period during which a registration application is not considered after issuance of a show-cause notice (SCN) is proposed to be reduced from one year to six months, to avoid prolonged uncertainty for applicants.

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SEBI has proposed changes to Clause 6 relating to associates, group entities, and persons in control. The amendments clarify that disqualifications of group entities will affect an intermediary only if SEBI formally declares such persons as not fit and proper. Further, intermediaries must replace disqualified KMPs within 30 days of such declaration.

The regulator has suggested removing the mandatory requirement for divestment of shareholding by persons in control who are declared not fit and proper.

Instead, such persons should only be restricted from exercising voting rights, while retaining their economic ownership. This change aims to prevent irreversible financial loss in cases where individuals are later cleared of wrongdoing. The SEBI has sought public comments till February 25, 2026 on the proposals.