A Need to Revisit the SEBI (Intermediaries) Regulations, 2008

[Pallavi Mishra is a 5th year student at Hidayatullah National Law University]

The Securities and Exchange Board of India (“SEBI”) notified the SEBI (Intermediaries) Regulations, 2008 were notified as an attempt to consolidate various laws governing the market intermediaries in India. These regulations lay down the common procedural compliances and adjudicatory mechanisms. They are enforced along with other substantive laws which specifically lay down the rules of conduct for various intermediaries.

After more than a decade of its implementation, while the Intermediaries Regulations may have stood the test of time in performing the role of investor protection, the same needs to be revisited. According to the High Level Committee Report chaired by Justice R. Dave published in June 2020, SEBI has around 408 pending enquiry proceedings in relation to the market intermediaries. In this post, the author analyses the major areas of concern in the Intermediaries Regulations which must be considered by SEBI to improvise the effectiveness of its quasi-legislative and other administrative powers.

Improving the Compliance Function

According to the International Organization of Securities Commission (“IOSCO”) principles, “compliant policy function” refers to the ongoing process of identification, assessment and monitoring of a market intermediary’s compliance with securities regulations. In giving effect to these principles, SEBI implements a compliance policy under Chapter III of the Intermediaries Regulations, which mandates the appointment of a compliance officer and the enactment of a code of conduct. The generic nature, along with the lack of strict accountability in these provisions, constitute the major reasons for their inadequacy in promoting best practices. Cases such as the Sahara and NSEL offer evidence to the fact that despite having the compliance policy function in place, the loopholes in the Intermediaries Regulations are wide enough to be manipulated.

An approach to further widen the compliance function while establishing a concrete organisational structure is necessary for an effective implementation of the Intermediaries Regulations. One way of undertaking this is to establish self-regulatory organisations (“SROs”) as the first-level regulators for the segment of market intermediaries in India. The capabilities and the functioning of SROs in an efficient manner can be seen from the working of stock-exchanges in India (and the US alike). However, unlike the US, the Indian regime has a very limited scope of operations performed by SROs. To strengthen the compliance function and limit the manipulation of loopholes in laws, an independent compliance committee within the SRO may be given the crucial responsibility of registration, regulation and supervision along with the power to take disciplinary actions in cases of non-compliance with the applicable laws and general sector standards.

To further ensure that only best practices prevail within the SROs, SEBI should grant recognition only on a nomination basis, upon an assessment of the capability of the proposing entity to function as an SRO for market intermediaries in India. With its establishment, only exceptional cases will require reporting to SEBI, thereby automatically reducing the burden of adjudication upon it.

Inspection and adjudicatory mechanism under the Intermediaries Regulations

The Intermediaries Regulations as they stand at present provide for a duplication of enquiry proceedings for an intermediary in cases of an alleged default. The first-tier of enquiry is conducted by the designated authority (“DA”) upon the orders of the designated member (“DM”) who is a whole-time member of SEBI. On receipt of the report of the DA, the DM further issues a show-cause notice to the intermediary calling upon it to submit in writing the reasons why the measures in the DA’s report should not be implemented. The reply of the intermediary is perused by the DM who is further required to give a personal hearing, following which the final order is passed on merits of the case.

The major point of delays in these enquiry proceedings occur at the level of the DM. This is because the SEBI currently allows the appointment of only four whole-time members who perform the role of the DM amongst other executive and judicial functions.  Moreover, since the DM is required to grant a personal hearing to the concerned intermediary, all processes relating to inspection of documents and cross-examination have to be conducted personally by the DM, leading to inordinate delays. The judgement delivered by the Securities Appellate Tribunal (“SAT”) in Adventz Finance Pvt. Ltd. v. SEBIalsodiscusses the serious limitations upon the exercise of adjudicatory functions by the DM personally.

A lengthy investigation and enquiry process is not favourable in cases of intermediaries, as there is a major element of investor protection and public interest involved. Considering that the enquiry proceedings are initiated only after exhaustive inspection and investigation, it is of importance to contemplate whether there is a need to have exhaustive double enquiry proceedings by both the DA as well as the DM. It is an established point in law that all inspection, investigation and adjudicatory procedures must adhere by the principles of natural justice. Abiding by this, the author is of the view that the double enquiry proceedings may be retained while reworking the procedure to provide efficiency and allow expeditious disposal of cases.

In contrast to the limit on appointment of four officers as the DM, SEBI does not face any numeric constraints on the appointment of officers as the DA. Pursuant to this, it is in public interest if all the enquiry procedures, including an opportunity of personal hearing, are completed at the DA’s level itself. This should be followed by a time-bound perusal of the DA’s report by the DM along with a review of the intermediary’s written submissions leading to the passing of the final order. The mandatory personal hearing before the DM should be done away with to reduce the adjudicatory burden. This does not violate the principles of natural justice as the Supreme Court in Madhya Pradesh Industries Ltd. v. Union of India and Others has held that oral hearing is not the only means of representation. To that extent, written submissions have been accepted as fair means of representation in quasi-judicial proceedings, giving the affected party an opportunity to defend itself adequately. An amendment in Chapter V of the Intermediaries Regulations to this effect will ease the regulatory burden, while also retaining the advantages of two-tier proceedings such as a deeper examination of facts.

Fit and Proper Criteria

The last part of the post deliberates upon the “fit and proper criteria” required to be fulfilled by the intermediaries for being granted the registration certificate. In several jurisdictions like the UK, Singapore as well as India, a fitness and propriety regime is a principles-based compliance which acts as an entry-barrier as well as the guiding factor for the conduct of intermediaries in the securities market.

The Intermediaries Regulations place wide discretionary powers in the hands of SEBI to determine the fitness and propriety of the intermediary based on any factor as it deems fit, including but not limited to integrity, reputation, character, absence of convictions and competence. It is of importance to understand that the adjudicatory mechanism of SEBI differs widely from the UK regime. In the UK, the Financial Conduct Authority has an independent Regulatory Decisions Committee to perform the role of an adjudicator, thereby maintaining the principle of separation of powers. SEBI’s regulatory structure on the other hand does not have a separate adjudicatory committee and it therefore performs both executive and judicial functions. In light of this, the scope of abuse of administrative discretion against intermediaries increases and therefore has a tendency to militate against the scheme under the Constitution of India.

Any quasi-legislative or judicial action by an administrative authority must fall within the boundaries of Article 14 of the Constitution which guarantees fair play, proportionality and reasonableness. The exercise of SEBI’s power in light of the fit and proper criteria has been questioned by the SAT in several cases. SEBI has over the years followed an unreasonably strict regime against intermediaries wherein it has cancelled the registration certificate on prima facie evidence without adopting a case-by-case approach. In Almondz Global Securities Ltd. v. SEBI, the SAT focused on the lack of uniformity in the judgement exercised by SEBI under the fit and proper criteria.

None of the four criteria mentioned under the fit and proper test have any guiding factors or proviso to take into consideration the interests of the market intermediaries. While administrative discretion is not ipso facto ultra vires the Constitution, the arbitrary exercise of it is. A properly applied test on a case-by-case basis does not in fact mean a reduced regulatory burden. It allows for an effective functioning of the market where the investors are not deprived of the services of the intermediaries, except where the intermediary indulges in activities capable of causing irreparable harm to the securities market.

Primarily, the author suggests shifting the onus upon the intermediary to establish that it is fit and proper for the purposes of registration and operation in the market, rather than SEBI proving the opposite for denying the certificate. More importantly, SEBI should also list the probable instances of disqualification under each criteria to reduce the subjectivity involved, while keeping the list inclusive but qualified by the ejusdem generisrule. A proviso should also be introduced in the Schedule to the effect that the failure to meet any of the four criteria should not itself lead to a refusal for the grant of the registration certificate. The relevance of an intermediary’s failure to meet the fit and proper criteria should depend on the surrounding factors such as the explanation offered by it for not meeting the criteria, the importance of the factor vis-à-vis the duties to be performed by it in the securities market and the passage of time since the failure of the intermediary to fulfil the fit and proper criteria on any grounds.

Once a registration certificate is cancelled or denied by the SEBI, it has serious implications on the intermediary’s ability to conduct itself in the securities market. Re-registration is often not possible, as the prior disqualification affects the reputation of the intermediary to a point of complete bar on its ability to practice in the future. Keeping this in view, it is essential that the discretionary power of the SEBI is qualified by limitations under the fit and proper criteria. This will allow it to maintain a balance between investor protection and market practices while judiciously exercising its discretion under the Intermediaries Regulations.


While SEBI’s functioning has been considerably enhanced since its establishment in 1992, there is substantial scope of improvement in its enforcement and adjudicatory mechanisms. There is also a need for introducing a distinct regulatory structure with separate adjudication wing as per the recommendations of the Financial Sector Legislative Reforms Commission, 2011. The Intermediaries Regulations serve as an important piece of legislation for investor protection and aim to promote the best practices in the securities market. In light of the broad objectives that SEBI seeks to promote, it is essential that a fair balance is struck between all the players in the market while exercising the discretionary powers given to it under these regulations.

Pallavi Mishra

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