Evaluating SEBI’s Fit & Proper Test: Striking the Right Balance

[Dhaval Bothra and Akshat Jain are law students at Symbiosis Law School Pune and National Law University Delhi, respectively]

Trust remains the cornerstone in matters of public money, and the Securities and Exchange Board of India (“SEBI”) is the watchdog of this trust. In furtherance of this aim, almost two years ago, the SEBI introduced amendments to the “fit and proper rule” under the Intermediary Regulations, 2008, which provides for the “automatic disqualification” of stock market intermediaries and/or directors, promoters etc. This “automatic disqualification” is presently the subject of a challenge by the intermediaries before the Bombay High Court in a petition filed by various Indian stock brokers.

The amended schedule II, clause 3 (“the Clause”) provides for the disqualification of stock market intermediaries on filing a criminal complaint or charge sheet in economic offences. It also mandates a prompt replacement of disqualified individuals within 30 days. Further, where a promoter or controlling interest holder fails to meet this “Fit and Proper” person criteria, they must abstain from voting rights and divest their holdings within six months of disqualification, or the intermediary faces disqualification.

This article hypothesizes that while the regulator’s attempt is well-intentioned, SEBI falls short of free-market prudence. The article further provides a comparative analysis of other sectors involving similar financial integrity and risk considerations. It also undertakes a study of international practices. It concludes by emphasizing the need for a balanced regulatory framework that safeguards individual rights while ensuring market integrity.

Myriad Regulators, Myriad Professions: No Automatic Disqualification

The SEBI’s imperative to protect public money and uphold the financial system’s integrity often leads to far-reaching prescriptions. Bodies such as the Reserve Bank of India (“RBI”), the Insurance Regulatory Development Authority of India (“IRDAI”), and the Insolvency & Bankruptcy Board of India (“IBBI”) have similar “fit & proper” criteria for public banks, insurers, and valuers respectively. However, no other regulator or profession presents such a far-reaching implication of an automatic disqualification based on a mere complaint, despite the common thread of public interest.

Consider, for instance, the RBI which follows a post-conviction approach in appointing directors to public banks. The Master Direction – RBI (Fit and Proper Criteria for Elected Directors on the Boards of PSBs) Directions, 2019, read with section 22 of the State Bank of India Act, 1955, states that a person shall not qualify for a directorship of Central Board or membership of Local Board or committees if they have been removed or dismissed from the service of the government on a charge of corruption or bribery, or if they are or have been convicted of any offence involving moral turpitude. Therefore, directors are evaluated for their suitability only after legal proceedings and convictions, not before.

Consider also the IRDAI, which prescribes a similar “fit and proper” criteria for the directors of insurers in its Guidelines for Corporate Governance. It mandates directors to have the necessary integrity and competence to uphold policyholders’ trust and ensure industry stability. They face disqualification only after a conviction and should have no prior convictions or adverse notices involving moral turpitude or any professional body.

Moreover, due to pending criminal proceedings, the IBBI’s recent decision to disqualify a registered valuer has been stayed by the Bombay High Court, further bolstering its judicial standing.

In India, under the Chartered Accountants Act, 1949, the Company Secretaries Act, 1980, the Companies Act, 2013, and the Advocates Act, 1960, disqualification occurs only upon conviction by a competent court for specific offences outlined within the respective acts. This approach aligns with the fundamental principle of “innocent until proven guilty”, ensuring that individuals retain their rights and liberties until a competent court finds them guilty beyond a reasonable doubt.

In contrast, the SEBI’s “fit and proper” test has adopted a more stringent approach by considering mere complaints or charge sheets as grounds for disqualification. It is imperative to note that at the stage of the proposed disqualification, there is no conclusive determination of guilt. Individuals are yet to have the opportunity to defend themselves before any punitive action is taken, raising concerns about the fairness and proportionality of the “fit and proper” test against other regulators, which also have a similar goal.

Global Comparative Framework: Protecting Capital Markets

Consider, for instance, the law in the European Union (“EU”) prescribed under the Joint Guidelines issued by ESMA and EBA on the assessment of the suitability of members of the management body and key function holders under Directives 2013/36/EU and 2014/65/EU. These directives lay down a framework for evaluating the reputation, honesty, and integrity of individuals seeking registration as intermediaries. Unlike SEBI’s approach, annex 3 of the ESMA and EBA guidelines states that pending criminal proceedings are to be “taken into account” as criteria but not as automatic grounds for disqualification. This approach highlights the significance of conducting thorough assessments of an individual’s reputation and involvement in regulatory and enforcement proceedings.

Similarly, in Singapore, the Monetary Authority of Singapore’s (“MAS”) Guidelines on Fit and Proper Criteriaemphasize honesty, integrity, and reputation as essential factors in assessing the suitability of a relevant person seeking registration as an intermediary. The MAS also considers pending criminal proceedings as criteria for evaluating an individual’s “fit and proper” status but not as automatic grounds for disqualification. This approach reflects a balanced regulatory framework that upholds market integrity while ensuring due process and fairness.

In the United Kingdom, the Financial Conduct Authority (“FCA”) also adopts a comprehensive approach to determine the honesty, integrity, and reputation of individuals under its Fit and Proper Test for Employees and Senior Personnel Handbook. Like the EU and MAS, the FCA considers pending criminal proceedings as criteria for evaluating a person’s “fit and proper” status but does not treat them as automatic grounds for disqualification.

Additionally, the International Organization of Securities Commissions (“IOSCO”) released a Fit and Proper Assessment – Best Practice Report, where only a conviction record acts as a bar to intermediary registration. Despite being part of the IOSCO Board, the SEBI’s regulations do not align with these international standards.

While the SEBI’s commitment to market integrity is commendable and well-intentioned, its automatic disqualification based on pending criminal proceedings without due process, fails the test of fairness and proportionality often laid down by the courts for regulatory interventions.


To strike a balance between upholding market integrity and safeguarding constitutional rights, certain crucial measures need to be adopted in the following manner:

  1. Adopting the “Criteria for Assessment” approach: By adopting a “criteria for assessment” approach, SEBI’s “fit and proper” test can move away from automatic disqualification based on pending criminal proceedings. Instead, the committee can conduct a comprehensive evaluation, considering factors like track record, ethics, and cooperation with regulators. Transparent guidelines, procedural safeguards, and periodic reviews will ensure fairness and due process. This approach will also focus on harmonization with international standards. This will enhance market integrity, investor confidence, and global recognition. This approach strikes a balance, promoting India’s robust and trusted financial ecosystem.
  2. Applying the principle of proportionality: A paradigm shift from immediate disqualification to a principle of proportionality is essential. This ensures that the severity of alleged offences aligns with the corresponding penalties imposed. Concurrently, establishing an independent review mechanism becomes imperative to impartially assess disqualifications and provide affected parties with a fair platform to present their case. Formal hearings granted to entities before finalizing disqualification decisions will assure due process. Integrating international best practices of regions like the EU will create a transparent and constitutionally compliant regulatory framework, instilling investor confidence and attracting substantial investments to the corporate and business sector.
  3. Adopting a risk-based scoring system: The SEBI should adopt a dynamic and risk-based scoring system within its “criteria for assessment” approach, assigning numerical scores to factors like pending criminal proceedings, compliance history, and corporate governance practices. This model, employed in countries like the USA and recommended by IOSCO, quantitatively assesses risk profiles and allows periodic updates based on changing market conditions and new risk indicators. By utilizing data analytics and artificial intelligence tools, the SEBI can gain deeper insights into market participants’ behaviour, detecting patterns of non-compliance and suspicious activities more efficiently. This will enable the SEBI to prioritize regulatory efforts on higher-risk entities, enhancing market oversight and reducing the burden on compliant ones.


Addressing the concerns arising from these violations is essential to mitigate potential impacts and foster a conducive investment climate which will promote the ease of doing business. Eliminating the risks of unwarranted disqualification will foster growth and progress in key sectors such as finance, technology, and infrastructure, making significant contributions to India’s overall economic development. A transparent and constitutionally compliant regulatory approach is required to instill investor trust and promote investments in India. Such an approach must uphold the principles of natural justice and equal protection of laws.

The SEBI’s approach, while well-intentioned, falls short of fairness and proportionality concerns by being excessive. It does not align with international practices and seems a mere lip service to solving myriad investor concerns plaguing the Indian markets. By ensuring a fair and stable business environment, India can attract more investments and drive economic growth in the long run.

– Dhaval Bothra & Akshat Jain

About the author

Add comment

Top Posts & Pages


Recent Comments


web analytics

Social Media