Contributors:
Mr Bhushan Shah, Partner

On 4 February 2026, the Securities and Exchange Board of India (SEBI) issued a Consultation Paper proposing amendments to the “fit and proper person” criteria under Schedule II of the SEBI (Intermediaries) Regulations, 2008 (“Intermediaries Regulations”). These criteria apply to intermediaries and to their key managerial personnel, promoters, and persons in control.

Following the Consultation Paper, SEBI approved the proposed amendments in its Board Meeting held on 23 March 2026.

Amendments to the existing provisions

One of the most significant changes relates to Clauses 3(b)(i) and 3(b)(ii) of Schedule II of the Intermediaries Regulations. Under the existing provisions, the mere pendency of a criminal complaint or FIR filed by SEBI, or the filing of a charge sheet by enforcement agencies in relation to economic offences, resulted in automatic disqualification. SEBI has now approved that these shall not be the primary grounds for disqualification.

At the same time, SEBI has strengthened the framework in cases where wrongdoing is established. Under the existing Clause 3(b)(v) of the Intermediaries Regulations, the disqualification was based on a conviction for an offence involving moral turpitude. This has now been expanded to include convictions for any economic offence or any offence under securities laws.

Further, Clause 3(b)(vi) of Schedule II of the Intermediaries Regulations previously treated both the initiation of winding-up proceedings and an order of winding up as grounds for disqualification. SEBI has now narrowed this provision. Only an order of winding up will be treated as a ground for disqualification, while the mere initiation of such proceedings will no longer be considered a ground.

SEBI has also revised the consequences of being declared not “fit and proper.” Under the existing Clause 4 of the Intermediaries Regulation, where no specific period was prescribed in a not “fit and proper person” Order issued by SEBI, a default prohibition of five years applied from making a fresh application for registration. This default rule has now been removed, and the prohibition will apply only for the period specified in SEBI’s order.

In addition, Clause 5 of the Intermediaries Regulation has been narrowed. Previously, if a Show Cause Notice (“SCN”) had been issued under Sections 11(4) or 11B of the SEBI Act, 1992, the application for registration would not be considered for one year. SEBI has now limited this restriction to SCNs under Sections 11(4) and 11B(1), and reduced the period of non-consideration from one year to six months.

New insertions to the existing provisions

SEBI has also introduced important procedural provision and compliance obligations through new insertions.

First, the insertion of Clause 3A under Schedule II of the Intermediaries Regulations provides that where any person falls within the grounds of disqualification specified under Clause 3(b), such occurrence must be reported to SEBI within 15 (fifteen) working days.

Second, Clause 3B under Schedule II of the Intermediaries Regulations has been introduced to provide that no person shall be declared not “fit and proper” without being given a reasonable opportunity of being heard.

MHCO Comment

The amendments represent SEBI’s attempt to simplify and rationalise the “fit and proper person” criteria by moving away from rigid disqualifications toward a more proportionate framework in compliance with the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018 and SEBI (Depositories and Participants) Regulations, 2018. The earlier position, where mere pendency of an FIR or charge sheet was the primary ground for automatic disqualification, effectively imposed consequences without adjudication, leading to significant reputational and commercial harm. Similarly, holding initiation of insolvency proceedings, as well as an order of winding up, as grounds for disqualification failed to recognise that the corporate debtor may survive the liquidation process; therefore, limiting disqualification to cases of actual winding-up orders corrects this imbalance. The introduction of Clauses 3A and 3B strengthens procedural fairness by mandating the timely disclosure of disqualifying events and expressly guaranteeing an opportunity to be heard. The removal of the default five-year prohibition and the narrowing of SCN-based restrictions further reinforce the principle of proportionality. In conclusion, these changes align the framework with principles of fairness, consistency, and enforcement, without diluting investor protection.

The views expressed in this update are personal and should not be construed as legal advice. Please contact us for any assistance.

This update was released on 26 Mar 2026.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or contact@mhcolaw.com for any assistance.

Legal Update Team
MANSUKHLAL HIRALAL & COMPANY
Advocates, Solicitors and Notaries
T: +91 22 40565252
Mumbai Office: Surya Mahal, 2nd Floor, 5, Burjorji Bharucha Marg, Fort, Mumbai-400 023, India
Delhi Office: Block C-9, Lower Ground Floor, Jangpura Extension, New Delhi - 110 014, India
www.mhcolaw.com

"Noted lawyer in the Real Estate practitioner from India" - Chambers & Partners

Please consider the environment before printing this email

The information contained in this communication is intended solely for the use of the individual or entity to whom it is addressed and others authorized to receive it. This communication may contain confidential or legally privileged information. If you are not the intended recipient, any disclosure, copying, distribution or action taken relying on the contents is prohibited and may be unlawful. If you have received this communication in error, or if you or your employer does not consent to email messages of this kind, please notify the sender immediately by responding to this email and then delete it from your system. No liability is accepted for any harm that may be caused to your systems or data by this message.