New Delhi, Feb. 4 -- A pending criminal complaint or charges filed by an enforcement agency should not cause an intermediary, such as alternative investment funds (AIFs) or merchant bankers or stock brokers, to lose their registration, the capital markets regulator has proposed.
In a consultation paper issued on Wednesday, the Securities and Exchange Board of India (SEBI) has suggested several such relaxations to the "fit and proper" criteria that decide the registration of intermediaries, under Schedule II of Intermediaries Regulations.
"Based on learnings from the experience gained in enforcement of the extant 'fit and proper person' criteria in the last five years and the best practices being followed internationally, including the broad principles of 'International Organization of Securities Commissions' (IOSCO), as well as domestic regulators, it was examined whether there is a need to review the provisions of Schedule II to reflect such learnings," the paper noted.
SEBI said it has received several representations highlighting onerous compliance requirements these criteria place and the irreparable damage that can be caused to a person who is later acquitted of all charges. So, the consultation paper has suggested six changes.
The first proposal has to do with disqualification of an intermediary when there is a pending proceeding or complaint against them. As the paper pointed out, this is not in alignment with the regulations for other market players, other regulated entities and international norms.
While the Stock Exchanges and Clearing Corporations Regulations and Depositories and Participants Regulations, which govern the "fit and proper" criteria for market infrastructure institutions such as stock exchanges and depositories, require a conviction for disqualification, the Intermediaries Regulations trigger disqualification at the mere filing of complaint or a chargesheet. Also, as per the IOSCO's best practices, the regulator has to also consider if the applicant or key person has been convicted within the last ten years.
Therefore, the regulator suggested doing away with this provision altogether and relying on SEBI's judgement on a case-by-case basis on principle-based criteria such as "integrity, honesty, ethical behaviour, reputation, fairness and character of a person". However, the paper added that the provision for disqualifying a person for being convicted by a court for moral turpitude may be extended to include conviction for any economic offence or any offence under securities laws.
Another important proposal is to take away only the voting rights of an intermediary's key management personnel, when the KMP fails to meet the fit and proper criteria. Current rules would require the KMP to divest their holdings in the intermediary. The paper thus seeks to differentiate between the KMP's voting rights and economic rights.
Also, the paper suggests that disqualification should not be done for corporate entities that have entered winding up proceedings under the Insolvency and Bankruptcy Code (IBC) but for those companies that have been ordered to wind up.
The fourth proposal is to include a clause that the rules should mention that a person or entity is given a hearing before deciding whether they are fit and proper. Though a hearing is usually given to the person concerned, the rules do not expressly state it, and the paper proposes to correct that.
The fifth proposal is to do away with the automatic disqualification of a person for five years, when a SEBI order issued against them does not specify a disqualification period; and the sixth is to make applying for registration easier for those to whom a showcause notice has been issued by SEBI.
Published by HT Digital Content Services with permission from VC Circle.