Background.
Entities seeking registration as market intermediaries, and the persons in control of such intermediaries, must meet the “fit and proper” criteria under Schedule II of the SEBI (Intermediaries) Regulations, 2008. The Schedule lays down two types of criteria:
• Principle-based criteria, and
• Rule-based criteria,
Introduction
With an intention to align the ‘fit and proper’ criteria under intermediaries regulations with other SEBI regulations and RBI master directions, SEBI has proposed amendments through a consultation paper and has invited public comments. This article discusses the proposed changes and their possible impact if implemented.
Proposed changes and rationale there of.
- Deletion of clauses relating to FIR and chargesheet.
As per clauses 3(B)(I) and 3(B)(II) of schedule II, a person is disqualified from being a fit and proper person if any criminal complaint or FIR is filed or charge sheet for any economic offence is issued against such person. SEBI proposes to delete both these clauses and amend the clause 3(B)(V) to include therein disqualification due to passing of order of conviction for economic offence, along with existing provision of passing order of conviction for offence involving moral turpitude.
Impact.
As a result, no person will be disqualified from being fit and proper person simply because a criminal complaint/FIR is registered or chargesheet is issued against him. Instead, he will be disqualified if order of conviction is passed against him for reasons listed under clause 3(B)(V). Further, if SEBI is of the view that FIR or chargesheet is of a serious nature and cannot be overlooked just because order is not yet passed, then SEBI may take cognizance of the same while evaluating the criteria under clause 3(A) which prescribe principle-based norms like integrity and honesty etc.
- Modification to clause relating to winding up orders.
Clause 3(B)(VI) states that an entity is disqualified from being a fit and proper person if winding up order is passed against such entity or even if winding up proceedings are initiated. SEBI proposes to modify this provision in such a way that an entity shall not be considered fit and proper if winding up order is passed and not in case of initiation of proceedings. This change is proposed considering the fact that, during the Corporate Insolvency Resolution Process, an entity may be revived out of its debts and no winding up may be ordered. In such a case, disqualification from being fit and proper person is not appropriate.
Impact.
Due to this change, the entities who are undergoing CIRP process will not be disqualified till the time the CIRP is ongoing. The entity will be disqualified if the CIRP fails and winding up order is passed. However, a point worth noting in this behalf is that, if the insolvency process is initiated by the entity itself then there is no point in giving this exemption as the entity itself is desirous of closing the business.
- intermediary to inform SEBI.
SEBI has proposed insertion of new clause 3A after clause 3 in schedule II. As per this new provision, if there is any event as listed in clause 3(b) with respect to any individual covered in clause 2, then the entity who has obtained the registration from SEBI as intermediary, is required to intimate the SEBI about occurrence of such event within 7 days from such occurrence. For example, if any order of conviction is passed against the KMP of any intermediary, then such intermediary should inform SEBI about such order being passed within 7 days of passing the order
Impact,
As of now, the intermediaries take a declaration from the individuals covered in clause 2 that they comply the fit and proper criteria. But, if this change becomes effective, then the intermediaries will have to keep track on real time basis, that if any event as listed in clause 3 has taken place and as a result, the individual does not satisfy fit and proper criteria. If so is the case, then it will be the responsibility of the intermediary to inform SEBI about the same.
- Elimination of 5 years period
Clause 4 of schedule II states that, if the order declaring any person as not fit and proper does not specify any period for which the order shall remain in force, then the the person shall be considered as not fit and proper for period of 5 years from the effective date of order. Now SEBI proposes to remove this period of 5years. SEBI proposes that if the order is silent and does not prescribe any period, then the criteria should also not provide for any such period.
Impact.
If the period of 5 years is removed from the criteria and the order as well is silent about the period, then it would be difficult to ascertain the period for which the person will be considered as not fit and proper.
- Reduction in non-eligibility period during notice period.
Clause (V) of schedule 2 states that if SEBI has issued any show cause notice under section 11(4) / 11B of the SEBI Act to any applicant or KMP/any person in its control, then the application for registration made by such intermediary shall not be considered for a period of one year from date of show cause notice or conclusion of proceedings whichever is earlier. SEBI proposes to reduce this period from one year to six months. This change is proposed in order to rule out the uncertainty of outcome for potential applicants and to ensure that access to registration is not unduly deferred where the proceedings are prolonged without the fault of the applicant.
Impact.
This proposal if excepted, would ease the process of obtaining registration. Also, it would protect the applicant from delay in the process due to reasons outside its control.
- Doing away with requirement of divestment of holdings
Second proviso to clause 6 requires that if any order declaring any person in control of the intermediary as not fit and proper is passed, then such person is required to divest his holding in that intermediary within specified period. SEBI has proposed that instead of divesting the holding, only the voting rights of the said person should be restricted, and the economic rights need not be affected.
Impact.
This change is proposed with an intention to mitigate the financial loss arising out of such sudden divestment of holdings. This change if finalised, would protect the person declared as not fit and proper, from financial loss and at the same time would protect the interest of investors in the intermediary by disallowing that person from exercising voting rights.
Conclusion.
The term market intermediary includes a large number of market participants who are required to comply with the intermediaries regulations and the fit and proper criteria there under. Other then that, entities like REITs and INVITs are also required to satisfy this criteria of fit and proper person at all times as per the respective regulations governing such entities. Therefore, the change in the fit and proper criteria would impact a large number of market participants. Ease in the conditions prescribed in the criteria would make it easy for such entities to comply with the same, resulting in turn in ease of doing business in capital markets.