[Dhaval Bothra is a dispute resolution lawyer at a law firm in New Delhi]
The consultation paper released by the Securities and Exchange Board of India (“SEBI”) on 04 February 2026 (“Consultation Paper”) has now culminated in the Securities and Exchange Board of India (Intermediaries) (Amendment) Regulations, 2026, published on 15 April 2026 (“2026 Amendment”). The 2026 Amendment has materially altered schedule II of the SEBI (Intermediaries) Regulations, 2008 and confirmed that SEBI has moved away from certain automatic, ex-ante disqualifications toward a more calibrated framework built around event-based triggers, procedural fairness, and case-specific evaluation.
For years, the market contended with a rigid architecture of disqualifiers under the ‘fit and proper person’ test. The 2026 Amendment now codifies several of the shifts that were earlier only proposed in the Consultation Paper. This was probably also a consequence of the proceedings before the Bombay High Court. As noted in a previous analysis of this subject, the framework was ripe for a re-evaluation. SEBI has now responded, but in doing so, it has initiated a move that, while commendable, marks a shift away from rigid rule-based disqualifications toward a more judgment-driven framework, introducing greater reliance on regulatory discretion and, with it, a different set of compliance and interpretive challenges.
From Automatic Disqualification to Evaluative Discretion
A central reform is the omission of items (i) and (ii) of clause 3(b) in schedule II, which previously treated (i) pending SEBI criminal complaints/FIRs; and (ii) pending charge sheets in economic offences as automatic disqualifiers. Under the amended framework, such preliminary-stage criminal triggers no longer result in per se disqualification. Instead, SEBI retains the ability to examine underlying facts under the broader principles-based test in clause 3(3)(a) of schedule II – including integrity, reputation, fairness, and character.
This represents a meaningful doctrinal shift, i.e., regulatory disability is no longer triggered merely by the initiation of criminal process. However, discretion now replaces certainty. The practical question is not whether SEBI will exercise such discretion, but how consistently it will do so – particularly where pending allegations, though no longer rule-based triggers, may still inform assessments under clause 3(3)(a). While the Consultation Paper hinted at future guidance, the notified amendments leave these thresholds to regulatory practice.
Interestingly (and in contrast), SEBI has expanded the conviction-based disqualification under clause 3(3)(b)(v). The amended provision now includes economic offences, offences under securities laws, and offences involving moral turpitude. This significantly widens the earlier scope, which was limited to moral turpitude. The reform enhances regulatory coherence across SEBI regimes and is normatively sound, as it links consequences to adjudicated guilt rather than mere allegations – drawing a clearer distinction between suspicion and culpability.
Navigating the Grey Period of Insolvency
The amendment to clause 3(3)(b)(vi) of schedule II omits the words “any winding up proceedings have been initiated or”, so disqualification is now attracted only where an order for winding up has been passed. This is one of the clearest signs that SEBI has accepted the commercial and legal distinction between the initiation of insolvency proceedings and terminal corporate failure.
Under the framework of the Insolvency and Bankruptcy Code, 2016, commencement of the corporate insolvency resolution process (“CIRP”) is not a determination of unfitness but a resolution process that may result in revival. The earlier formulation risked treating financial distress as equivalent to regulatory incapacity. The amended provision appropriately avoids that overreach and aligns the ‘fit and proper’ test with the commercial realities of insolvency law.
At the same time, this does not imply that intermediaries undergoing insolvency fall outside SEBI’s regulatory purview. Rather, SEBI has chosen not to hard-code insolvency as a disqualification trigger at a preliminary stage, while retaining the flexibility to intervene through its broader supervisory and principle-based powers, particularly under clause 3(3)(a).
Practically, this means that entry into CIRP will not automatically result in regulatory disability, but it will invite closer scrutiny of governance, financial soundness, and client protection measures. Intermediaries would therefore be well-advised to focus on demonstrating operational continuity, ensuring strict compliance with client asset protection norms, and maintaining transparent engagement with SEBI and market infrastructure institutions.
The amended position is thus better understood not as a regulatory gap, but as a shift from automatic exclusion to case-specific supervisory oversight, allowing SEBI to respond proportionately depending on how the insolvency process unfolds.
Procedural Reforms
Clauses 3A and 3B
The insertion of clauses 3A and 3B in schedule II is perhaps the most structurally important reform in the package. Clause 3A requires the applicant or intermediary to inform SEBI if any person covered under clause 2 becomes subject to an event under clause 3(b). Clause 3B provides that a person shall be declared not ‘fit and proper’ only after being granted a reasonable opportunity of being heard. This is not merely cosmetic. Under the scheme of schedule II, the declaration that a person is not fit and proper is the gateway to serious consequences for directors, key managerial personnel, promoters and persons in control. By expressly linking that declaration to a hearing, the 2026 Amendment textualises a safeguard that, while always consistent with administrative law, was not previously articulated with sufficient clarity.
The earlier regime permitted severe practical consequences to be traced back to automatic disqualification events. The amended regime shifts the emphasis from the event to the declaration. Thus, the 2026 Amendment better aligns the structure of consequence with the structure of due process.
Clause 4
Furthermore, the amendment to clause 4 removes the earlier default rule that where SEBI’s order did not specify a period of ineligibility, the person would be barred from applying for registration for five years from the effective date of the order. That automatic five-year exclusion has now disappeared. Deeming provisions of this kind often create consequences that exceed the rationale of the underlying order. If the Board itself did not specify a duration, the law should not lightly superimpose a substantial period of exclusion by default. The amendment restores primacy to what the order actually says, and in that respect reflects a more proportionate understanding of regulatory disability.
Clause 5
Clause 5 deals with fresh registration applications. It provides that where a show cause notice has been issued against the applicant or a relevant connected person under the Intermediaries Regulations, section 11(4), or section 11B(1), the application will not be considered for grant of registration for a limited period. The amendment makes two changes. First, it narrows the reference from section 11B generally to section 11B(1). Second, it reduces the period of non-consideration from one year to six months, or until the conclusion of the proceedings, whichever is earlier. The practical effect is limited but important. Clause 5 does not suspend an existing registration, nor does it amount to a finding that the applicant is unfit. It simply postpones consideration of a fresh application where relevant proceedings are already pending.
Clause 6
Clause 6 deals with what happens after SEBI declares someone not ‘fit and proper’. The 2026 Amendment makes the process more structured, but the consequences are still serious. They can be understood as follows:
- If the issue is only with an associate or group entity, that does not automatically make the intermediary unfit. It will affect the intermediary only if the intermediary itself, or another relevant person connected to it, is also involved in the same matter.
- If the person declared not ‘fit and proper’ is a director, principal officer, compliance officer or key managerial person, the intermediary must replace that person within 30 working days.
- If the person declared not ‘fit and proper’ is a promoter or a person in control, the intermediary must ensure that the person stops exercising voting rights and also sells the holding within six months.
Although, the Consultation Paper had suggested a softer approach for persons in control, i.e., take away voting rights, but do not force divestment. The 2026 Amendment does not do that. It keeps both consequences. Therefore, while the amendment makes the route to these consequences fairer by requiring a formal SEBI declaration after hearing, it does not make the consequences themselves any lighter.
Bottom Line
The 2026 Amendment marks a calibrated shift in the ‘fit and proper person’ framework, from rigid, automatic disqualifications to a more nuanced, discretion-driven regime anchored in procedural fairness. While the removal of overbroad preliminary triggers, expansion of conviction-based grounds, and express recognition of hearing rights are significant improvements, the reform stops short of a structural overhaul.
In particular, mandatory divestment for persons in control continues to form part of the regime once an adverse determination is made. The result is a hybrid framework that is less mechanical at the threshold and more balanced in process, but still capable of imposing stringent consequences. Ultimately, its effectiveness will depend on how consistently and transparently SEBI exercises its discretion, especially under the principles-based criteria and the declaration mechanism.
– Dhaval Bothra