SEBI Proposes Overhaul of 'Fit and Proper' Framework On **February 4, 2026**, the Securities and Exchange Board of India (SEBI) released a consultation paper proposing a significant revamp of the **‘fit and proper person’** criteria under Schedule II of the Intermediaries Regulations, 2008. The move aims to balance regulatory rigor with ease of doing business, reducing automatic disqualifications that penalize entities before wrongdoing is proven. Key Regulatory Shifts **Codified Right to Hearing** SEBI has proposed explicitly codifying the **right to a hearing** before any person or entity is declared "not fit and proper." While currently practiced, this amendment removes procedural ambiguity, ensuring natural justice is embedded in the regulations. **refined Disqualification Norms** The regulator suggests removing **"initiation of winding-up proceedings"** as an automatic disqualification trigger. Instead, only a **final winding-up order** will count. Additionally, automatic disqualification based merely on pending criminal complaints or charge sheets may be replaced with a **principle-based assessment** of integrity and reputation, though SEBI retains discretion for serious cases. Strategic Relief for Intermediaries **Voting Rights vs. Divestment** In a major relief for promoters and persons in control, SEBI proposes replacing the mandatory **divestment of shareholding** with a limitation on **voting rights**. * **Current Rule:** Forced sale of stake if declared unfit. * **Proposed Rule:** Retention of economic ownership; only voting rights are frozen. * **Benefit:** Prevents irreversible financial loss if the individual is later exonerated. **Group Entity Impact** Disqualification of associate or group entities will now impact an intermediary only if SEBI **formally declares** those specific entities as "not fit and proper," preventing contagion of ineligibility across corporate groups without due process. Operational Timelines & Efficiency * **Application Freeze Reduced:** The period during which a registration application remains pending after a Show Cause Notice (SCN) is proposed to be cut from **1 year** to **6 months**. * **KMP Replacement:** Intermediaries must replace disqualified Key Management Personnel (KMPs) within **30 days** of a regulatory order. * **No Default Ban:** The default **5-year** ineligibility period (applied when no specific timeframe is mentioned in an order) is proposed to be scrapped. Ineligibility will strictly follow the duration specified in the order. Market Context This proposal addresses long-standing industry concerns regarding "rule-based" triggers that cause reputational damage at preliminary legal stages. Public comments on the consultation paper are open until **February 25, 2026**.