Sebi had given the intermediaries time till 2 August to comply with the circular.

In November 2022, Sebi had notified amendments to Schedule II of the (Intermediaries) Regulations. The ‘Schedule II’ deals with the ‘fit and proper’ criteria to be followed by intermediaries registered with Sebi. The matter came to light after various market intermediaries including Motilal Oswal, Anand Rathi, Ventura Securities, KR Choksey Shares and Securities, CD Equisearch, and LKP Securities, among others, approached the high court, challenging the constitutional validity of the specific clause on ‘fit and proper’.

Amendments notified in Schedule II of the regulations under clause 3(b) (i) and (ii) state that principal officers, directors, managing partners, compliance officers and key managerial persons will attract disqualification from being ‘fit and proper’, the moment a chargesheet is filed by an enf-orcement agency for a matter concerning economic offence.

The intermediary is mandated to replace such a person within 30 days while also ensuring divestment of their stake within six months.

In its petitions before the high court, the intermediaries said that such provisions by Sebi are “manifestly unreasonable, arbitrary, unfair, forbiddingly excessive, extremely wide in scope and applicability, and create an unreasonable restriction”. The regulations seek to disqualify persons from participating in the securities market merely on the basis of accusations.

The petitions state that the provisions “completely fail to provide any safeguards to protect against the possibility of misuse and abuse of the regulations”.

In 2019, Sebi came down heavily on these intermediaries by issuing supplementary show cause notices in connection with the ₹5,600-crore NSEL scam. Sebi was investigating their alleged role in misselling NSEL products to 13,000 investors.

In relation to this, Ajay Menon, chief executive officer (broking and distribution) of Motilal Oswal Financial Services had received the show cause notice. Janak Dwarkadas, appearing for Motilal Oswal Financial Services, argued that the disqualification was made on the basis of a chargesheet being filed and not the seriousness of it. Dwarkadas also questioned the inclusion of the contents of the chargesheet in Sebi’s affidavit.

“There is an unserved chargesheet. A sessions court is yet to consider the contents of the chargesheet. How can Sebi disqualify him on that sole basis?”, the senior counsel said.

On Wednesday a bench led by Justices GS Patel and Neela Gokhale asked the intermediaries to file their response to Sebi’s affidavit by 24 August and posted the matter for further hearing on 30 August.

Updated: 02 Aug 2023, 09:23 PM IST