Brokers disagree with Sebi’s term of a “fit and proper person.”
Synopsis
The division bench of Justice GS Patel and Justice Dr Neela Gokhale has instructed the capital markets regulator to submit its answer in the issue by July 20, and the case has been postponed until August 2 for further hearing.
In the Bombay High Court, more than a half-dozen firms, including big-league domestic brokerages Motilal Oswal Financial Services (MOFSL) and Anand Rathi Shares and Stock Brokers, have challenged the constitutional validity of the Securities & Exchange Board of India’s (Sebi) 2021 amendments detailing the ‘fit and proper person’ criteria for intermediaries.
The division bench of Justice GS Patel and Justice Dr Neela Gokhale has instructed the capital markets regulator to submit its answer in the issue by July 20, and the case has been postponed until August 2 for further hearing. The most controversial elements of the revisions to the original rules state that if a chargesheet is brought against a person for suspected violation of any law requirement, the individual must be removed as a director or key management within 15 days.
Senior lawyer Janak Dwarkadas, representing Motilal Oswal, claimed that the Sebi rules attempt to ban a person from participating in the securities market solely on charges and allegations without taking the nature of an act into account. He further said that the rules do not indicate whether the claims have any impact on their participation in the securities markets.
“If a chargesheet is filed, even if the charges are not proven, it may result in the disqualification of a person from the intermediary within 15 days,” Dwarkadas contended. “If the intermediary does not comply with that, even that entity will be in violation and may not be considered ‘fit and proper,’ which is a violation of fundamental rights.”
Motilal Oswal further claimed that the modification does not treat all operational agencies equally, and that the provision only applies to intermediaries (brokerage houses) rather than stock exchanges and clearing agencies.
Roongta Corporate Services, CD Equisearch, Systematix Shares & Stocks (India), LKP Wealth Advisory, LKP Securities, KRChoksey Shares & Securities, and Almondz Global Securities are among the other petitioners. On July 4, all of the petitioners appeared in court via Nitesh Jain, a partner at the law firm Trilegal.
The petitioners want the court to step in and declare the modified Sebi rules illegal. They also want the court to throw down the modifications that outline the ‘fit and appropriate’ requirements. During the hearing, Sebi informed the bench that it would not insist on compliance with its notice issued to a dozen proprietary firms until the next hearing date.
The difficulty stems from a chargesheet filed by Mumbai Police’s Economic Offence Wing (EOW) against Ajay Menon, managing director of Motilal Oswal, in an ongoing case. Menon’s name appears on the EOW chargesheet, which immediately disqualifies him since he fails the ‘fit and suitable person’ standard for intermediaries.
