Brokers Vs SEBI: Compliance With 'Fit And Proper' Rule Deferred Till Aug. 30

The markets regulator told the Bombay High Court on Wednesday that it will not insist on compliance with several show-cause notices issued by it for violation of fit and proper conditions under the Intermediaries Regulation until the next day of hearing on Aug. 30.

The court has given the brokerages until Aug. 24 to file their replies to the affidavit filed by the Securities and Exchange Board of India.

Several big brokerages, including Motilal Oswal Financial Services, Anand Rathi Shares and Stock Brokers, and KR Chokesy Shares and Securities, challenged in July the constitutionality of 2021 amendments to the intermediaries regulation that redefined fit and proper criteria for market intermediaries.

A person must be removed from the directorship or key managerial position of an intermediary within 15 days if a charge sheet is filed against him, according to the amendments. The individual would not be considered a 'fit and proper person' under the regulation once such a chargesheet was filed.

Brokerages had alleged this rule to be arbitrary as it's only applicable to intermediaries such as brokers and not other market infrastructure institutions such as clearing houses or stock exchanges. Further, it was argued that the regulations disqualify persons from the intermediary's board even without considering the contents or seriousness of the matter.

The root of the challenge lies in a chargesheet filed by Mumbai Police's Economic Offence Wing against Ajay Menon, managing director of Motilal Oswal, that automatically disqualifies him from the position. Post which, the markets regulator had issued a show cause notice to Menon.

SEBI was asked to reply to the challenge by Aug. 2.

Representing Motilal Oswal Financial Services, senior advocate Janak Dwarkadas objected to the SEBI affidavit during today's hearing. The regulator has included the contents of a charge sheet that is yet to be served to Menon, he said. The session court has yet to consider the charges, and Menon could be discharged subsequently. An allegation in an unserved chargesheet cannot be grounds for disqualification, he further submitted.

The matter will be heard next on Aug. 30.