he Securities and Exchange Board of India (SEBI) issued a clarification today concerning the interpretation of specific clauses under the “fit and proper” criteria within the Intermediaries Regulations, 2008. The clarification was directed at Baroda BNP Paribas Trustee India Private Limited, following their inquiry regarding the applicability of Schedule II’s provisions on both corporate entities and individual persons. This clarification aims to distinguish the regulatory expectations for corporations and individuals to maintain trustworthiness and compliance within India’s securities market.
The inquiry stemmed from a query raised by the Board of Directors of Baroda BNP Paribas Trustee India Private Limited. Acting as the trustee company for Baroda BNP Paribas Mutual Fund, the board sought an informal interpretive letter to better understand clause 3(b) within Schedule II of the Intermediaries Regulations, 2008. The main question posed by the board focused on whether certain clauses, specifically related to financial stability and integrity, were meant exclusively for corporations or whether they applied to individual persons as well.
Background on the Inquiry
Baroda BNP Paribas Trustee India Private Limited, in its request to SEBI, noted that the “fit and proper person” criteria are essential for trustees of mutual funds to demonstrate ongoing credibility and reliability. The company was particularly focused on the definition of “person” in clause 3(b)(vi) and its relevance to individuals versus corporations. According to SEBI’s established rules, the criteria include factors such as integrity, ethical behavior, and reputation, among others. In clause 3(b)(vi), the requirement for “winding-up proceedings” raised questions among the board members, who sought to confirm if it applied exclusively to corporate entities.
This criterion, which deals with financial closure and potential insolvency, was seen as potentially less relevant for individuals but critical for corporate bodies, given the different legal frameworks that govern the two groups.
SEBI’s Response and Interpretation
Responding to Baroda BNP Paribas Trustee’s request, SEBI issued an interpretive letter clarifying that the term “person” within clause 3(b) refers to both natural persons (individuals) and juridical persons (corporate entities). However, SEBI emphasized that the interpretation of “winding up” under clause 3(b)(vi) applies specifically to corporate entities. This clause pertains to winding-up proceedings—a situation more commonly associated with businesses and companies facing financial closure.
For individuals, SEBI clarified that clause 3(b)(vii), which addresses the requirement of solvency, sufficiently covers the individual’s need to meet financial and ethical standards under the “fit and proper person” criteria. This clause ensures that individuals are financially sound and free from insolvency declarations, thus upholding the standard of trustworthiness required by SEBI for participating in India’s securities markets.
Details of SEBI’s “Fit and Proper” Standards
SEBI’s “fit and proper person” standards serve as a regulatory benchmark to ascertain the credibility of market participants. The criteria, established under the Intermediaries Regulations, aim to safeguard the market’s integrity by ensuring that entities and individuals involved in the securities industry meet high standards of ethical conduct, financial soundness, and legal compliance.
The key factors under SEBI’s “fit and proper person” standards include:
- Integrity and Reputation – SEBI considers a person’s ethical track record, ensuring they have no history of criminal or fraudulent activity.
- Legal and Financial Compliance – Ensuring that individuals or entities have no ongoing legal proceedings, financial disqualifications, or regulatory bans.
- Solvency and Financial Health – For individuals, clause 3(b)(vii) mandates solvency as a necessary condition, while for corporate entities, clause 3(b)(vi) addresses corporate-specific conditions like winding-up proceedings.
- Regulatory Disqualifications – The Board also looks for any existing regulatory or legal prohibitions that may prevent a person from engaging in market activities.
Further Guidance and Implications
SEBI’s letter concluded by reiterating that its interpretation was specific to the guidance sought by Baroda BNP Paribas Trustee India Private Limited. SEBI highlighted that its response does not serve as a definitive legal ruling but as an informal guidance based on the details provided by the company.
The regulator also noted that the letter does not impact other applicable laws or SEBI regulations that might govern different aspects of compliance. Additionally, SEBI underscored the importance of context, acknowledging that varying circumstances could lead to alternative interpretations in similar situations.
Implications for Market Intermediaries
This guidance provides a clear framework for market intermediaries and their governance bodies in interpreting the “fit and proper” criteria. By clarifying the differential application of clauses 3(b)(vi) and 3(b)(vii), SEBI has provided a roadmap for both individuals and corporate entities to meet regulatory standards.
For corporate entities, the clarification emphasizes the importance of financial stability and protection against insolvency. This is critical for trustee companies and mutual fund entities that play a significant role in managing investors’ funds. By aligning with SEBI’s interpretation, these entities can ensure compliance, thereby preserving their licenses and operational status.
For individual persons, particularly those in leadership roles within intermediary firms, the guidance stresses the importance of maintaining a solvent financial profile. This assurance builds trust within the securities market by confirming that individuals managing financial assets are financially sound and responsible.
Conclusion
SEBI’s clarification on the “fit and proper person” criteria underlines its commitment to upholding integrity and transparency within India’s securities markets. By providing this interpretive guidance, SEBI has delineated the responsibilities and expectations for both corporate entities and individuals. This interpretative letter serves as a valuable reference for intermediaries navigating regulatory expectations and reinforces SEBI’s role in ensuring a robust regulatory environment that benefits all market participants.
Securities and Exchange Board of India
GENERAL MANAGER
MARKET INTERMEDIARIES REGULATION
AND SUPERVISION DEPARTMENT – POD
SEBI/HO/MIRSD/MIRSD-PoD-1/P/OW/2024/34481/1
November 08, 2024
Baroda BNP Paribas Trustee India Private Limited
201(A), 2nd Floor, A Wing, Crescenzo, C-38 & C-39,
G Block, Bandra Kurla Complex,
Mumbai — 400051, Maharashtra
Dear Sir/Madam,
Sub: Request for Informal Guidance by way of an Interpretive Letter under Clause 5(ii) of the Securities and Exchange Board of India (Informal Guidance) Scheme, 2003
1. This is with reference to your letter dated September 05, 2024 (“application”) seeking guidance by way of an interpretive letter under the Securities and Exchange Board of India (Informal Guidance) Scheme, 2003 (“Informal Guidance Scheme”).
2. In your application under reference, you have, inter alia, represented as under:
2.1 Baroda BNP Paribas Trustee India Private Limited (the Company’) acts as the trustee company of Baroda BNP Paribas Mutual Fund (‘BBNPP MF’). The Company through its Board of Directors discharges its obligations as Trustee to BBNPP MF.
2.2 The Board of Directors of the Company have queried on one of the clauses in lit and proper person’ declaration as provided under Schedule II of Securities and Exchange Board of India (Intermediaries) Regulations, 2008 (Intermediaries Regulations). The ‘fit and proper person’ criteria as stated under Intermediaries Regulations is reproduced as below:
“(3) For the purpose of determining as to whether any person is a ‘fit and proper person, the Board may take into account any criteria as it deems fit including but not limited to the following:
(a) integrity, honesty, ethical behaviour, reputation, fairness and character of the person;
(b) the person not incurring any of the following disqualifications:
(i) criminal complaint or information under section 154 of the Code of Criminal Procedure, 1973 (2 of 1974) has been filed against such person by the Board and which is pending;
(ii) charge sheet has been filed against such person by any enforcement agency in matters concerning economic offences and is pending;
(iii) an order of restraint, prohibition or debarment has been passed against such person by the Board or any other regulatory authority or enforcement agency in any matter concerning securities laws or financial markets and such order is in force;
(iv) recovery proceedings have been initiated by the Board against such person and are pending;
(v) an order of conviction has been passed against such person by a court for any offence involving moral turpitude;
(vi) any winding up proceedings have been initiated or an order for winding up has been passed against such person;
(vii) such person has been declared insolvent and not discharged;
(viii) such person has been found to be of unsound mind by a court of competent jurisdiction and the finding is in force;
(ix) such person has been categorized as a wilful defaulter;
(x) such person has been declared a fugitive economic offender; or
(xi) any other disqualification as may be specified by the Board from time to time.”
3. In view of above, you have sought clarification as under:
3.1 One of the Board of Directors of the Company has raised a query with respect to clause 3(b)(vi) relating to winding up proceedings to understand the genesis of this declaration and whether this will relate to an individual.
3.2 While all other clauses can be applied to an individual, winding up proceedings prima facie is applicable to a company, and hence whether this point can be considered as Not Applicable from an individual’s perspective is the query. If the same is believed to be applicable to an individual, in what capacity should this be applied by such an individual, may also be clarified.
4. We have considered the submissions made by you in your application. Without necessarily agreeing with your analysis, our response on the queries raised in your letter, are as under:
Person would include both a natural person and a juridical person and to that extent, interpretation for the meaning of person for the purpose of clause 3(b)(vi) of Schedule II of Intermediaries Regulations would be to a juridical person such as a corporate entity. However, an individual is sufficiently covered under clause 3(b)(vii) to ensure that he is solvent for the purpose of ‘Fit and Proper Person’ criteria.
Hence, the clause 3(b)(vi) of Schedule II of Intermediaries Regulations is applicable for a corporate entity and clause 3(b)(vii) is applicable for an individual.
5. The above position is based on the information furnished in your letter under reference. Different facts or conditions might lead to a different interpretation. Further, this letter does not express the decision of the Board on the questions referred through your letter.
6. You may also note that the above position is expressed only with respect to the guidance sought in your letter under reference in respect of the provisions as referred above and does not affect the applicability of any other law or requirement of any other SEBI Regulation, Guidelines and Circulars administered by SEBI or the laws administered by any other authority.
Yours faithfully,
Aradhana Verma
