Will put on hold 'fit and proper' notices to stock broker companies till August 2: SEBI to Bombay High Court

The Securities and Exchange Board of India (SEBI) informed the Bombay High Court on Thursday that for the time being, it will not insist on compliance with show cause notices issued under the SEBI (Intermediaries) Regulations, 2008 requiring securities market intermediaries to intimate if they satisfy certain "fit and proper person" criteria laid down in the 2008 regulations..A division bench of Justices GS Patel and Neela Gokhale recorded SEBI’s statement in a batch of 12 petitions filed by various stock broking companies through law firm, Trilegal and DSK Legal. Senior Advocate Rafique Dada appeared for the SEBI and assured the bench that SEBI will not insist on compliance with the notices in view of the petitions before the Court.The division bench accepted Dada’s statement and adjourned the case till August 2.“We accept Dada’s statement that given pendency of matters before this court, SEBI is not presently insisting compliance within 15 days which is a requirement (under the Regulation). All rival contentions are kept expressly open," the bench noted.The bench has granted two weeks of time to SEBI to file its response to the plea..The petitioners before the Court include Motilal Oswal Financial Services (MOFSL), Anand Rathi Shares and Stock Brokers, Roongta Corporate Services, CD Equisearch, Systematix Shares & Stocks (India), LKP Wealth Advisory, LKP Securities, KR Choksey Shares & Securities, and Almondz Global Securities, amongst others. They have challenged clause 6 of Schedule II of the 2008 Regulations, which lays down that if a chargesheet is filed against the directors of a company, such directors would stand disqualified. .The petitioners raised grievance that if they fail to comply with the notices issued to the intermediaries to declare whether the "fit and proper person" criteria have been complied with, the regulator may take action against them.Senior Advocates Janak Dwarkadas, Amit Desai, Prateek Seksaria, and Zal Andhyarujina, appearing for these entities, contended that the provision was in violation of the principles of natural justice. “If there is a chargesheet filed, even while the charges are not proven, may lead to disqualification of a person from the intermediary within 15 days, and if the intermediary fails to comply with that, even that entity would be in violation and may not be termed as ‘fit and proper’. This is a violation of fundamental rights. The impugned notification says that any initiation of the winding-up process attracts disqualification. They cannot say this," Dwarkadas contended.He further argued that the provision was not treating all agencies at par as the rule did not apply to stock exchanges but only to stock broker companies..The counsel also emphasized that the provision under challenge violated fundamental rights under Articles 14, 19(1)(g), and 21 of the Constitution as it sought to disqualify persons from participating in the market merely on the basis of the allegations. .The Trilegal team included Advocates Nitesh Jain, Hridhay Khurana, Joran Diwan, Anubhav Ghosh, Devarsh Shah, Atharva Gade.The DSK Legal team included Advocates Samit Shukla, Vinodini Srinivasan, Saloni Shah, Shivani Khanwilkar.[Read order]