The Securities and Exchange Board of India (Sebi) has approved a series of measures on conflict of interest, disclosure and recusal norms for officials of the market regulator. The Sebi board allowed foreign portfolio investors to settle their trades on a net basis and moved to revamp the fit and proper norms for market intermediaries.
The Sebi chairperson and whole-time members will be subject to the same restrictions on investments and trading as other employees, the regulator said in a statement. Their investments in unlisted companies and other commercial ventures have to be liquidated or frozen during their tenures.
“We are trying to be as transparent as possible,” Sebi chairman Tuhin Kanta Pandey said at a press conference. “There is a bit of a difference today (in disclosures) between the employees and the chairman and whole-time members. This will be the same going forward.”
The regulator will set up a digital system to manage conflict of interest and the whistleblower system for reporting perceived, actual and potential conflicts of interest.
Details of immovable property of the top Sebi officials including the chairman, whole-time members, executive directors and chief general managers will now be publicly disclosed in the same manner as applicable for All India Services and Central civil services officers.
In November, a high-level committee had proposed significant reforms to Sebi’s conflict of interest rules, including annual public disclosures of assets and liabilities by the chairman, whole-time members and employees with the rank of chief general manager and above – a first for the regulator’s top brass.
The aim was to strengthen transparency and ensure that any personal, professional or financial relationships that could affect independent decision-making were identified upfront.
Among other approved norms is the mandate of disclosing assets, liabilities, trading activities and relationships of employees, the chairperson and whole-time members and a cap of 25% for investments managed by a single intermediary.
“Introduction of a digital system to monitor declarations, conflicts and recusals can make the system more transparent. It needs to be seen how Sebi will leverage technology to implement the principles in practice,” said Sidharth Kumar, senior associate at BTG Advaya, a disputes and transactional law firm.
“Additionally, operational guidelines on the oversight committee needs to be crafted carefully to ensure the independence of the regulator,” he added.
Oversight panel
The board decided to hand over the decision to constitute a separate set of regulations for board members and creating an oversight committee on ethics and compliance to the central government.
The market regulator constituted a high-level committee last March, following allegations of a conflict of interest involving former Sebi chairperson Madhabi Puri Buch.
In August 2024, US short-seller Hindenburg Research alleged that Buch and her husband had undisclosed stakes in entities incorporated in Bermuda and Mauritius that were purportedly linked to the Adani Group, which Sebi was then investigating over allegations of fraud. The Adani Group rejected the claims, as did Buch and her husband.
FPIs
The Sebi board said FPIs can settle their trades on a net basis in the cash market. Currently, FPIs settle their trades with the custodian on a gross basis. The move is expected to reduce costs for FPIs, especially on index rebalancing day. Non-outright transactions will continue to be settled on a gross basis. Norms on netting of trades will be implemented on or before 31 December 2026.
“The request was that we should have a general netting, but then we have a problem where FPIs are not allowed to do day trading and therefore, if you have this (netting) complete even in the same scrip, then that risk will arise and therefore only the outright – which means that either purchase or sale (has been included),” said Pandey.
The Sebi board approved measures to revamp the fit and proper norms for market intermediaries. In February, the market regulator said that its experience in enforcing the rules over the past five years, along with evolving global best practices, prompted a review of Schedule II of the Intermediaries Regulations.
The move follows representations from market participants flagging onerous compliance requirements and the risk of irreparable harm due to premature disqualifications. The Schedule II norms mandate high ethical standards for applicants, directors, and key management personnel, focusing on reputation, competence, and financial solvency.
Fit and proper test
Among the changes approved is a ban on disqualification at the early stages of criminal proceedings. Earlier, an applicant or intermediary could fail the ‘fit and proper’ test if they were the subject of a pending criminal complaint filed by Sebi or named in a charge sheet by an enforcement agency for an economic offence. Sebi will now rely on principle-based criteria, which would judge a person or an entity based on their reputation, integrity and conduct. This would be applicable on a case-to-case basis.
The market regulator approved another proposal to limit disqualification of a legal entity to cases where a winding-up order has actually been passed, rather than initiated.
Another area under revamp is the default five-year prohibition that applies when Sebi declares a person not ‘fit and proper’ but does not specify the duration of the ban. This automatic ban has been removed.
The regulator also cleared a proposal to streamline the winding-up of alternative investment funds (AIFs) and the surrendering of their registration. Even after an AIF’s fixed tenure ends, some of them are unable to fully wind up and return all the money to investors because part of their funds is tied up in ongoing litigation or tax disputes.
Since regulations require complete distribution of funds before surrendering registration, these AIFs get stuck, continuing to exist without active investment activity.
“This will reduce the compliance burden on AIFs with no active fund management activity while retaining necessary regulatory oversight,” the Sebi chief said.
Sebi cleared a proposal allowing such funds to retain money beyond their tenure in genuine cases, such as those involving legal or tax complications, and introduced a category called “inoperative funds” for those with no active management.
These inoperative funds would face reduced compliance requirements. To retain funds, AIFs have to either show proof of receipt of a litigation notice or tax or regulatory demand, the consent of at least 75% of investors by value, or proof of amounts retained for operational expenses through invoices or prior-year comparables.
“The inoperative fund tag has been a longstanding ask of the AIF industry. This will also reduce operating costs for the inoperative fund,” said Siddarth Pai, founding partner, chief financial officer and enviromental, social and governance officer at 3one4 capital, adding that the norms provide regulatory clarity to AIFs.
Reits, InvITs
To promote ease of doing business for real estate investment trusts (Reits) and infrastructure investment trusts (InvITs), the market watchdog approved measures aimed at easing cash deployment, enhancing borrowing flexibility, and streamlining post-concession asset handling, while retaining existing investor protection norms.
InvITs will now be allowed to continue holding special purpose vehicles (SPVs) beyond the end of a project’s concession period. Under the current rules, an SPV must hold at least 90% of its assets in infrastructure projects. Once a concession expires, the asset typically reverts to the government, leaving the SPV without a qualifying infrastructure asset.
Finally, the board also approved a proposal to reduce the minimum investment limit by individual investors in social impact funds to ₹1000 from ₹2 lakhs. The move is expected to broaden retail participation in the segment. A social impact fund invests in companies or projects that contribute positively to social and environmental wellbeing.
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