By Sandeep Parekh, Managing partner, Finsec Law Advisors
The Securities and Exchange Board of India (Sebi), at its 213th Board meeting on March 23, approved six sets of reforms that reveal its priorities under Chairman Tuhin Kanta Pandey. Five are directed at the market—easing compliance for alternative investment funds (AIFs), reducing transaction costs for foreign portfolio investors (FPIs), widening retail access to social finance, providing operational flexibility to infrastructure investment (InVITs) and real estate investment trusts (REITs), and recalibrating intermediary eligibility criteria. The sixth and the most consequential is directed inward—the adoption of a comprehensive conflict-of-interest and disclosure framework for Sebi’s own leadership and employees in response to the governance questions that marked the final years of the previous chair.
On AIFs, the Board has approved a pragmatic exit framework. AIFs may now retain liquidation proceeds beyond the permissible fund life where they face pending litigation or tax demands (supported by documentary evidence), anticipated liabilities (with consent of 75% of investors by value), or residual operational expenses (capped at three years). AIFs seeking to surrender registration while holding such residual amounts will be tagged “inoperative” and exempted from periodic filings, Private Placement Memorandum updation, and performance benchmarking. This addresses a genuine regulatory anomaly—funds with no active management being compelled to maintain full compliance infrastructure merely because of residual balances arising from circumstances beyond their control.
The approval of net settlement of funds for FPIs’ outright transactions in the cash market addresses a longstanding inefficiency. Under the gross settlement regime, FPIs were required to fund full purchase obligations independently of offsetting sales, resulting in avoidable capital lock-in and forex conversion costs, particularly acute on index rebalancing days. The reform confines netting to the funds leg; securities delivery remains gross. This achieves cost efficiency without increasing risk in the system.
The minimum investment in Social Impact Funds has been reduced from Rs 2 lakh to Rs 1,000, aligning with the minimum application size for Zero Coupon Zero Principal Instruments on the Social Stock Exchange. While the democratisation intent is welcome, whether the investor protection framework designed for an AIF product is adequate at mutual-fund-level ticket sizes will need monitoring.
The “fit and proper person” criteria under Schedule II of the Intermediaries Regulations have been overhauled. The automatic disqualification triggered by pending criminal complaints and first information reports is replaced by a principle-based and case-by-case assessment, a reform consistent with the presumption of innocence and with international practice where conviction rather than charge typically triggers rule-based disqualification.
Convictions for all economic offences now trigger disqualification (expanding beyond the previous “moral turpitude” standard), the right to be heard before being declared unfit is expressly codified in Schedule II, the category of proceedings triggering non-consideration of registration is confined to Sections 11B(1) and 11(4) of the SEBI Act, and the show-cause notice non-consideration period is halved from one year to six months. The retroactive withdrawal of pending cases initiated under the stricter prior framework is a pragmatic and welcome measure.
On InvITs and REITs, the Board approved four targeted amendments—continued special purpose vehicle holding post-concession (with a one-year exit window, computed from the later of completion of the concession agreement, conclusion of pending claims, or expiry of the defect liability period); expanded liquid fund deployment to schemes holding AA-rated and above instruments; greenfield investment access for privately listed InvITs (up to 10% of asset value); and broader borrowing permissions for leveraged InvITs covering capital expenditure, major maintenance, and debt refinancing.
The most consequential resolution concerns Sebi’s institutional governance. The Board adopted the recommendations of the High-Level Committee on conflict of interest, constituted in March 2025 under former Chief Vigilance Commissioner, one of the first acts of Chairman Pandey upon assuming office, and a direct response to the governance controversy that engulfed his predecessor.
The substantive measures are considerable. The Chairman and Whole-Time Members (WTMs) will now be classified as “insiders” under the Prohibition of Insider Trading Regulations, subjecting Sebi’s leadership to the same trading restrictions the regulator enforces on market participants. Investment restrictions currently applicable to employees now extend uniformly to the Chairman and WTMs, who must liquidate, freeze, or divest equity holdings upon joining. These restrictions apply prospectively to spouses and dependent family members, with existing investments grandfathered. A novel 25% concentration cap limits exposure to any single Sebi-registered intermediary, with breaches triggering mandatory recusal.
The institutional architecture includes a new Office of Ethics and Compliance, a digital recusal system, a whistleblower mechanism, and mandatory initial, annual, and event-based disclosures of assets, liabilities, and relationships.
The public disclosure norm for immovable property has been aligned with All India Service and Central Civil Services standards, though full asset and liability details will be disclosed internally to Sebi rather than publicly, reflecting a compromise with employee privacy concerns.
Two significant limitations, however, temper the reform’s force. First, the adopted framework will be incorporated into Sebi’s voluntary 2008 Code on Conflict of Interest for Members of the Board, rather than notified as binding regulations. The HLC had recommended a separate set of enforceable regulations, a recommendation that the Board has referred to the central government. The gap between a voluntary code and a binding regulatory framework is not merely procedural; it determines whether non-compliance attracts consequences or merely disapproval. Clearly, that job must be done by the finance ministry.
Second, the proposal for an independent Oversight Committee on Ethics and Compliance which would have provided external supervision of the conflict-of-interest framework, has also been referred to the central government. The newly created Office of Ethics and Compliance will, for now, be supervised by the Chief Vigilance Officer, who reports to the Chairman.
The conflict-of-interest controversy of 2024 raised questions not merely about individual conduct but about the adequacy of Sebi’s institutional safeguards. The central government’s response to the referred recommendations will be critical in determining whether this episode results in durable institutional reform or a well-documented set of good intentions.
The 213th Board meeting reveals an institutional posture of pragmatic calibration, aligning regulatory requirements with operational reality in the market, while attempting to embed accountability within the regulator itself. The five market-facing reforms are well-designed and responsive to genuine practical difficulties. Whether the accountability reform achieves its purpose will depend on the distance between the voluntary code and enforceable regulation brought by the government. In fact, such a code should be implemented across regulators in the financial markets.