Common Code of Conduct for Intermediaries

Before 2008, almost every category of SEBI-registered intermediary lived under its own product-specific code of conduct, scattered across a dozen separate sets of regulations. The SEBI (Intermediaries) Regulations, 2008 changed that architecture. Regulation 16 fixes a single, uniform behavioural floor — the Code of Conduct in Schedule III — that binds an intermediary and its directors, officers, employees and key management personnel, on a continuous basis, whatever business they are registered to do. This chapter unpacks Schedule III part by part, ties each obligation back to the operative regulations in Chapter III, and shows how the Securities Appellate Tribunal and the Supreme Court have read these duties when an intermediary's licence is on the line.

Why a common code at all

The 2008 Regulations were SEBI's attempt to consolidate the registration, conduct and disciplinary machinery that had previously been duplicated across the stock brokers, merchant bankers, bankers to an issue, debenture trustees, registrars, portfolio managers and other product regulations. Before 2008 an investor wronged by a registrar to an issue, and an investor wronged by an underwriter, were protected by two entirely separate codes drafted years apart, often in inconsistent language, and policed under separate disciplinary regimes. That fragmentation produced both regulatory gaps and regulatory arbitrage. Rather than re-draft a fresh behavioural code for each category, SEBI lifted the common denominators of honest intermediation into a single Schedule III and made it applicable across the board through Regulation 16. Schedule IV of the same regulations simultaneously amended the older product regulations — for example, substituting a uniform ‘fit and proper person’ clause keyed to Schedule II into the Bankers to an Issue Regulations, 1994 and the Collective Investment Schemes Regulations, 1999, and substituting a common ‘liability for action in case of default’ clause pointing to Chapter V of the 2008 Regulations.

The design logic is straightforward: investor protection should not depend on which counter of the market an investor happens to deal at. A registrar mishandling allotment data and a broker front-running a client order both breach the same idea of fiduciary trust, so the conduct standard should be common even if the product-specific operational rules differ. The 2008 Regulations therefore operate at two layers — a common conduct floor that no intermediary may fall below, plus the category-specific operational rules in each product regulation that sit on top of it. Where the two conflict, the safer reading is cumulative compliance: the intermediary must satisfy both. This is the doctrinal cousin of the category-specific codes you will study in the stock brokers' code of conduct and the common framework under the 2008 Regulations. For the full map of how these notes fit together, see the SEBI Intermediaries hub.

Regulation 16: the binding hook

The entire Code hangs on one short, deceptively powerful provision. Regulation 16 reads: “An intermediary and its directors, officers, employees and key management personnel shall continuously abide by the code of conduct specified in Schedule III.” Three features deserve emphasis for exam purposes. First, the obligation is continuous — it is not a one-time eligibility test at registration but an ongoing condition of holding the certificate. Second, it reaches beyond the registered entity to individual directors, officers, employees and key management personnel, so personal accountability cannot be deflected onto the corporate shell. Third, Schedule III is incorporated by reference, which means a breach of any clause of the Code is a breach of the Regulation itself, attracting the disciplinary machinery of Chapter IV (inspection) and Chapter V (suspension and cancellation).

Regulation 16 sits within Chapter III, ‘General Obligations of Intermediaries’, alongside the operational duties in Regulations 12 to 15. Read together, these provisions form the conduct spine of the framework: Schedule III states the principles, and Regulations 12–15 supply the concrete, auditable obligations through which compliance is demonstrated.

Part I: Investor protection, service standards and fees

Schedule III opens with investor protection. Clause 1.1 requires every intermediary to make all efforts to protect the interests of investors and to render the best possible advice having regard to the client's needs, the environment and the intermediary's own professional skills. Clause 1.2 demands high standards of integrity, dignity, fairness, ethics and professionalism, and crucially makes the intermediary responsible for the acts or omissions of its employees and agents in the conduct of its business — a vicarious-liability anchor that prevents firms from hiding behind a rogue-employee defence.

Clause 1.3 articulates the core fiduciary trio: render high standards of service, exercise due skill and diligence over persons it employs, and exercise independent professional judgment — while expressly forbidding collusion with other intermediaries to the detriment of investors. Clause 1.4 prohibits increasing charges or fees without proper advance notice to clients. The Securities Appellate Tribunal has repeatedly treated ‘high standards of service’ as a justiciable standard rather than aspirational language, though it also polices proportionality — reading down penalties that are disproportionate to a mere delay in compliance rather than a substantive failure of service.

Part II: Prompt disbursal of amounts

Part II is a single, sharp obligation. Clause 2.1 requires an intermediary to be prompt in disbursing dividends, interest or any such accrual income received or collected by it on behalf of its clients. The clause targets the classic agency abuse of float — an intermediary sitting on client entitlements and quietly enjoying the time value of money that belongs to the investor. Because the income is held in a representative capacity, retention beyond what is reasonable is not a mere service lapse but a breach of the trust relationship that the Code is built to protect.

The clause is short but doctrinally significant because it locates the duty in the law of agency and trust rather than contract alone. An intermediary that collects a client's dividend does so as the client's agent; the money never becomes the intermediary's own, and any benefit derived from holding it accrues to the principal. Delay therefore has two distinct consequences under the Code: the service-standard breach under Part I and the misuse-of-client-property breach that shades into the segregation failures policed under Parts V and VI. In practice SEBI reads Clause 2.1 alongside the segregation duties discussed below — money or securities collected for a client must be both segregated from the intermediary's own assets and promptly passed on, and a firm that commingles client float with proprietary funds will usually be found to have breached the prompt-disbursal duty as well.

Part III: Disclosure and confidentiality

Part III balances two competing informational duties. On disclosure, Clause 3.1 requires adequate disclosures to clients in a comprehensible and timely manner so they can make a balanced and informed decision; Clause 3.2 prohibits misrepresentation and requires that information provided not be misleading; and Clause 3.3 forbids exaggerated statements, oral or written, about the intermediary's own qualifications, capability or achievements relative to other clients. These clauses convert the abstract idea of suitability into concrete communication standards.

On confidentiality, Clause 3.4 forbids divulging confidential client information — directly or indirectly, orally or in writing — without the client's prior permission, subject only to disclosures required by law. The disclosure-confidentiality pairing reflects the dual character of intermediation: the intermediary must be transparent to its own client while guarding that client's information from everyone else. The duty to give suitable, non-misleading advice also dovetails with Regulation 15, which separately governs the rendering of investment advice and its disclosure of interest.

Part IV: Conflict of interest and insider trading

Clause 4.1 is the Code's conflict-of-interest backbone. It requires an intermediary to avoid conflicts of interest, to put in place a mechanism to resolve any conflict that does arise, to take reasonable steps to resolve it equitably, and to make appropriate disclosure to the client of any possible source or potential area of conflict of duties and interest that would impair its ability to render fair, objective and unbiased services. The structure is layered: avoid first, manage and disclose where avoidance is impossible. The phrase ‘fair, objective and unbiased services’ is the standard against which a conflict is measured — a conflict matters under the Code not in the abstract but precisely to the extent it impairs the intermediary's ability to serve the client impartially.

Clause 4.2 prohibits the intermediary, its managing directors or employees, and their associates — whether through their own accounts or through family members, relatives or friends — from indulging in any insider trading. The reach to relatives and friends mirrors the broad ‘connected person’ logic of the insider trading regime and forecloses the obvious circumvention of routing trades through proxies. The Supreme Court's expansive reading of fraudulent practice in SEBI v. Kanaiyalal Baldevbhai Patel, (2017) 15 SCC 1 — which held that front-running can amount to a fraudulent and unfair trade practice and that inducement, not classical deceit, is the touchstone — supplies the enforcement backdrop against which Clause 4.2 must be read, since front-running by an intermediary is the paradigm conflict of interest the clause targets. Importantly, that decision extended the prohibition on front-running beyond intermediaries to non-intermediaries as well, holding that the PFUTP framework reaches anyone who trades ahead of a large order to profit from the anticipated price move. For an intermediary, the Code adds a layer the general law does not: the duty is not merely to refrain from fraud but to maintain a structural mechanism that prevents conflicts from arising in the first place, so that an employee who trades ahead of a client order breaches both the PFUTP prohibition and the affirmative Clause 4.1 duty to have controls in place.

Part V: Compliance and corporate governance

Part V is the longest and most enforcement-relevant portion of Schedule III. Clause 5.1 requires good corporate policies and governance, and forbids fraudulent or manipulative transactions and unfair competition that would harm or disadvantage other intermediaries or investors. Clause 5.3 prohibits the intermediary from being a party to, or instrumental in, the creation of a false market, price rigging or manipulation, passing of unpublished price-sensitive information, or any activity distorting market equilibrium or undertaken for personal gain — effectively importing the prohibitions of the PFUTP framework into the Code itself.

Clause 5.4 obliges co-operation with SEBI and forbids untrue statements or suppression of material facts in any document furnished to the Board. Clause 5.6 requires the intermediary to maintain an appropriate level of knowledge and to comply with the awards of the Ombudsman under the SEBI (Ombudsman) Regulations, 2003, and Clause 5.7 requires prompt intimation to SEBI of any legal proceedings initiated for a material breach. The Supreme Court's treatment of director accountability in N. Narayanan v. Adjudicating Officer, SEBI, (2013) 12 SCC 152 — where the Court upheld a two-year market debarment and a Rs. 50 lakh penalty against a whole-time director for inflated financials, describing disclosure and transparency as the two pillars on which market integrity rests — is the governance benchmark Part V codifies for intermediaries.

Part VI: Infrastructure, controls and record-keeping

The final part addresses operational resilience. Clause 6.1 requires internal control procedures and financial and operational capabilities reasonably expected to protect the intermediary's operations, clients and other registered entities from financial loss arising from theft, fraud, professional misconduct or omissions. Clause 6.2 requires an intermediary registered in more than one capacity to maintain an arm's length relationship in both manpower and infrastructure between its activities. Clause 6.3 requires adequate, well-documented infrastructure backed by operations manuals, and Clause 6.4 requires records to be created and maintained so that documents and data can be traced even if originals are lost. Together with Clause 5.2's data-continuity and electronic back-up requirement, Part VI is the clause set SEBI invokes when an intermediary's back-office failure causes client harm — most visibly in the client-securities misuse cases discussed below.

The operational scaffolding: Regulations 12 to 15

Schedule III states principles; Regulations 12–15 make them auditable. Regulation 12 requires the intermediary to furnish SEBI, by 1st April each year, a compliance officer's certificate confirming continuous compliance with all obligations and the truth of disclosures in Form A; to prominently display the certificate of registration at all offices; and to display the compliance officer's name and contact details for investor complaints. Regulation 13 fixes the now well-known grievance-redressal benchmark: the intermediary must endeavour to redress investor grievances promptly but not later than forty-five days of receipt, maintain records of grievances and redressal, and upload quarterly data on grievances received, redressed and those unresolved beyond three months. Regulation 14 requires appointment of a compliance officer to monitor compliance with the Act, rules, regulations, circulars and exchange or SRO bye-laws, and to report material non-compliance in writing to the board. Regulation 15 governs investment advice, requiring disclosure of interest before advice is rendered and a reasonable basis for any recommendation made to a relying client. These provisions are explored further in the common framework chapter.

How the Code connects to 'fit and proper' status

Schedule II's ‘fit and proper person’ criteria and Schedule III's Code of Conduct operate as twin gates. Schedule II tests integrity, reputation and character, the absence of convictions and restraint orders, and competence including financial solvency and net worth, both at entry and continuously — Regulation 9(d) makes continuous compliance with Regulation 4's requirements a standing condition of the certificate. Schedule III then governs behaviour once inside the gate. A serious or persistent breach of the Code can itself render a person no longer ‘fit and proper’, so the two schedules feed each other: conduct failures erode fit-and-proper status, and loss of that status is a ground for cancellation under Chapter V. SEBI's periodic recalibration of the Schedule II disqualification triggers — debated in terms of whether disqualification should attach at the FIR or chargesheet stage or only on conviction — is therefore directly relevant to how Code breaches translate into licensing consequences.

Enforcement standard: civil liability without mens rea

A central doctrinal point for any conduct-Code question is the standard of liability. In Chairman, SEBI v. Shriram Mutual Fund, (2006) 5 SCC 361, the Supreme Court held that a penalty for breach of a civil obligation under the securities laws follows once the contravention is established, and that proof of mens rea is not a precondition. The Court reasoned that the statutory scheme of monetary penalties under Chapter VI-A of the SEBI Act is designed to deter non-compliance and protect investors, and that requiring proof of intention would frustrate that deterrent purpose. Translated to Schedule III, this means an intermediary cannot escape liability for a Code breach merely by pleading the absence of dishonest intent — the failure to maintain high standards of service or to segregate client funds is actionable on its own terms.

The Shriram principle must, however, be read with the proportionality discipline the SAT applies at the penalty stage. While liability may attach without intent, the quantum of penalty is calibrated to the gravity of the breach, the loss caused and the conduct's repetitiveness — which is why the Tribunal has reduced penalties that were excessive relative to a technical or short delay in complying with a circular. The Code thus operates on a two-step logic: strict liability for the breach, proportionate sanction for the consequence.

The Code in action: client-funds and securities misuse

The most instructive recent applications of Parts V and VI concern misuse of client assets. In the Karvy Stock Broking Ltd. v. SEBI matter (SAT, 2021), the broker had pledged clients' securities held under power of attorney to raise funds for group purposes without client consent — reportedly securities worth over a thousand crore rupees diverted to fund group activities. SEBI's interim order barring Karvy from taking new clients and directing the depositories NSDL and CDSL not to act on its power-of-attorney instructions was sustained pending forensic audit — a textbook deployment of the infrastructure and governance clauses against a back-office abuse of fiduciary control over client securities. The depositories were further directed to permit transfer of securities only to the respective beneficial owners who had paid in full, ring-fencing the wronged clients from the consequences of the broker's misconduct. The case crystallises the principle that a power of attorney granted for operational convenience does not transfer beneficial ownership; using client securities as the intermediary's own collateral is precisely the ‘personal gain’ conduct Clause 5.3 forbids.

Similarly, in the IIFL Securities v. SEBI proceedings (SAT, 2023), SEBI found a failure to segregate the broker's own funds from clients' funds and misuse of credit-balance clients' funds for proprietary and other clients' settlements over a multi-year period, and restrained IIFL from onboarding new clients for two years — an order the SAT stayed on interim relief while the appeal was heard. The contrast between the two outcomes is itself instructive: the existence of a serious segregation finding triggers liability, but the SAT's willingness to grant interim relief shows the appellate forum testing both the proportionality of the sanction and the soundness of the underlying finding before the bar bites.

Both matters illustrate why segregation of client funds and securities is the operational heart of the Code: it converts the abstract fiduciary duty in Clause 1.3 into a concrete, auditable ring-fence, and it is the single most heavily litigated conduct obligation for brokers. The same theme runs through the dedicated stock brokers' code of conduct and the capital-adequacy norms that back it.

Who is bound, and the limits of the corporate shield

Because Regulation 16 names directors, officers, employees and key management personnel alongside the intermediary, SEBI can and does proceed against individuals personally, not merely the registered firm. Clause 1.2's express attribution of employees' and agents' acts and omissions to the intermediary closes the gap from the other direction — the firm cannot disclaim a subordinate's misconduct as outside its responsibility. The result is a two-way accountability: the firm answers for its people, and its people answer in their own right. N. Narayanan reinforces this at the governance level, treating whole-time directors as gatekeepers who cannot plead ignorance of the financial statements they certify. For aspirants, the safe formulation is that Schedule III imposes both institutional and personal conduct obligations, enforced cumulatively rather than alternatively.

Exam takeaways and common traps

Three traps recur in objective and descriptive papers. First, candidates conflate Schedule II (fit and proper, criteria for registration) with Schedule III (Code of Conduct, behaviour after registration) — keep them distinct but linked. Second, the grievance-redressal limit is forty-five days under Regulation 13(1), not the older thirty-day figure that appears in some secondary material; quote the regulation, not the memory. Third, on liability standard, the correct answer is that civil penalties under the SEBI Act do not require mens rea per Shriram Mutual Fund, while front-running and similar conduct can be fraudulent under the PFUTP framework as read in Kanaiyalal Baldevbhai Patel — do not blur the civil-penalty and fraud analyses. Frame any answer on the common Code around Regulation 16 as the hook, the six parts of Schedule III as the substance, and Chapters IV–V as the consequence. Cross-reference the merchant bankers' regulations to show how the common Code overlays category-specific duties.