Summary: This blog examines the Securities Market Code Bill, 2025, in terms of key changes, and their implications for SEBI and the securities market. SEBI’s regulatory role, along with increased involvement of market infrastructure institutions, securities market service providers and self-regulatory organisations, is poised for significant reform. While the shift towards a principle-based statute upholding good governance, natural justice, transparency and accountability is laudable, certain challenges relating to implementation and capacity-building should be addressed.

Background

• The Securities Market Code Bill, 2025 (“SMC”)[1], introduced in the Lok Sabha on December 18, 2025 and referred to the Parliamentary Standing Committee on Finance for examination, will repeal the Securities and Exchange Board of India Act, 1992 (“SEBI Act”), the Securities Contracts (Regulation) Act, 1956 (“SCRA”) and the Depositories Act, 1996. The objective is to rationalise, consolidate, modernise and update the securities laws, as well as incorporate various lessons from regulatory experiences and judicial decisions over the years.
• The SMC has its origins in the deliberations of the Financial Sector Legislative Reforms Commission (“FSLRC”) between 2011 and 2013. FSLRC’s concern for efficient and unified regulation is reflected in SMC provisions on Inter-regulatory coordination[2]. However, the recommendation in FSLRC Report of March 2013 for a single financial regulator appears to have been discarded.

SEBI: Power, with responsibility

• In recognition of growing complexities and fast-paced developments in the securities markets, the SMC acknowledges the role of SEBI as the primary regulator having the final authority over the securities market.
• The SEBI Board has been strengthened by increasing the number of Board members from nine to 15, with five members designated as Whole-Time Members. Additionally, powers currently exercisable concurrently by the Central Government and SEBI, have now been handed over to SEBI.[3]

Looking inward

• In response to various judicial decisions and other developments, the SMC has incorporated aspects from such decisions. These include restitution of disgorged amounts to affected persons, proportionality of action (in recognition of the Supreme Court ruling in Justice K.S. Puttaswamy and Anr. V. UoI and Ors., W.P. (c) N0. 494 of 2012, dated 24.08.2017), deference to natural justice in regulatory processes, separation of powers within SEBI (as per recommendations of the Expert Committee constituted by the Supreme Court in Vishal Tiwari v. UoI and Ors., W.P. (C) No. 162 of 2023) and the incorporation of urgent basis and period of validity for interim orders.
• SEBI’s expansive powers are thus sought to be contained by certain checks and balances legislated into the SMC:
  • Strict separation of powers between investigation, adjudication, and settlement proceedings[4]
  • Disclosure of conflicts of interest by Board members[5]
  • Requirement of proportionality in enforcement actions[6]
  • Principles of natural justice, notice when starting investigation, and opportunity of hearing before adverse action against individuals and market participants, even in the case of interim orders barring exceptional situations[7]
  • Requirement of written reasons during exercise of discretion by WTMs, e.g., while granting extension in timelines for investigation[8], for dispensing with the requirement of notice at the beginning of investigation,[9] and for the period of validity of interim orders[10]
  • Parameters for ensuring predictability in securities law enforcement — quantification of unlawful gains during investigation[11] is required, wherever possible, and previous quasi-judicial decisions in similar cases are a relevant factor adjudication[12]
  • Periodic regulatory impact assessment and self-review
  • Timelines for initiation as well as completion of investigation, as well as for validity of interim orders — SEBI will move to time-bound investigation and adjudication, barring exceptional cases where extensions can be granted only after Whole-Time Members record their reasons in writing.

SMC: First Principles to Brass Tacks

• As principle-based law, the SMC is like the Constitution for the Indian securities market. It is all-encompassing and overrides subordinate legislation such as rules, regulations, instructions, etc. However, for proper implementation, certain definitions need clarity. The risks of excessive delegation and the challenges in suitably incentivising market participants that may be assigned regulatory functions of investigation or registration, need to be addressed. The application of the conflict of interest framework and Chinese walls between investigation, adjudication, settlement to case allocation internally within SEBI may see some challenges. SEBI also needs to consider manpower augmentation and restructuring to handle the substantial increase expected in its quasi-judicial caseload.
• Delineation of defaults based on seriousness – Minor defaults have been decriminalised and now carry only civil penalties without criminal consequences. However, there is an overlap between ‘fraudulent or unfair practices’ under Clause 92 and “market abuse” under Clause 93. This raises concerns regarding implementation of the proposed market-abuse related provisions since they involve more severe enforcement consequences.
• Slippery slope of delegated legislation – Many of the specifics and details necessary for implementation of the SMC continues to be left to rules, regulations, subsidiary instructions[13], bye-laws etc., to be made effective separately.[14] While these are useful for quick updates or clarifications where necessary, SEBI should guard against frequent changes in subordinate legislation as it creates a perception of an unpredictable regulatory regime, particularly among sophisticated investors. The objective of principle-based regulation should be to encourage disclosure-based and self-driven compliance by securities market participants. Therefore, the bulk of a rule-based regime should not be seen to simply migrate to subordinate legislation.
• The SMC also saves existing subordinate legislation, except where it is interpreted to be inconsistent with the SMC. Clause 152 (2) (b) of the SMC proposes that notwithstanding repeal of the 3 Acts, “anything done or any action taken or purported to have been done or taken, including any rule, notification, regulation, scheme, order or notice made or issued or any appointment or declaration made or any operation undertaken or any direction given shall, in so far as it is not inconsistent with the provisions of this Code, be deemed to have been done or taken under the corresponding provisions of this Code”. Accordingly, the regulations that are currently in force will continue to operate, and only so far as there is any inconsistency, the SMC will prevail.
• Delegated investigation, registration – SEBI’s reliance on delegated investigation[15] or registration[16] to boost its regulatory capacity will need attentive oversight over market entities to which such responsibilities may be assigned. Detailed regulations for exercise of such function by market entities, with suitable incentives for profit-making market entities to adapt to regulatory functions, will be required.  
• Increase in quasi-judicial responsibilities of SEBI – SEBI is likely to see a significant increase in its quasi-judicial workload. Mandatory hearing as a norm in interim order cases[17], SEBI Ombudsperson deciding unresolved investor complaints as quasi-judicial authority[18], adjudication as one-point stop for all other quasi-judicial processes for penalty, directions, cancelling certificates of registration of intermediaries, etc., all increase the scope of adjudication by SEBI. Further, Clause 31 (4) envisages a layer of SEBI oversight over the MII/ Self-Regulatory Organization (“SRO”) doing the registration. SEBI is empowered to look at refusals of registration where they are brought to its notice, and issue suitable directions. This would require additional manpower. This should also imply a right to be heard before adverse orders are passed against the person seeking registration, which should be made explicit.

Expansion of appellate infrastructure, planned reinforcement of the Securities Appellate Tribunal

1. Consequent to the above, we assess that the caseload of the Securities Appellate Tribunal (“SAT”) is likely to substantially increase with appealable orders of Ombudspersons and MIIs/ SROs under the SMC. Accordingly, the SMC has suitably augmented the judicial infrastructure for appeals from SEBI’s quasi-judicial decisions to the SAT. The Central Government may determine the number of Judicial and Technical Members of SAT[19], with no upper limit, and there may be several SAT benches[20]. The Central Government shall also provide SAT with officers and employees.[21] Any possible impasse due to absence of quorum in SAT is also addressed by prescribing that the senior-most judicial member of SAT will act as presiding officer until a new presiding officer takes charge[22].

Empowerment of Market Infrastructure Institutions (“MIIs”)

1. Registration of intermediaries may be delegated by SEBI to MIIs under the SMC. Further, where earlier the settlement of disputes between a member of MII and other parties was left largely to the MII and its bye-laws, the SMC itself now prescribes the action an MII can take where a member contravenes its bye-laws — penalty, expulsion, compensation, annulment of contracts, suspension of accounts — with built-in provisions for hearing the affected party before passing any order.
2. To strengthen MIIs, the SMC prescribes principles for their fair and transparent functioning. Lessons from previous experiences regarding the importance of non-discriminatory access to the services of an MII, and other principles such as transparency, have been woven into the SMC. The SMC now also calls for monitoring and identification of contravention of SMC provisions by the MII. Other principles of corporate governance such as ensuring independent, fit and proper status of members of the MII, participation of users and market participants in the governing Board of the MII, etc., are mentioned in the SMC itself.

Other significant developments

1. Recognition of ROFR, tag-along, drag-along rights in the SMC– Shareholder agreements typically contain clauses with rights of first refusal (“ROFR”), tag-along rights, drag-along rights, etc. Upto October 2013, when SEBI specifically permitted such contracts vide a Notification[23] under Sections 16 and 28 of the SCRA, the enforceability of such clauses was in question. Now, for the first time, the SMC incorporates into the statute itself, a consolidated exemption to certain contracts for sale or purchase or other dealings in securities from requiring SEBI’s prior permission.[24] This brings a sense of certainty to the regulatory regime for such contracts and is a welcome move.
2. Initiation of proceedings for SEBI Act-related offences under the PMLA – The SMC also proposes certain amendments to the Scheduled Offence[25] pertaining to the SEBI Act, 1992, under the Prevention of Money-Laundering Act, 2002[26] (“PMLA”). The Schedule is now proposed to include offences qualifying as “market abuse”[27] under Clause 93, read with Clause 96, of the SMC, instead of “Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control”[28] as per the present Schedule of the PMLA. The intent appears to be to ensure that only market abuse cases lead to initiation of proceedings under the PMLA. However, “market abuse” is defined to include activities that overlap with fraudulent and unfair trade practices under Clause 92. Further, this list can also be augmented further through SEBI regulations[29], enabling initiation of proceedings under the PMLA for a wide range of securities law contraventions.
3. In addition, only failure to comply with SEBI Orders is now proposed as a Scheduled Offence under the PMLA. Section 24 of the SEBI Act presently mentioned in the Schedule of the PMLA is wider and pertains to contravention/ attempt to contravene provisions of the SEBI Act, rules or regulations, failure to pay penalty or comply with directions/ orders of SEBI. Therefore, under the SMC, contraventions of the Act or regulations alone, without corresponding enforcement orders, do not constitute basis for initiation of proceedings under the PMLA.

Conclusion: The Last Mile

1. The SMC suitably empowers SEBI to regulate the market, promote its development and protect the interests of investors. It envisages reinforcement of the regulatory and appellate infrastructure to meet the challenges of a fast-growing economy. While acknowledging the discretion required in exercise of regulatory powers in a dynamic environment, it looks to contain this discretion within the bounds of natural justice, proportionality and transparency. The mechanisms established for fairness in investigation, adjudication and enforcement are particularly commendable, as are the provisions on self-review and regulatory impact assessment.
2. The SMC has also cleared the regulatory landscape of incongruities, overlaps and obsolete provisions. It has imbibed the lessons learnt through SAT and court decisions over the years. Delegation of regulatory functions can be expected to bridge the gap between the regulator and the regulated entities, with increased accountability and understanding of the regulatory mandate across the board.
3. It is important to address concerns such as clarity in gradation of offences, risks of excessive delegation of regulatory powers, practical implementation of the Chinese walls between various arms such as investigation and adjudication, and the manner in which subordinate legislation would end up supporting the principles outlined in the SMC. This would help the SMC achieve its objectives effectively.

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[1] The Parliament, under Entry 48 of the Union List of the Seventh Schedule to the Constitution of India, has exclusive power to make laws on stock exchanges and futures markets.  

[2] Chapter XV of the SMC.

[3] For example, as per Clause 37 of the SMC,  the grant of registration to Market Infrastructure Institutions (“MIIs”) like stock exchanges, depositories, clearing corporations, is now exclusively SEBI’s function. In the extant SCRA, regulation 4 envisages concurrent exercise of power for grant of recognition to stock exchanges by Central Government and SEBI. Similarly, and in a departure from the current SCRA, it is for SEBI to direct suspension of an MII’s business in emergencies, the Central Government is not proposed to be involved. Further, for supersession of the governing Board of an MII, the SMC stipulates that the Central Government may form an opinion on the matter on the recommendation of SEBI, thus reinforcing SEBI’s influence and power in this regulatory domain.

[4] As per Clause 17 (2) of the SMC, no person is to be designated as AO if he has been involved in any of the other regulatory processes for that matter – initiation or conduct of inspection or investigation, appointment of AO, consideration of settlement application by any person in that matter, or issuance of interim order. 

[5] Clause 8 (4) of the SMC.

[6] Clause 11 (3) of the SMC states – “The Board shall review its performance and functioning including proportionality and effectiveness of the regulations made in this behalf.”. Further, Clause 19 (a) of the SMC states – “The adjudicating officer shall have due regard to the following factors before making any order under section 20, namely:—(a) the order shall be proportionate to the default or contravention committed by the noticee and act as a deterrent against the commission of such default or contravention by the noticee or any other person in future”.

[7] The proviso to Clause 27 (2) requires an opportunity of being heard to the person concerned, while the second proviso permits SEBI to dispense with such pre-decisional hearing for reasons to be recorded in writing.

[8] Provisos to Clause 13 (2) of the SMC.

[9][9] Proviso to Clause 14 (6) of the SMC.

[10] Clause 27 (4) of the SMC.

[11] Clause 13 (3) of the SMC.

[12] Clause 19 (e) of the SMC.

[13] Clause 49 of the SMC provides for subsidiary instructions to clarify ambiguity in regulation or lay down any procedural requirement ancillary to any regulation.

[14] Clause 146 of the SMC lists 51 such areas for delegated legislation

[15] Proviso to Clause 13 (1) enables SEBI to seek assistance of a securities market service provider or expert to assist the investigating officer.

[16] Clause 31 (1) of the SMC

[17] Proviso to Clause 27 (2) of the SMC.

[18] Clause 75 of the SMC.

[19] Clause 80 (1) of the SMC.

[20] Clause 80 (2) of the SMC.

[21] Clause 84 of the SMC.

[22] Clause 83 of the SMC.

[23] SEBI Notification No. LAD-NRO/GN/2013-14/26/6667 dated October 3, 2013, issued under Sections 16 and 28 of the SCRA.

[24] Clause 48 of the SMC lists for exemption from the SMC – spot delivery contracts, contracts for pre-emption including right of first refusal or tag-along or drag-along rights or such other similar rights, certain contracts with an option to buy or sell securities, contracts including derivatives under Chapter IIID of the Reserve Bank of India Act, 1934, and such other contracts as the Central Government may specify by notification.

[25] The term ‘scheduled offence’ is defined in Section 2 (y) of the Prevention of Money-Laundering Act, 2002 to mean the offences specified in Parts A, B or C of the Schedule to the said Act.

[26] Para. 11 in Part A of the Schedule to the PMLA 2002.

[27] Clause 93 (read with Clause 96) of the SMC includes insider trading, device/scheme/artifice to defraud, illegal use of non-public information, scrip price and volume manipulation, front-running and “any other activities as may be specified by regulations which adversely affects the integrity of the securities markets”

[28] Para. 11 of the Schedule to the PMLA currently mentions Section 12A read with section 24 of the SEBI Act, and section 24 of the SEBI Act, as Scheduled Offences.

[29] Clause 93 (g) of the SMC states that “93. No person shall directly or indirectly commit any of the following acts of market abuse, namely:- (g) engage in such other activities as may be specified by regulations which adversely affects the integrity of the securities markets.”