Parliamentary panel moots Securities Markets Code Bill preamble reset

A parliamentary panel has backed key changes to the Securities Markets Code Bill, strengthening investor protection while curbing excessive delegation of criminal powers

The Parliamentary Standing Committee on Finance has backed key revisions to the Securities Markets Code (SMC) Bill, including a clearer preamble defining regulatory objectives, tighter limits on criminal provisions by scrapping a contentious clause, and greater clarity on the issuance of investigation notices, while retaining the provision mandating the transfer of a portion of the regulator’s surplus funds to the Consolidated Fund of India. 

One of the key changes in the Bill is the revision of the preamble to include the objectives of protecting investor interests, promoting the development of the securities market, and ensuring effective regulation — going beyond the consolidation of the Securities and Exchange Board of India (Sebi) Act, 1992, the Securities Contracts (Regulation) Act, 1956, and the Depositories Act, 1996. “The committee has recommended that the long title, the opening provision of the code, should expressly articulate its statutory objective. Equally significant is its recommendation that the concluding sentence of the Bill, the memorandum regarding delegated legislation, should prohibit the delegation of essential legislative functions,” said M S Sahoo, former chairperson of the Insolvency and Bankruptcy Board of India and a former whole-time member of Sebi. 

However, the requirement for the transfer of Sebi’s annual surplus to the Consolidated Fund of India remains unchanged. Under the SMC Bill, 25 per cent of the annual surplus in the general fund in any financial year will be credited to a reserve fund, which will not exceed the total annual expenditure of the preceding two financial years. The reserve fund will be used to meet Sebi’s expenses. 

“This removes any institutional incentive to levy fees beyond what is necessary for effective regulation. At the same time, it blurs the distinction between a regulatory fee and a tax, since a fee is constitutionally justified as a quid pro quo for services rendered. A preferable approach would have been for the committee to recommend that regulatory fees be levied only to the extent necessary to meet the legitimate funding requirements of the regulator, with the levy remaining firmly anchored in the principle of quid pro quo,” said Sahoo. 

During FY25, the total amount of fees and other charges received was ₹2,334 crore, up from ₹1,851.48 crore in the previous year. Total income from various sources, including fees, interest earned on investments, and filing fees for various documents, stood at ₹2,712.4 crore in FY25. In comparison, expenses for the year stood at  ₹1,278.3 crore. 

Other establishment-related matters, such as the composition of the board and appointments, remain unchanged in the report.

The parliamentary committee has recommended scrapping a controversial provision in the proposed securities law that would have allowed the regulator to expand the scope of criminal offences. It said Clause 93(g) should be deleted, observing that all serious forms of market abuse requiring criminal action are already covered under Clauses 93(a) to 93(f). Allowing the regulator to declare new activities as criminal independently, the committee warned, would amount to excessive delegation of legislative power. 

“The committee has done something Indian financial legislation rarely does. It has drawn an explicit boundary around what a regulator may decide by regulation and what must stay in the statute. Ten provisions have been flagged for exactly this reason. That’s not legislative housekeeping; that’s a doctrine,” said Sumit Agrawal, senior partner, Regstreet Law Advisors and former Sebi officer. 

The committee emphasised that the authority to define criminal offences must remain within the law passed by Parliament and should not be left open-ended. 

Further, the committee recommended that all acts of market abuse attracting criminal penalties under Clause 96 should be clearly listed in the Code. “It effectively addresses all the concerns raised by industry fora and brings greater clarity to the drafting. Due to the similarity in the language used in Clauses 92(g) and 93(g), there was a concern that the prosecution could invoke the PMLA even for violations under Clause 92,” said Bharat Vasani, senior advisor, corporate laws, Cyril Amarchand Mangaldas. 

The committee also clarified that the mandate for prior notice in investigations will apply only to the person against whom the investigating officer proposes to exercise the powers, though exceptions have been provided where issuing a notice could result in the destruction or tampering of evidence. 

Addressing concerns over the independence of the ombudsperson, who will be one of Sebi’s officers, the committee said that the grievance before the ombudsperson is not against Sebi but against a securities market service provider or an issuer. Sebi, therefore, remains an independent third party to such disputes. However, it has specified a timeline of 120 days for the redress of grievances by the ombudsperson. 

Standing committee’s recommendations

• Drop clause which allows Sebi to define new criminal offences
• Require prior notice for probes, with exceptions to protect evidence
• Set a 120-day timeline for Ombudsperson grievance redressal
• List criminal offences in the Code
• Keep existing provisions on Sebi’s board composition and appointments
• Retain clause that mandates transfer of Sebi’s surplus funds