Securities Markets Code is a welcome step for simpler market regulation

The newly introduced Securities Markets Code, 2025 (SMC 2025), will replace three laws in an act of consolidation and simplification. The Code has been referred to the Parliamentary Standing Committee on Finance for scrutiny. The three Acts in question are the Securities Contracts (Regulation) Act, 1956; the Securities and Exchange Board of India (Sebi) Act, 1992; and the Depositories Act, 1996. These deal with securities and operations of exchanges, holding and transferring securities in dematerialised or electronic form, and establish Sebi as regulator and the Securities Appellate Tribunal (SAT).

 

While the Code retains most of the existing provisions, there are additions and changes that warrant mention here — the composition of Sebi and its powers, for instance. The board of Sebi has nine members, which will go up to 15. The provision to have up to six independent, part-time members is expected to bring in an external perspective and expertise. The SMC proposes to expand clauses defining conflict of interest for Sebi members to include all members with direct or indirect interests, including the interests of their family members. It gives the central government the powers to remove a member whose interests may harm Sebi’s functions. The Code restricts the appointment of investigating or adjudicating officers to individuals who are whole-time members (including the chairperson) or Sebi officers, unlike the current situation in which any person may be appointed for such tasks. However, an adjudicator must not have been involved in prior investigation.

 

For the sake of clarity and closure for alleged violators, in the matter of any investigation, the Code sets a limit of eight years from the date of the alleged offence. Now there is no limit. The limit will not apply to cases with a “systemic impact” on markets or to cases referred by investigating agencies. Currently, under the three Acts, contraventions are punishable with imprisonment, and fines, or both, in addition to penalties. The Code retains only the monetary penalty for some violations and imprisonment for offences like non-compliance with specified orders of adjudicating officers or directions of investigating officers and market abuses such as insider trading, defrauding investors, dealing in securities while possessing non-public information, or manipulating market prices of securities. It proposes to bring “market abuse” under the Prevention of Money Laundering Act, which could allow the Enforcement Directorate to investigate.

 

The Code formally recognises the concept of market infrastructure institutions (MIIs). The Code also allows Sebi to delegate its powers of registering intermediaries or specific classes of investors to MIIs.  It calls on Sebi to establish an investor-grievance redress mechanism and directs service providers to set up such mechanisms.  It empowers Sebi to appoint an ombudsperson to redress grievances. The SMC recognises the concept of market infrastructure institutions (MIIs), including stock exchanges, clearing corporations, and depositories, and any new category of MIIs which may be notified by the Centre. MIIs can make bye-laws to ensure non-discriminatory access to services, minimise market abuse, ensure interoperability with other MIIs, and so on. Sebi is empowered to delegate some registration functions to MIIs. The Code also enables an “investor charter” for protecting investors.

 

In many ways, this consolidation could simplify the process of regulating markets, and it defines conflict of interest more broadly than the existing Act does, which is to be welcomed. There are concerns in some quarters that the SMC gives a lot of powers to Sebi. A clearer statement of checks and balances for Sebi’s powers may be required to ensure the regulator stays accountable.