V Shunmugam
The Securities Markets Code, 2025, Bill, tabled in Parliament last week, is legal housekeeping with a forward-looking impact. The Code makes the powers of the capital markets regulator —Securities and Exchange Board of India— cleaner, and harder to challenge procedurally, explains V Shunmugam
What’s behind this new Code?
Three old laws—the Securities and Exchange Board of India (Sebi) Act, the the Securities Contracts (Regulation) Act, and the Depositories Act—have been stitched into one Securities Markets Code. No new product announced, no trading rule changed, no headline reform. But anyone who has dealt with Sebi enforcement, exchange governance, or even product approvals knows the real issue was never the absence of power—it was where that power came from.
In recent years, some high-profile Sebi enforcement orders shook markets when announced, only to be stayed or significantly diluted later. The Code addresses this not by making the capital markets regulator harsher, but by making its powers cleaner and harder to challenge procedurally.
Is this the end of ad-hoc circulars?
Circulars will not disappear. Indian markets are too dynamic for that. But the Code reduces the need for creative interpretation. Sebi often had to stretch older provisions to cover modern realities—algo trading, complex derivatives and integrated clearing risks. By incorporating many settled practices into the statute itself, the Code lowers the likelihood that tomorrow’s enforcement action is undone just because someone argues, “This power was never clearly granted in the Act.” As an investor or intermediary, this means fewer moments of “big announcement today, legal uncertainty tomorrow.”
Solving fundamental ambiguity
For years, exchanges wanted to launch power derivatives. Sebi and the Central Electricity Regulatory Commi-ssion had to request the Supreme Court to withdraw a prior lawsuit to enable them to proceed with this. The Code strengthens the position that once a derivative is traded on recognised market infrastructure, it belongs within the securities market framework, even if the underlying asset is regulated elsewhere. This does not magically launch products—but it reduces the scope for turf wars. The same applies to currency and interest rate derivatives, where Reserve Bank of India-Sebi coordination drives the markets. For market participants, this means fewer “regulatory no-man’s lands” where products may exist in theory but not in practice.
Effect on market infrastructure institutions
Market Infrastructure Institutions (MII) such as exchanges, clearing corporations and depositories operate as regulated first-line supervisors, with Sebi as the final authority. They monitor trades, manage systemic risk, decide on access, and sometimes act as quasi-regulators. Earlier laws did not fully anticipate this role. The Code places MIIs on a clearer statutory footing, particularly regarding surveillance, data use and supervisory technology. When an exchange halts trading, changes margin norms overnight or flags manipulation, affected participants challenge these actions legally. Clear statutory backing means such actions are less likely to be questioned as “beyond mandate.” For investors, this improves confidence that market plumbing will not fail under legal stress.
Reversal of Sebi orders by SAT: What’s there for retail investors?
Many reversals of Sebi orders by Securities Appellate Tribunal (SAT) are not about guilt or innocence—they are about process, proportionality, and statutory authority. Orders fail not because misconduct didn’t occur, but because the legal scaffolding was weak. The Code strengthens that scaffolding. It clarifies how investigations are initiated, how penalties are grounded, and how proportionality is assessed. This reduces the pattern of enforcement actions being announced with certainty, only to be diluted later. Durable enforcement is better investor protection than aggressive enforcement.
Investor protection mechanisms —grievance redressal, compensation funds, and enforcement against mis-selling—already existed. But many of them were buried in regulations and schemes. The Code does not reinvent these mechanisms, but it anchors them more firmly in statute. This matters: for example, when an intermediary is suspended or collapses, investors want clarity on whether their assets are segregated, how claims are prioritised, and how long the resolution might take. The Code improves legal certainty on these questions. It draws a clearer line between market losses (your risk) and losses caused by misconduct or failure (regulatory responsibility).
Overall impact
The SMC is legal housekeeping with a forward-looking impact. It resolves the fragmentation created by three separate Acts and years of amendments, thereby providing markets with a more transparent and coherent legal framework. This matters because, as markets mature, predictability and legal certainty matter as much as regulation itself. The Code formalises powers already in use, reducing interpretative risk and regulatory surprises.
For investors, it means more durable outcomes. For intermediaries, fewer legal grey areas. For global participants, this matters because cross-border capital is sensitive to jurisdictional certainty and regulatory enforceability. It lays the foundation for the next phase of India’s capital market growth.
The writer is partner, MCQube