Expanding Powers, Shrinking Checks: The Accountability Deficit in the Securities Markets Code 2025

[Mridul is a student at Gandhinagar National Law University.]

Indeed, the much publicised and discussed overhaul of the Indian capital market architecture in a generation, which is the Securities Markets Code 2025 (SMC) presented in the Lok Sabha on 18 December 2025, by Bill Number 200 of 2025, and currently under examination by the Parliamentary Standing Committee on Finance. This is a reform which is welcoming on its face.

This paper does not refute that thesis. The less dramatic claim to which it objects is this; that the massive increase in the powers of the Securities and Exchange Board of India (SEBI) has not been matched by a proportionate increase in the mechanisms which restrain those powers. A keen examination of SMC shows that it has not. The SMC expands SEBI's sphere of functioning across enforcement, adjudication, and redress of grievances — yet the institutional safeguards designed to check that encroachment remain structurally imperfect. What has been obtained is a stronger regulatory framework that is not any more responsible.

The Ombudsperson Problem: The Accountability as Illusion

The most obvious action taken by the SMC on investor protection is that it has restored the SEBI Ombudsperson which now has a specific statutory support of Clauses 73 to 78 of the SMC. The Ombudsperson is mandated with the capacity to hear unresolved grievances by the investors as a quasi-judicial body. 

The flaw of the structure is not hard to discover. SEBI appoints the Ombudsperson to be part of its own officers. This implies that the organ intended to adjudicate the complaints against intermediaries that are governed by SEBI — intermediaries whose lapses in enforcement are commonly mirrored in the supervision lapses by SEBI itself — is manned by people who continue to make their career within the institutional field of SEBI. The Banking Ombudsman Scheme that is managed by the Reserve Bank of India owes its legitimacy specifically due to the fact that it is inaccessible to the commercial banks whose clients it adjudicates. The Ombudsperson of the SMC is structurally analogous to an ombudsman hired within the banking system proper — a structure that would be viewed as constitutionally questionable in any similar system.

The commentary of the SMC by Cyril Amarchand Mangaldas on the Ombudsperson is accurate that the quasi-judicial role of the Ombudsperson will substantially increase SEBI's caseload. What is not said is the converse: when the adjudicator of last resort for investor grievances is placed within the institutional hierarchy of the regulator itself, the independence of that adjudication is structurally compromised before a single complaint is filed. It can only be beneficial to the Parliamentary Standing Committee to bear in mind a fixed-tenure appointment process based on retired judicial officers or external professionals as is the case with the Financial Ombudsman Service in the United Kingdom — consciously shielded, by an independent board structure, under the Financial Services and Markets Act 2000. The Financial Conduct Authority, similarly, operates at arm's length from the Financial Ombudsman Service — a structural separation the SMC's drafters would do well to replicate.

Clause 92-93 Definitional Overlap: Discretion Without Guardrails

Another, more technically acute issue is presented by the definitional character of the enforcement structure of the SMC. The SMC establishes two types of serious breaches which are: fraudulent and unfair trade practices in Clause 92, and market abuse in Clause 93 of the SMC. This difference is of the essence since any form of market abuse — that includes insider trading, trading on non-public information, defrauding investors, and positional power to control the market prices — result in not only civil penalties but also, criminal liability. Fraudulent and unfair trade practices. on the other hand are only monetarily reprimanded through Clauses 94 to 110.

The issue is that Clause 92 and Clause 93 cannot be separated easily. The definition of market abuse is drafted in a very broad manner to include a behaviour that would also be deemed as a fraudulent or unfair trade practice. This vagueness is no mere inconvenience in drafting — it is a question of constitutional responsibility in the first place. The decision on whether to characterise the same act as a civil default into monetary penalty or as a criminal offence into imprisonment rests solely with the adjudicating officer of the prosecutorial discretion of SEBI. The PRS summary of the SMC specifically raises such a flag on this overlap by pointing out that whilst market abuse attracts criminal liability including imprisonment, the category of fraudulent practices does not and therefore acute inquiries arise as to what was the rationale solution by which one activity of conduct was classified as such by one grouping instead of the other.

The Market Abuse Regulation 2014/596/EU (MAR) by the European Union is informative in this. MAR has a tiered internally consistent taxonomy of market misconduct and offers special safe harbour provisions in case of legitimate buyback programmes, stabilisation operations, and accepted market practices which inhibit selective regulatory invocation against conduct which has legitimate market functions. The SMC has no corresponding safe harbours. The SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations 2003 (as superseded by the SMC) had the same flaw, and those alongside did not contain provisions of a similar safe harbour. 

The Delegated Legislation Problem: Parliament's Receding Role

A democratic cost of accountability in SMC structure has not been given due consideration although the principle-based structure of the SMC is highly praised due to its flexibility in regulation. In form, a principle-based statute is delegating the content of a regulatory obligation to subordinate instruments: SEBI regulations, circulars and the bye-laws of Market Infrastructure Institutions (MIIs) under the new delegation regime of Clause 31 of the SMC. The skeleton is enacted by Parliament and the flesh by SEBI.

This in itself is not an issue — all contemporary regulatory systems entail a lot of executive law-making. The lack of a properly organized parliamentary review of subordinate legislation on the activity of SEBI is a problem. Section 31 of the SEBI Act 1992, under the current regime, directs that the regulations issued by the SEBI be presented before Parliament — but there is no compulsory committee review or process comparable to the one applied to delegated legislation in the United Kingdom. In the UK, the systematic review of delegated legislation is organized by the Statutory Instruments Act 1946, which provides parliamentary scrutiny under the Joint Committee on Statutory Instruments — a body which has a systematised process of reviewing the legality and vires of such a delegated instrument before it can be enacted. The SMC carries this gap forward unchanged. As Sucheta Dalal observed in Moneylife, SEBI's expanded regulatory mandate under the SMC raises a fundamental question that the Code leaves unanswered: if SEBI's powers grow, who watches the watchdog? Since the Code is stated as a framework statute — the substantive detail of securities regulation to be occupied by SEBI through subordinate instruments — the structure of regulatory elucidation is a notable democratic drawback.

The process by which the SMC was developed compounds this concern. The SMC was also brought into force without a preceding public draft, explanatory memorandum, and a joint committee review — as opposed to the United Kingdom's Financial Services and Markets Act 2000, which was accompanied by an exhaustive pre-legislation parliamentary scrutiny, a sequence of consultation drafts, and review by a joint committee. The consolidation exercise which had been first announced in the Union Budget 2021-22 was almost five years old and had no white paper, no draft legislation, or even any public consultation until it was introduced into Parliament. It is not less, but more of a democratic tenet, that a framework, which extends regulatory authority, be subject to augmented popular scrutiny before being enacted.

The Unaddressed Structural Issue of SAT

The SMC rightly predicts that the larger quasi-judicial caseload of SEBI — that will occur due to the Ombudsperson role plus MII registration supervision and more powerful adjudication authorities under Clauses 12 to 23 — will result in greater appeals to SAT, and it accommodates this by allowing the Central Government to ad hoc decide the number of SAT members and benches. What the SMC fails to cover is a deeper structural issue, which is the framework of identifying the limited jurisdiction that SAT has in regard to the regulatory and delegated acts of SEBI — in comparison to its adjudicative orders — is only vague. Where SEBI exercises authority by circular or regulation, as opposed to order which may be appealed by direct SAT, the only option of the aggrieved party is a writ petition to either a High Court or the Supreme Court under Articles 226 and 32 of the Constitution of India. This poses a jurisdictional gap that the advanced market players have been utilizing long and which the principle-based architecture of SMC will enlarge by raising the quantity of regulatory output of SEBI. One of the issues in which the Standing Committee should deliberate is whether the SMC should expressly clarify and possibly broaden the issues which can be appealed before SAT — by particular classes of directions taken by SEBI regulators — as a structural check to the heightened powers of the regulator.

Conclusion: Power with No Check in Proportion

The main thesis of this article is not as broad as that, which is that the increase of the powers of SEBI under the SMC has not been offset by a corresponding increase in the supply of institutional checks to those powers. Clauses 73 to 78 Ombudsperson mechanism framework is flawed in its organisational nature of appointing itself internally. The overlapping definition in Clause 92–93 provides unchecked prosecutorial discretion. The delegation in principle model Clause 31 transferred the substantive law-making out of Parliament without mechanisms of review of structure. And the regulatory acts of SEBI continue to be under the jurisdiction of SAT as it was under the SEBI Act 1992.

These loopholes can be bridged by the Parliamentary Standing Committee on Finance before the SMC becomes a law. Whether that opportunity is taken will determine whether the Securities Markets Code represents a modernisation of India's capital market regulation — or merely a modernisation of the regulator's powers.