India is rewriting the rules of its share markets. The new law fixes real problems. It also moves power around in ways worth understanding before it becomes law.
For thirty years, the real rules of India's share markets have not been in any law passed by Parliament. They have been in circulars.
The Securities and Exchange Board of India (SEBI), the market regulator, was set up in 1992 with wide powers, and it used them to write a lot of rules. One study of what SEBI issued between 2014 and 2016 found about seventy per cent came out as circulars. Parliament never saw them. Fewer than one in ten were put out for public comment. SEBI had a shortcut for enforcement too: instead of running a full case, it could issue a "direction" telling someone to stop, usually by banning them from the market. About a third of its enforcement over a decade worked this way.
This was not lawless, and it worked well. India built fast, deep, modern markets partly because the regulator could change a rule in a week instead of waiting years for Parliament. But the rules deciding whether a fund could borrow, or a broker could trade, applied to everybody and had been voted on by nobody. A legal opinion had a shelf life.
The Securities Markets Code Bill, 2025 is meant to end that. It merges three old laws into one law with 157 clauses: the SEBI Act of 1992, the Securities Contracts (Regulation) Act of 1956, and the Depositories Act of 1996. It was introduced in the Lok Sabha in December 2025. A parliamentary committee finished reviewing it in July 2026. It has not passed yet. It could within weeks.
A lot of what it does is plainly good. Investigations must ordinarily finish in 180 days, though extensions are available. SEBI cannot start a case more than eight years after the event. India has never had a time limit like this, and it means a firm can eventually stop worrying about an old year. The officer who investigates you can no longer be the officer who judges you, though the separation is case-by-case, not a distinct adjudicating cadre. Before making a rule, SEBI must consult, assess the impact and review it later. Fines must fit the offence, and orders must give reasons.
But writing rules into law forces choices. A circular can stay vague, because you can rewrite it next week. A law has to be specific, and once it is specific, people can argue about it in court. So the Code has to answer questions that thirty years of improvising left open. Who decides? Who counts as part of the government? Who loses money when a trade goes wrong? What is a market, and what is just a private arrangement?
It answers all four. Each answer has a cost, and the costs land on different people.
Power moves in four directions
Most readings of this Code say SEBI comes out stronger. That is true, but incomplete. Power actually moves four ways at once, and the four do not fit together neatly.
Up, from the government to SEBI. Some jobs used to need both the government and SEBI. Now SEBI does them alone: registering exchanges, and even shutting one down in an emergency.
But the government keeps its power to give SEBI binding instructions. Those instructions must be in writing. Neither side has to publish them. Put that next to SEBI's own power to issue directions to firms, and you get a quiet path: the government's wishes can reach the market unseen. None of this is illegal. It is just invisible. And invisible rule-making is exactly the problem this law was written to fix.
Down, from SEBI to the market's own institutions. SEBI can now hand registration and supervision work to exchanges, clearing houses and depositories. This is the biggest practical change in the Code, and the subject of the next section.
Sideways, to new bodies that decide disputes. There is a new Ombudsperson for investor complaints. The Securities Appellate Tribunal, the specialist court that hears appeals against SEBI, can now grow without limit and sit in several benches. New Special Courts will try the crimes that remain. Notice what that says. You only build more appeal capacity if you expect more appeals. A law sold as simplification is quietly budgeting for more litigation, because decisions by the Ombudsperson and by exchanges can now be appealed too.
Outward, to the government's bank account. SEBI must keep a reserve fund and send its surplus money to the Consolidated Fund of India. So on the one measure of independence that is easy to see (money), the "stronger" regulator is weaker than before.
Add it up and this is not a regulator being handed more power. It is a regulator being rearranged: more control over the market, less control over its own money, less control over who settles disputes, and the same exposure to the government it always had.
Exchanges become part of the state
Stock exchanges, clearing houses and depositories have always been strange creatures. They are companies with shareholders and profits to make. They also decide who is allowed to trade, punish their own customers, and sit in the middle of every transaction.
The Code settles that split personality in favour of the public side. Their rulebooks now need public consultation, SEBI's approval, publication and tabling in Parliament, which makes them rules with the force of law, not company policies. They can fine members, suspend them, throw them out, order compensation and cancel trades, all through written orders appealable to the Tribunal. Ordinary courts are shut out. And the government can dissolve an exchange's board, which is something you do to a public body, not a business partner.
In short, exchanges are now an arm of the state. That is a fair call; they have been using public power for decades without matching accountability.
But it puts a permanent conflict inside a commercial company. Its duty to shareholders says: get more listings, more volume, more customers. Its duty under the law says: turn business away, expel members, impose costs. Every time an exchange disciplines a big client, that is now a legal decision a tribunal can overturn, not a business decision covered by a contract. Meeting that standard costs money (lawyers, records, careful process), and that cost reaches traders through higher fees.
For brokers and custodians there is a subtler shift: day to day, the body regulating you is increasingly the exchange you trade on, which is also the business you pay. And if an exchange refuses to register you and you appeal to SEBI, the Code does not clearly promise you a hearing. That gap will end up in court.
Will a completed trade stay completed?
Markets run on a promise so basic that nobody says it out loud: once your trade goes through, it is done. You never find out who was on the other side, and you do not need to, because the clearing house steps into the middle. It becomes the buyer to every seller and the seller to every buyer. That is the only reason you can trade with a stranger safely.
India learned this the hard way. The old badla system let obligations roll forward from one settlement period to the next. Nothing was ever quite finished, and risk piled up quietly until it blew up. Moving to modern clearing was the most important market reform India ever did, and the whole point was to make "settled" mean settled.
The Code does two opposite things to that promise.
It makes settlement safer from private failure. Rules protecting completed trades move from exchange rulebooks into the law itself. If a firm goes bankrupt, the clearing house's collateral now ranks ahead even of the freeze that normally stops all claims against an insolvent company. Good, and worth having.
It makes settlement less safe from government action. The same Code lets SEBI cancel completed trades, declare them void, or change the rights arising from them. Exchanges get similar powers. And as drafted, a mid-level adjudicating officer can do this, not just a senior board member. The grounds are broad: the interest of investors, the orderly development of the market. The current law's requirement to record written reasons has not been carried over.
This is not hypothetical. In May 2026, after a police complaint about unauthorised index options trades, clearing houses held back payouts of about seventy-eight crore rupees, hitting more than a hundred and sixty brokers and over three thousand clients. Nobody had found anyone guilty of anything. A complaint was enough. The money was released ten days later, again on an instruction rather than a finding, which is the whole point: nothing was ever adjudicated in either direction.
Here is why that costs money. A risk you cannot predict is a risk you cannot insure, so you hold capital against it instead. Clearing members will need to set money aside against the chance that a finished, fully margined trade gets reversed by an order, and with no history to base that number on, they will guess high. Foreign investors decide where to put money partly on legal opinions confirming that trades in a country are final, and an opinion with a caveat means a smaller allocation. Market makers, quoting prices all day on thin margins, are most exposed of all. If they pull back, everyone pays through wider spreads.
A market can live with slow settlement or fast settlement. It cannot live with uncertain settlement. India has spent twenty years speeding up its settlement cycle on the logic that faster means safer, but faster only means safer if what settles stays settled. If the Code protects finality in one chapter and allows it to be undone in another, it needs to say which wins, who is senior enough to decide, what evidence is needed, and whether you get a hearing first. It says none of that.
Lighter penalties at the bottom, heavier at the top
People describe the Code as decriminalising securities law. That is half true, and the half that is missing matters.
At the small end, it is exactly right. Late filings, sloppy record-keeping and registration lapses stop being crimes and become fines. Nobody should face prison for a missed form.
At the serious end, the Code gets tougher. Market abuse can mean anything from one month to ten years in prison, and fines from ten lakh to twenty-five crore rupees. Some offences are reported to carry ceilings as high as a hundred crore, well above today's levels. And a single adjudicating officer can order you to hand back profits, compensate investors or stop trading, with no ranking between those remedies, and no formula anywhere for calculating how much profit you supposedly made.
So the honest summary is not "lighter". It is: small things get easier, serious things get much harder. That is reasonable policy. Three drafting problems are less reasonable.
The main offence can stretch. "Market abuse" includes a list of things, and also anything else SEBI decides to add through regulations. Since market abuse carries prison time, that means SEBI can create new crimes by writing a rule. Deciding what sends a person to jail is Parliament's job, and Indian courts have never been relaxed about handing that job to someone else. There is also a practical cost: you cannot build a compliance system around a definition that might change without a vote.
Two offences describe the same behaviour. "Fraudulent or unfair practices" gets you a fine. "Market abuse" can get you prison. The conduct they describe overlaps heavily. So the same trading pattern can be treated either way, and how much trouble you are in depends on which one an officer picks. There is no published guidance on how that choice gets made.
The money-laundering fix might not hold. Under the Prevention of Money Laundering Act, almost any breach of securities law can currently trigger money-laundering proceedings, which bring asset freezes and hard bail conditions. The Code narrows that to market abuse alone, a real improvement. But since SEBI can widen "market abuse" by regulation, it can widen this door too, without going back to Parliament.
One more gap: the Code does not say whether its bigger penalties apply only to conduct after it starts. Old cases are preserved only "so far as they are not inconsistent" with the new law, a phrase that guarantees fights, because every firm with a pending case will argue about which penalties apply. One clear sentence would settle it.
The practical effect is a step change. When the worst case gets ten times bigger, compliance stops being a back-office chore and becomes a board-level issue. Big institutions will absorb that. Smaller brokers and boutique fund managers will find the cost of proper compliance rising faster than their revenue, which is how enforcement rules quietly push an industry towards consolidation.
The fund industry gets rebuilt underneath
The biggest change in this Code affects a group that has barely noticed it: fund managers, and particularly alternative investment funds, the private pools that channel money from institutions and wealthy investors into private equity, venture capital, real estate, credit and infrastructure.
These funds exist mainly because SEBI wrote a rulebook for them in 2012. The fund itself is usually a trust: its legal shape comes from trust law, its regulatory shape from rules SEBI can change by notification. The parent law never actually said what an alternative investment fund was.
Three parts of the Code change that, and you have to read them together:
- The definition of "securities" now includes units of pooled investment vehicles, putting fund units in the same list as shares, bonds and derivatives.
- A separate clause names those vehicles: mutual funds, alternative investment funds, real estate investment trusts, infrastructure investment trusts. It gives them, in the law itself, the power to raise money, borrow, issue debt, pledge assets and repay lenders.
- The registration clause covers pooled investment vehicles and their sponsors.
There is also a new idea in the Code called an "investment scheme": any arrangement where money is pooled from investors who do not control how it is spent. Only a few things are excluded: co-operatives, deposits with finance companies, insurance, provident funds and chit funds.
Four things follow from this.
It is now about what you do, not what you call yourself. If investors put money in and do not run it day to day, you are inside a definition written by Parliament, whatever wrapper you used. Structures built specifically to sit outside the 2012 rules (some co-investment platforms, syndicates, club deals, certain family-office and angel setups that are really pooled money) now have to get past a definition in the law itself. You can argue with a SEBI officer about a rule. You argue about a law in a tribunal, and it binds SEBI as much as it binds you.
The 2012 rulebook is no longer the final word. Once the Code starts, those rules survive only where they do not clash with it, and that test applies line by line. The Code gives funds borrowing power in the law, while the rules limit leverage by fund category. The Code makes sponsor registration a legal requirement, while the rules handle sponsors through eligibility conditions. Wherever they disagree, the Code wins. Somebody needs to map those clashes now, not after it starts.
Every fund document in the market is built on ground that is about to move. A private placement memorandum, the document a fund uses to raise money, cites the law giving SEBI its powers, the rules governing the fund, and the definition of the securities it will buy. When the Code starts, all three references become history. Memoranda, contribution agreements, side letters and legal opinions need reviewing, not just to swap in new references, but to check whether terms agreed under the old rules still work under the new law. Managers raising money now should be drafting that language today. A document sent out weeks before the Code starts, and still being marketed after, describes a system that no longer exists.
And funds get a different relationship with the state. On balance this is good news: powers written into law cannot be taken away by notification, and foreign investors doing due diligence get a clearer answer about what they are buying into. But being in the law also means being visible, and visible means supervised. A fund whose units are "securities" in the main law, whose sponsor is registered, and whose existence comes from Parliament sits squarely inside the tougher enforcement system described above. The industry has spent a decade arguing its investors are sophisticated and need less protection than the general public. The Code does not accept that. It puts fund units in the same clause as listed shares.
Most people will read this Code as news for exchanges and brokers. It is also a rebuild of the legal foundation under every rupee of private capital pooled in India.
What investors actually got
The investor protection package is real: a Charter with legal backing, deadlines for handling complaints, an Ombudsperson who can investigate and award compensation, and a system for returning recovered money to the people who lost it. Measured against a complaints system that used to swallow grievances without answering them, that is progress.
Three things take the shine off it.
The old SEBI Act put investor protection in its preamble, the opening statement of what the law is for. That matters more than it sounds. When a clause is unclear, Indian courts look at the preamble to work out what Parliament meant, and much of SEBI's broad power today comes from clauses that courts have repeatedly read generously in light of that opening line. The new Code moves investor protection into an ordinary clause alongside many others. Investors gained machinery and lost priority. In a law with 157 clauses that will produce decades of arguments, what a judge reaches for when the words run out is not a small thing.
The Ombudsperson is also not independent. SEBI picks the Ombudsperson from among its own officers, and that person then decides complaints about firms SEBI supervises, sometimes about SEBI's own failure to supervise them. No amount of good procedure fixes that, and the Bill gave no clear route to appeal those decisions.
And the deadlines are lopsided. Investigations must ordinarily finish in 180 days. Judging the case afterwards has no deadline at all, so a matter can be investigated quickly and then sit unresolved for years. For a firm, the damage comes from being under a cloud, not from the verdict. A time limit on the first half and none on the second is half a protection, and it is the wrong half.
Why this matters beyond the share market
This is the first Indian law to write good regulatory behaviour into the statute itself: consult before making rules, assess the impact, review them later, keep punishment proportionate, separate the investigator from the judge, set time limits, explain your orders. None of that is specific to share markets. It is what any well-run regulator should do, and no Indian law has required it before rather than hoping for it.
India has a dozen regulators built on the same 1990s pattern (broad powers, thin process, government by circular), and each will be modernised eventually. Nobody will start from scratch. They will start from this Code, because it is the only worked example available.
Which is why the loose ends here are not just a securities problem. An unpublished channel for government instructions. Crimes the regulator can invent by writing a rule. Investor protection demoted out of the preamble. No deadline on judging a case. No answer on whether a completed trade can be undone. Each could be fixed with a sentence. Left alone, each gets copied into telecom, insurance, pensions and data protection over the next decade.
This Code is much better than what it replaces, and India should have it. But it is being treated as the end of a legislative process when it is really the start of an institutional one, the point where a country decides, in words that will outlast everyone who wrote them, how much power the state should hold over a market, and how openly it should have to use it.
That deserves the extra sentence or two it still needs.
This article is for general information only. It is not legal advice and does not create a lawyer–client relationship. For advice on your situation, please contact us.
