SEBI tightens a rule it wanted to relax

I have a piece in today's Financial Express on an interpretation SEBI has taken with respect to what other businesses a mutual fund manager (AMC) can do. SEBI has, within nine months, told the industry two incompatible things about the same regulation. A consultation paper published in July 2025 conceded that the broad basing requirement had become a barrier to fair competition. An interpretive letter issued in April 2026 made that barrier higher. Below is the full piece:

A rule SEBI said it wanted to relax has, through interpretation, become tighter. On 7 July 2025, the regulator published a consultation paper conceding that the broad basing requirement under Regulation 24(b) of the Mutual Funds Regulations had “proven to be a barrier” and had not provided a level playing field to asset management companies. On 9 April 2026, SEBI issued an interpretive letter that reads the same rule more severely than industry had assumed. The two positions are not easily reconciled.

The letter was issued to UTI Alternatives Private Limited, a wholly owned subsidiary of UTI Asset Management Company that manages three Category-II Alternative Investment Funds. UTI Alternatives asked four questions: does the broad based fund requirement in Regulation 24(b) apply to management services rendered by an AMC subsidiary to an AIF and its schemes; if it does, is compliance tested at the fund level or at the scheme level; in a master-feeder structure where feeders do not take standalone investment decisions, is it enough if only the master is broad based; and does the look-through benefit available to specified foreign portfolio investors under the Master Circular extend to similarly regulated domestic entities such as banks, insurers, and provident fund trusts.

SEBI’s answers, in order, are: yes, scheme level, no, and no. Taken together, they require that every pooled vehicle receiving management services from an AMC subsidiary, at every level of a structure, independently satisfy the 20-investor floor and the 25 per cent concentration cap. No relief is granted for capital intermediated through regulated domestic entities.

The first difficulty is textual. Regulation 24(b) restricts an AMC to “management and advisory services provided to pooled assets including offshore funds, insurance funds, pension funds, provident funds, or such categories of foreign portfolio investor as may be specified by the Board”. The words “broad based fund” do not appear in the main clause. The expression appears in an Explanation that is tethered to a proviso permitting portfolio management services to non-broad based funds. The regulation, read as a whole, distinguishes between “pooled assets” in the main clause and “broad based fund” in the proviso carve-out. SEBI’s own consultation paper recognises the distinction: it proposes to allow AMCs to serve “pooled non-broad based funds”, a category that would be redundant if every pooled asset were, by definition, broad based.

The second difficulty is the scheme-level test. SEBI draws on Regulation 10 of the AIF Regulations, under which each scheme of an AIF is treated as a distinct investment vehicle for registration, corpus, and investor limits. That is a registration and compliance concept under one framework. It does not determine the scope of an AMC’s permissible business under a different framework. Applying a scheme-level test without a clear anti-conflict rationale simply transposes a mechanical threshold across frameworks.

The third difficulty is master-feeder. The letter requires each feeder to independently clear the broad basing criterion, on the reasoning that management services are rendered separately to each. A feeder, by design, is a conduit. It does not take independent investment decisions. The underlying investor base sits at the master level. Insisting on scheme-level broad basing at every layer elevates form over substance, and disturbs arrangements routinely used to aggregate anchor institutional capital before it is channelled into a master vehicle.

The fourth difficulty is the look-through asymmetry. An appropriately regulated foreign portfolio investor gets the benefit of a look-through to its underlying investors. An Indian bank, insurer, or provident fund trust, each supervised intensively by the RBI, IRDAI, or PFRDA, does not. The formal reason offered is that domestic entities sit outside the foreign portfolio investor framework in which the look-through was prescribed. That is true, but it is the wrong way round. Domestic regulated entities are more, not less, supervised than many foreign investor categories that are opaque and still do enjoy the benefit.

The larger point is the collision with SEBI’s own stated direction. The consultation paper of 7 July 2025 recorded that the broad basing requirement “has proven to be a barrier” and had not provided a level playing field to AMCs against other intermediaries managing pooled non-broad based funds. It proposed, as an ease of doing business measure, to permit AMCs to serve such funds, subject to safeguards on differential fees, inter-business transfers, and information access. Before that proposal could take effect, SEBI has interpreted the same regulation to tighten, not ease, the position. Existing Category-II AIF structures built around anchor investors, master-feeder arrangements used for tax or jurisdictional segregation, and mandates drawing on domestically regulated capital are all caught. Independent AIF managers, who sit entirely outside Regulation 24(b), are untouched. The competitive gap the consultation paper sought to close has just widened.

Informal guidance under the SEBI (Informal Guidance) Scheme, 2025 formally binds SEBI only in its dealings with the applicant. In practice it shapes how the industry behaves. A letter that reads words into the main clause of a regulation, transposes a registration concept into a business-scope restriction, and runs against the regulator’s own publicly stated policy direction is not ordinary interpretation. SEBI has published a consultation paper pointing in one direction and an interpretive letter pointing in the other. The way SEBI has interpreted the regulation, now renumbered under the 2026 rewrite, will hurt mutual fund managers and place them at a hugely competitive disadvantage to global players who manage all kinds of pools of funds and SEBI’s preferring ‘broad based’ pools of capital is neither rooted in policy nor in ease of doing business. The only silver lining in the informal guidance is that it does not bar AMCs from managing broad based funds, but only puts certain conditionalities to managing such pools, which are achievable, as importing the proviso to the improper regulation must be imported fully, not partly. 

The Draft IFSCA Market Abuse Regulations

I have a piece with Aniket Singh Charan and Rishabh Jain in today's Financial Express examining IFSCA's Draft Prohibition of Market Abuse Regulations, 2026, proposing to consolidate the insider trading and market fraud frameworks that currently apply in the IFSC into a single instrument. Consolidation is welcome. But the details matter. The full piece is as below:

Consolidating two regulatory regimes into one is the easy part. The harder task is to do so without quietly expanding the reach of either. The International Financial Services Centres Authority's draft Prohibition of Market Abuse in Securities Markets Regulations, 2026 (Draft MAR), released for public comments on 6 March 2026, attempts the consolidation. It proposes to replace the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations) and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations) as they apply in the IFSC, folding insider trading and market fraud into a single instrument.

Presently, in the IFSC the PIT Regulations govern the use of unpublished price sensitive information (UPSI), which is information pertaining to a listed entity that is not generally available but which, if made available, would materially affect the price of that entity's securities. Persons who, in the preceding six months, have been associated with a company in a capacity that would allow them access to UPSI are considered “connected persons”. Both connected persons and persons who actually possess UPSI are considered “insiders”.

Insiders are prohibited from communicating, procuring, providing, or allowing access to any UPSI, except in furtherance of legitimate purposes, performance of duties, or discharge of legal obligations. They are also prohibited from trading while in possession of UPSI, save in a narrow range of specified cases. Listed entities, intermediaries, and fiduciaries are required to formulate their own codes of conduct under the PIT Regulations. This framework has been largely continued in the Draft MAR, though the term “material non-public information” (MNPI) is used instead of UPSI. 

The Draft MAR, however, does not prescribe minimum standards for the code of conduct, unlike the PIT Regulations, leaving such standards to be specified later by the IFSCA. This is significant as under the PIT Regulations, the code of conduct applies to Designated Persons, that is, persons so designated by the organisation on the basis of their actual or potential access to UPSI. This typically includes promoters, executive directors, and senior personnel. Designated Persons are subject to higher compliance requirements than other insiders, including obtaining pre-clearance of trades from the Compliance Officer. Under the Draft MAR, unless the same is reintroduced in the code of conduct standards specified by the IFSCA, there may be a move away from the Designated Person framework altogether.

Under the PIT Regulations, disclosures (on a continuing basis) are required from promoters, members of the promoter group, directors, designated persons, and their immediate relatives where trades exceed INR 10 lakh in a calendar quarter, with onward disclosure by the company to the stock exchange. Under the Draft MAR, the threshold is set at USD 25,000 and the obligation is extended to all insiders, making such disclosures mandatory rather than discretionary. This raises concerns, as a strict interpretation would require any person dealing in listed securities to assess whether they qualify as an insider, even without MNPI. If implemented, this should be accompanied by an obligation on listed entities to identify and notify insiders of their responsibilities.

Separately, the PIT Regulations enable an informant to voluntarily disclose information pertaining to insider trading violations to SEBI. Such an informant is protected from retaliation and victimisation, and is eligible for a reward based on the usefulness of the information. This informant mechanism no longer appears in the Draft MAR. Protection and reward of informants is a standard and frequently used mechanism across jurisdictions, and has often led to successful enforcement proceedings. The mechanism ought to be revamped, strengthened, and extended across the IFSCA’s regulatory framework rather than discarded.

The PFUTP Regulations prohibit any person from engaging in four categories of acts in connection with securities: first, dealing in a fraudulent manner; second, employing manipulative or deceptive devices in contravention of securities laws; third, employing any device, scheme, or artifice to defraud; and fourth, engaging in any act, practice, or course of business that operates or would operate as fraud or deceit upon any person. This prohibition is continued in the Draft MAR.

The PFUTP Regulations list certain practices as manipulative or fraudulent, largely covering common-sense prohibitions that are retained in the Draft MAR. However, some additions raise concern. For instance, the Draft MAR treats “cornering of securities to gain control with a view to establish artificial demand or price” as fraudulent. Given that “artificial” is undefined, this could risk misapplication to legitimate large or algorithmic trading strategies based on bona fide market views.

Similarly, the Draft MAR treats “short sell securities in the hope of driving the price down” as fraudulent. However, short selling reflects a legitimate market view and contributes to price discovery. This, along with similar provisions, risks overextending the market abuse framework into areas better addressed through risk controls like position limits. While market integrity is important, not every market impact should be deemed fraudulent given the seriousness of such a charge, it must be defined narrowly and not capture legitimate trading practices.

The Draft MAR also sets out defences to charges of market manipulation and insider trading, broadly in two categories. First, a person may show that they made reasonable inquiries and relied on credible information, which is a fair protection for bona fide conduct. However, this defence should ideally be limited to fraudulent or manipulative practices and not extend to insider trading. Second, a person may argue that their actions were part of legitimate activities such as underwriting, market making, or price stabilisation. While appropriate, these should preferably be excluded from the definition of offences itself, rather than treated as defences to be proved.

The Draft MAR is a welcome step. Consolidating insider trading and market fraud into one instrument is overdue, and much of what it proposes is sound. But market abuse regulation lives in its edges, in how widely the net is cast and how narrowly the defences are drawn. Cornering and short selling are not frauds because a regulator says so, and the Designated Person framework is not a detail to be left to later rule-making. The IFSCA should revisit these before the Draft is finalised. A consolidated regime is worth having. A consolidated regime that overreaches is not.

  

India's Bond Market: The Missing Link

I have a piece with Nishant Prasad and Aniket Singh Charan in today's Financial Express on one area of reform to improve the corporate bond market, ie. focus on distribution. Below the full piece:

Every developed economy has one thing India lacks: a deep, liquid corporate bond market that works alongside banks and equity markets to channel long-term capital efficiently. India’s corporate bond market stood at roughly 14% of GDP in 2023. South Korea’s is at 79%. Malaysia’s is at 54%. Even China, which only began building modern credit markets in the 1990s, sits at 38%. The gap is not a minor statistical curiosity. It is a structural problem with real consequences for how Indian companies fund themselves — and at what cost. And despite years of regulatory effort, the gap has not meaningfully closed.

The issuance data is equally stark. India’s corporate bond issuance has remained below 1% of GDP every year since 2012. The United States issues between 5% and 7.5% of GDP in corporate bonds annually. China averages around 3.5%. Together, the two countries account for more than half of all global corporate bond issuance. India barely registers. The consequence is that Indian businesses — particularly those outside the top credit ratings — remain heavily dependent on bank financing, which is expensive, short-term, and often unavailable to smaller borrowers. This is not how you fund long-term infrastructure or sustain high-growth industries.

SEBI has not been idle. Over the past few years, it has pushed through several targeted reforms. Online Bond Platform Providers (OBPPs) now allow retail investors to buy listed debt securities through digital platforms, which has improved accessibility and brought some transparency to pricing. The Request for Quote (RFQ) platform on exchanges like NSE has created an electronic venue for secondary market trading. The numbers are encouraging: on March 2, 2026, the NSE RFQ platform recorded over 24,000 trades in a single day, up from just 80 trades a day in March 2023. That is a meaningful shift in trading behaviour, even if the overall market remains thin by global standards.

But regulatory action has its limits when the underlying structural problems remain unaddressed. The NITI Aayog’s December 2025 report, “Deepening the Corporate Bond Market,” sets out the issues plainly. Regulatory oversight of the bond market is fragmented across SEBI, RBI, and the Ministry of Corporate Affairs — a situation that creates inconsistency in compliance requirements and slows down market development. The report floats the idea of a dedicated bond market regulator, which is worth debating seriously, but even short of that, better coordination between existing regulators would help. Mandating RFQ usage for entities regulated by the RBI and PFRDA, expanding market-making incentives for NBFCs and banks, and introducing higher trading quotas to improve price discovery are all measures that could move the needle on secondary market liquidity. The infrastructure needs attention too: UPI integration, digital KYC, Aadhaar-based verification, and mobile-friendly platforms could meaningfully expand retail participation if implemented properly.

There is, however, one gap that neither SEBI’s recent reforms nor the NITI Aayog report adequately addresses: distribution. And this matters more than it might seem.

India’s mutual fund industry crossed ₹50 lakh crore in assets under management on the back of a well-developed distribution network. The SIP habit that transformed household savings behaviour did not happen through direct investment platforms alone — it happened because distributors got into living rooms, explained the product, and made investing feel accessible. The portfolio management services and alternative investment fund segments similarly rely on structured distributor relationships. In both cases, industry bodies like AMFI and APMI standardised conduct norms, ran certification programmes, and acted as a bridge between regulators and the market. The results are visible in the scale of participation.

The corporate bond market has no equivalent. OBPPs provide digital access to listed bonds, but their reach stops at the point where a customer needs to be found, educated, and guided toward a fixed-income product. Semi-urban investors, first-time bond buyers, and retail participants who might allocate money to corporate bonds given the right guidance simply have no one to call. There is no regulated class of bond distributors, no certification framework, no conduct norms specific to debt distribution. The last mile is missing.

Creating a structured bond distributor framework under SEBI, or through an industry body with regulatory backing, would address this directly. Eligibility criteria and certification requirements would ensure distributor competence. Conduct norms would protect investors from mis-selling — a concern that has derailed retail participation in other financial products. And a distributor network operating across physical and digital channels could do what platforms alone cannot: build trust, explain risk, and convert passive savers into active bond investors. The framework does not need to be invented from scratch; AMFI’s model for mutual fund distributors offers a ready template that SEBI could adapt for debt securities.

India’s corporate bond market has the regulatory intent and, increasingly, the infrastructure. What it lacks is the human layer — the intermediaries who expand markets not by improving platforms but by reaching the people those platforms cannot find. The mutual fund analogy is instructive precisely because it shows how distribution, not just product design or regulation, determines whether a financial market achieves scale. Fixing the missing link in India’s bond market will not happen through better apps. It will happen when there is someone on the other side explaining why a corporate bond belongs in a retail investor’s portfolio.

Regulating by analogy: India's Digital Gold Dilemma

 I have a piece with Navneeta Shankar in today's Financial Express on how to properly regulate the digital gold market, which is under unnecessary pressure from various states and regulators. Below the full piece:

India’s regulators have a recurring instinct when confronted by new financial products: rather than defining them on their own terms, they reach for the nearest statutory category and stretch it to fit. The recent order of the Karnataka High Court in Nishchay Babu Arkalgud v. State of Karnataka is the latest, and most instructive, instance of this tendency.

At the centre of the controversy is Jar, a platform built on a deceptively simple proposition: let users buy physical gold in denominations as low as Rs. 10, with the underlying metal held by independent custodians such as Brinks India Private Limited. The model is less financial engineering than behavioural nudge, it converts spare change into incremental gold ownership, drawing on a deep-rooted cultural preference for the asset.

That model has now been drawn into the ambit of the Banning of Unregulated Deposit Schemes Act, 2019 (BUDS Act), a statute designed to dismantle Ponzi schemes and curb illicit deposit-taking. Acting on inputs from the Reserve Bank of India (RBI) and a public caution issued by the Securities and Exchange Board of India (SEBI) in November 2025, which noted that digital gold falls outside its regulatory perimeter, the police registered an FIR against the company and its directors under Sections 21(1) and 21(2) of the BUDS Act.

The legal contest that followed is instructive. Jar’s position was straightforward: these were completed sale transactions, evidenced by invoices, with title passing to the buyer immediately. There was no “deposit”, no promise to return money, no pooling of funds. The platform facilitated a purchase and arranged for custody, nothing more. The State countered with a purposive argument: the definition of “deposit” under the BUDS Act is intentionally broad and must be read to advance its protective object. Given the scale of the business and the potential for consumer harm, investigation was warranted.

The Court declined to quash the FIR, emphasising that “deposit” must be interpreted purposively, and left the core question, whether these transactions can legally constitute deposits, to be resolved through investigation.

That restraint is procedurally defensible. But it elides a more fundamental difficulty. The threshold for declining to quash a criminal proceeding is not the same as the threshold for invoking a penal statute. In conflating the two, the Court has deferred a question that deserves direct engagement.

The BUDS Act defines a “deposit” as an amount received with a promise of return, with or without benefit. That formulation is not incidental, it is the axis around which the statute turns. The mischief the law targets is schemes that solicit money from the public on assurances of repayment or profit. Where that element is absent, the Act’s application is very difficult to sustain.

Digital gold is structurally different. Money is exchanged for a commodity; ownership passes immediately; the asset is then held by an independent custodian on the buyer’s behalf. There is no obligation to “return” anything, because the consideration has already been discharged. The user is a buyer, not a depositor. To characterise such a transaction as a deposit is not purposive interpretation, it is a category substitution, driven by outcome rather than structure. When that substitution occurs in a penal statute, the risk of overreach is real. Statutory definitions cannot be made elastic to the point of meaninglessness.

The risk of this approach extends well beyond Jar. If “deposit” can cover a sale in which title passes immediately, the implications ripple outward: e-commerce platforms, prepaid models, and a range of hybrid financial products could be exposed to similar interpretive expansion. A targeted enforcement action risks becoming a precedent that unsettles a much wider range of legitimate commerce.

None of this is to suggest that digital gold should remain unregulated. It should not. Questions of asset backing, custody standards, pricing transparency, and consumer recourse remain unresolved. SEBI’s own caution is a candid acknowledgement that these products operate without the safeguards associated with regulated financial instruments.

But the answer to that gap cannot be found by pressing an ill-fitting statute into service. The BUDS Act was not designed to govern commodity transactions on digital platforms. Using it as a proxy regulator may address immediate enforcement pressure, but it does nothing to create a durable legal framework, and may complicate the path to one.

India has been here before. Payments, peer-to-peer lending, and other emerging sectors each passed through periods of regulatory uncertainty before being brought within tailored frameworks. The pattern has generally held: recognise the product’s distinct character, identify its specific risks, and craft rules that address those risks without distorting the underlying structure. The beginning point, while that happens would be for the digital gold industry to form a self regulatory organization or SRO to set standards of holding, valuation and customer safety.

Digital gold is at that juncture now. The question it raises is not whether “deposit” can be stretched to include it, but what regulatory category best reflects what it actually is, a commodity product with financial characteristics, a financial product with commodity underpinnings, or a hybrid that warrants its own framework. That classification must be made deliberately, not by default.

The Karnataka High Court has allowed the process to continue. But the question it has surfaced will not be answered through a criminal investigation. It is, at its core, a question of regulatory design, one that belongs to the legislature and the regulators, not the police. If the law begins to treat purchases as deposits, it risks blurring distinctions that matter not just for digital gold, but for the broader architecture of commercial regulation. Gold has always represented security in India. The irony is that its digital form now finds itself in legal uncertainty, not because of what it is, but because of how the law has chosen to see it.

Towards better governance - The 213th Board meeting reveals an institutional posture of pragmatic calibration

I have a piece with Manas Dhagat in today’s Financial Express on this week’s SEBI board decisions. These are important reforms with respect to both a) ease of doing business as also b) the institutional transparency and governance mechanisms of SEBI itself. The EODB reforms relate to AIFs (post term handling), FPIs (allowing net settlement of funds, not securities), Social Impact Fund (democratisation), Fit and Proper standards (rationalisation - applicable primarily if guilt established), Invits/REITs (flexibilit of investments). The full piece is as below:

SEBI’s 213th Board Meeting: Market Reforms and an Institutional Reckoning

The Securities and Exchange Board of India (SEBI), at its 213th Board meeting on March 23, 2026, approved six sets of reforms that, taken together, reveal the regulatory priorities of the current dispensation under Chairman Tuhin Kanta Pandey. Five are directed at the market,  easing compliance for alternative investment funds (AIFs), reducing transaction costs for foreign portfolio investors (FPIs), widening retail access to social finance, providing operational flexibility to infrastructure and real estate trusts, and recalibrating intermediary eligibility criteria. The sixth, and the most consequential, is directed inward: the adoption of a comprehensive conflict-of-interest and disclosure framework for SEBI’s own leadership and employees, in response to the governance questions that marked the final years of the previous chair.

Market-Facing Reforms

On AIFs, the Board has approved a pragmatic exit framework. AIFs may now retain liquidation proceeds beyond the permissible fund life where they face pending litigation or tax demands (supported by documentary evidence), anticipated liabilities (with consent of 75% of investors by value), or residual operational expenses (capped at three years). AIFs seeking to surrender registration while holding such residual amounts will be tagged “inoperative” and exempted from periodic filings, PPM updation, and performance benchmarking. This addresses a genuine regulatory anomaly, funds with no active management being compelled to maintain full compliance infrastructure merely because of residual balances arising from circumstances beyond their control.

The approval of net settlement of funds for FPI outright transactions in the cash market addresses a longstanding inefficiency. Under the gross settlement regime, FPIs were required to fund full purchase obligations independently of offsetting sales, resulting in avoidable capital lock-in and forex conversion costs, particularly acute on index rebalancing days. The reform confines netting to the funds leg; securities delivery remains gross. This calibrated design achieves cost efficiency without increasing risk in the system. Implementation is targeted by December 31, 2026.

The minimum investment in Social Impact Funds has been reduced from ₹2 lakh to ₹1,000, aligning with the minimum application size for Zero Coupon Zero Principal Instruments on the Social Stock Exchange. While the democratisation intent is welcome, whether the investor protection framework designed for an AIF product is adequate at mutual-fund-level ticket sizes will need monitoring.

The “fit and proper person” criteria under Schedule II of the Intermediaries Regulations have been overhauled. The automatic disqualification triggered by pending criminal complaints and FIRs is replaced by a principle-based, case-by-case assessment ,  a reform consistent with the presumption of innocence and with international practice where conviction, rather than charge, typically triggers rule-based disqualification. Convictions for all economic offences now trigger disqualification (expanding beyond the previous “moral turpitude” standard), the right to be heard before being declared unfit is expressly codified in Schedule II, the category of proceedings triggering non-consideration of registration is confined to Sections 11B(1) and 11(4) of the SEBI Act, and the SCN non-consideration period is halved from one year to six months. The retroactive withdrawal of pending cases initiated under the stricter prior framework is a pragmatic and welcome transitional measure.

On InvITs and REITs, the Board approved four targeted amendments: continued SPV holding post-concession (with a one-year exit window, computed from the later of completion of the concession agreement, conclusion of pending claims, or expiry of the defect liability period); expanded liquid fund deployment to schemes holding AA-rated and above instruments; greenfield investment access for privately listed InvITs (up to 10% of asset value); and broader borrowing permissions for leveraged InvITs covering capital expenditure, major maintenance, and debt refinancing.

The Regulator Regulating Itself

The most consequential resolution, however, concerns SEBI’s own institutional governance. The Board adopted the recommendations of the High-Level Committee on conflict of interest, constituted in March 2025 under former Chief Vigilance Commissioner, one of the first acts of Chairman Pandey upon assuming office, and a direct response to the governance controversy that engulfed his predecessor. 

The substantive measures are considerable. The Chairman and Whole-Time Members will now be classified as “insiders” under the Prohibition of Insider Trading Regulations, subjecting SEBI’s leadership to the same trading restrictions the regulator enforces on market participants. Investment restrictions currently applicable to employees now extend uniformly to the Chairman and WTMs, who must liquidate, freeze, or divest equity holdings upon joining. These restrictions apply prospectively to spouses and dependent family members, with existing investments grandfathered. A novel 25% concentration cap limits exposure to any single SEBI-registered intermediary, with breaches triggering mandatory recusal. The institutional architecture includes a new Office of Ethics and Compliance, a digital recusal system, a whistleblower mechanism, and mandatory initial, annual, and event-based disclosures of assets, liabilities, and relationships.

The public disclosure norm for immovable property has been aligned with All India Service and Central Civil Services standards, though full asset and liability details will be disclosed internally to SEBI rather than publicly, reflecting a compromise with employee privacy concerns.

Two significant limitations, however, temper the reform’s force. First, the adopted framework will be incorporated into SEBI’s voluntary 2008 Code on Conflict of Interest for Members of the Board, rather than notified as binding regulations. The HLC had recommended a separate set of enforceable regulations, a recommendation that the Board has referred to the Central Government. The gap between a voluntary code and a binding regulatory framework is not merely procedural; it determines whether non-compliance attracts consequences or merely disapproval. Clearly, that job must be done by the finance ministry.

Second, the proposal for an independent Oversight Committee on Ethics and Compliance which would have provided external supervision of the conflict-of-interest framework, has also been referred to the Central Government. The newly created Office of Ethics and Compliance will, for now, be supervised by the Chief Vigilance Officer, who reports to the Chairman. 

The conflict-of-interest controversy of 2024 raised questions not merely about individual conduct but about the adequacy of SEBI’s institutional safeguards. The Central Government’s response to the referred recommendations will be critical in determining whether this episode results in durable institutional reform or a well-documented set of good intentions.

The 213th Board meeting reveals an institutional posture of pragmatic calibration,  aligning regulatory requirements with operational reality in the market, while attempting to embed accountability within the regulator itself. The five market-facing reforms are well-designed and responsive to genuine practical difficulties. Whether the accountability reform achieves its purpose will depend on the distance between the voluntary code and enforceable regulation brought by the government. In fact, such a code should be implemented across regulators in the financial markets.

On the same page is FE's own opinion on the subject of governance and accountability norms. 

Getting ‘Fit and Proper’ Back in Shape

I have a piece with Manas Dhagat and Pragya Garg in today's Financial Express on the proposed amendment to 'Fit and Proper' norms of SEBI. The proposal is a welcome reform which removes the 'beheading before trial' approach of disqualifying people even though they are not found to have (yet) committed an offence merely because an FIR, Chargesheet or other civil proceedings are initiated: 

The securities market operates on public funds and is exposed to systemic risk. Regulators therefore apply a “fit and proper” criterion to assess integrity, competence, reputation, and financial soundness before granting market access. This protects investors and sustains market trust and stability. The Securities and Exchange Board of India (“SEBI”) through a Consultation Paper, proposed amendments to the ‘fit and proper’ framework under the SEBI (Intermediaries) Regulations, 2008 (“Intermediaries Regulations”), reflecting a nuanced attempt to contemporise regulatory standards.

At the heart of SEBI’s proposals is a selective relaxation of certain automatic, rule-based triggers for disqualification in favour of greater reliance on the existing principle-based criteria under the Intermediaries Regulations that aligns more closely with global norms and jurisprudential fairness. This recalibration is not merely semantic. It signals a subtle but important maturing of regulatory philosophy, one that recognises that the presumption of innocence and proportionality are essential to sustaining confidence in India’s capital markets.

Under the existing framework, the mere filing of a criminal complaint or FIR by SEBI, or a charge sheet by any enforcement agency in an economic offence matter, leads to immediate disqualification of intermediaries and their associated individuals, even while the case is still pending. This has often led to reputational and commercial consequences that far outstrip proven misconduct. The proposed amendments remove such automatic rule-based disqualifications and instead anchor the specific rule-based trigger for disqualification at the stage of conviction. However, SEBI retains discretion under the principle-based criteria to consider the pendency of criminal proceedings of a severe nature on a case-to-case basis, and may lay down guidelines regarding cases where such pendency is egregious enough to incur disqualification.

This recalibration produces two salutary effects. First, it reaffirms the fundamental tenet of criminal justice that mere allegations do not amount to guilt. Regulatory intervention at the pre-conviction stage has, at times, risked blurring this essential boundary and undermining the presumption of innocence. Second, it brings greater coherence to the regulatory architecture by harmonising the intermediaries framework with other SEBI regulations, including those applicable to stock exchanges and depositories, which already adopt conviction-based thresholds for specified disqualifications.

While the regulator must remain alive to serious wrongdoing, calibrating thresholds to proven conduct helps avoid premature regulatory penalties that may be disproportionate to the underlying facts.

Another noteworthy proposal in the Consultation Paper is the introduction of express provisions codifying procedural safeguards, specifically the requirement to notify SEBI of events that could affect fitness and to provide the concerned party a reasonable opportunity to be heard before any determination of unfitness is recorded.

Embedding these rights directly into the regulations (rather than relying on administrative practice) brings greater clarity and predictability. While the opportunity of being heard is already afforded in practice, expressly codifying it in the regulations removes procedural ambiguity, a principle that has underpinned fair administrative action in multiple legal contexts.

SEBI’s proposals also target the incidental consequences of unfitness findings. Presently, where a regulatory order declaring a person unfit is silent on the duration of the prohibition on new registration applications, a default five-year bar applies. The amendments seek to remove this automatic consequence, thereby making prohibition periods an outcome of conscious regulatory determination rather than a mechanical consequence of statutory silence.

Further, the ambit of proceedings that trigger registration restrictions, currently including both directions and penalties, is proposed to be confined to actions under Section 11B(1) of the SEBI Act, 1992, which primarily relates to directions. The time period for non-consideration of registration applications upon issuance of a show cause notice is also proposed to be reduced from one year to six months.

Perhaps the most commercially significant proposal is the removal of mandatory divestment for persons in control declared not fit and proper. Instead, the intermediary would be required to ensure that such a person does not exercise voting rights within seven days of such declaration.

This represents a calibrated regulatory response: it neutralises the governance influence of a disqualified person, the core regulatory concern, without mandating the irreversible step of divestment. From a policy perspective, this strikes a better balance between protecting public interest and preserving economic rights given the concerns around irreversible financial loss, particularly in cases where the person may later be acquitted or found not guilty in the proceedings pursuant to which the disqualification was incurred.

The Consultation Paper also proposes a refinement in how insolvency proceedings impact ‘fit and proper’ assessments. Under the existing framework, the initiation of winding-up proceedings could lead to disqualification. Recognising that insolvency processes (especially under the Insolvency and Bankruptcy Code) are inherently resolution-oriented, SEBI proposes that disqualification ought to arise only upon the actual passing of a winding-up order, not at the threshold of initiation.

This is not merely technical tinkering. It acknowledges the commercial reality that many insolvency proceedings result in successful resolution plans and revival, and that penalising entities at the point of process commencement could unjustifiably constrict market participation.

SEBI’s proposal is commendable for seeking to balance regulatory rigour with procedural fairness, ensuring that disqualification mechanisms remain principled and proportionate. If adopted, the changes would help prevent irreversible financial and reputational harm in cases where an individual is later acquitted, while introducing greater procedural clarity and a more calibrated balance between rule-based and principle-based criteria. At the same time, SEBI’s discretion to act on serious concerns on a case-to-case basis would remain intact.

Beyond Consolidation: The Structural Reforms SEBI Needs

I have a piece with Parker Karia and Purva Mandale in today's Financial Express on the Unified Securities Code arguing that the reforms of a new code on securities law is much needed:

About two months ago, the Government introduced the much-awaited Securities Market Code, 2025 (SMC), now being scrutinised by the Parliamentary Standing Committee on Finance. The SMC consolidates scattered laws into one coherent statute, eliminates redundancies, and represents a forward-looking approach to securities regulation. While it incorporates lessons from three decades of market evolution, it falls short on certain structural aspects, which are discussed in this article.

Segregation of Functions

The Supreme Court, and various commissions and committees, have repeatedly noted that SEBI is a unique regulator inasmuch as it performs legislative, executive, and judicial functions. Ordinarily, the arms performing these functions are separate and independent. At SEBI, however, the lines between them are entirely blurred. While a nominal segregation exists, personnel performing these functions are not truly ring-fenced. The SMC's attempt to restrict investigative personnel from enforcement roles provides a more granular internal firewall, but these functions still reside within a single institutional hierarchy where personnel remain fungible. Moreover, such measures already exist and have not proven sufficient.

The segregation required must be deeply structural, not merely procedural. The SMC should restructure the regulator so that the institutional framework itself ensures ring-fencing. The divide between regulator, investigator, and judge should not be mere best-practice guidance. it should be hard law.

This is especially critical for SEBI's quasi-judicial functions. The global standard is for the securities regulator to investigate and file actions before external courts or tribunals, rather than adjudicating in-house. While replicating that model entirely may be impractical given India's judicial delays, the SMC should at least mandate that SEBI's adjudicating officers be external persons, independent of SEBI, particularly in matters involving market abuse, fraud, and insider trading. The US Supreme Court's recent ruling in SEC v. Jarkesy offers a valuable primer on this question. The appointment of external adjudicators with professional qualifications in law and finance, or demonstrable experience in securities adjudication, would likely produce orders that are more robust and less easily overturned on appeal.

SEBI's Investigative Powers

As financial markets grow more sophisticated, so do fraudulent schemes. Those who engage in market abuse do not publicise it. Encrypted and disappearing messages pose significant challenges to effective investigation and successful prosecution. It is difficult to combat white-collar crime with one hand tied behind the back. SEBI itself has acknowledged these difficulties — its proposed SEBI (Prohibition of Unexplained Suspicious Trading Activities) Regulations, 2023 (PUSTA Regulations), sought to shift the burden of proof onto the alleged violator.

While the PUSTA Regulations were not the right approach, SEBI's concerns are legitimate. The solution, however, lies not in reversing the burden of proof, but in broadening the regulator's investigative powers.

With great power comes great responsibility. Any expansion must be accompanied by stringent procedural safeguards ensuring that privacy cannot be invaded without just cause. These safeguards are necessary not only for future powers Parliament may confer, but also for those SEBI already possesses. For instance, SEBI can currently call for the trading or banking details of any person — such powers must be subject to strict due process protections.

Principle-Based Regulation

Laws governing a dynamic sector like securities markets should adopt a principle-based approach rather than a rule-based one. Today, the subordinate legislation governing SEBI intermediaries is highly prescriptive, aimed at ensuring consistency and reducing ambiguity. This departs from common-law principles that allow core law to grow organically through judicial interpretation.

This rule-based approach has led to regulatory overreach and compliance fatigue. It encourages a box-ticking culture, reduces flexibility in adapting to market developments, and increases compliance costs, all of which negatively impact the ease of doing business. Most critically, over-prescription produces both false negatives and false positives: the guilty go free, and the innocent are convicted.

It may be time to shift to a principle-based framework. Regulations would set out broad, high-level guidance that clearly conveys the spirit of the law, allowing flexibility for complex and evolving situations. Regulatory standards would be established through reasoned enforcement orders, allowing principles to be applied contextually. Consider a simple but telling example: the US defines fraud, and implicitly insider trading, in a single sentence. India, by contrast, devotes two entire regulations solely to defining fraudulent activity and insider trading. Where the US has used 150 words, India has used 22,000.

In conclusion, while the SMC is the next logical step for the orderly development of India's securities markets and the fostering of economic growth, this opportunity should be used not merely to consolidate existing laws, but to create a framework that is truly future-proof.