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.
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