by Natasha Aggarwal, Pratik Datta, K. P. Krishnan, Bhavin Patel, M. S. Sahoo, Renuka Sane, Ajay Shah and Bhargavi Zaveri-Shah.
Finance is the brain of the economy. It dictates allocative efficiency. The financial system chooses which industries and firms receive capital. This efficiency determines the extent to which investment translates into GDP growth. Getting finance right is critical. The prioritisation of financial reform must be absolute.
The Securities Market Code Bill, 2025 (SMC) marks a substantial advance over the existing Securities and Exchange Board of India Act, 1992, particularly in strengthening governance arrangements and formalising the processes of regulation-making. Importantly, it makes a serious attempt to end the ''circular raj'' by confining the issuance of subsidiary instruments to the Chairperson or senior members of the Board, rather than dispersed internal authorities. Further, it has introduced timelines for investigations and attempted to separate the investigation function from the adjudication function, making the first effort towards a clearer separation of powers. That said, the SMC can make further strides if it focuses on the issues described below.
We now address the issues in relation to specific provisions drafted within the current SMC.
Separation of powers
The SMC raises three related concerns, which demonstrate a concentration of powers at SEBI.
Issue 1: Excessive delegation of essential legislative functions
Clause 96 prescribes imprisonment, a fine, or both as penalties for market abuse (an offence defined under Clause 93). However, Clause 93 also grants the regulatory authority to define new offences within the 'market abuse' category, which would carry the same criminal sanctions. This raises concerns around excessive delegation: the identification of criminal offences is a core legislative function and cannot be delegated. Moreover, such excessive delegation is subject to being struck down in judicial review.
Issue 2: Regulation-making on adjudication
Clause 146(2)(j), read with Clause 17(4), permits SEBI to make regulations on the manner of conducting adjudication proceedings. This should not be done by SEBI itself. SEBI is the agent, and the Parliament is the principal. The Parliament must define the checks and balances on the coercive power of the agent. Otherwise, the agent always has incentives to appropriate more arbitrary power.
Issue 3: Ineffective separation of investigative and adjudicatory functions
Clauses 17 and 27 introduce limited separation of investigative and adjudicatory functions for specific matters. Investigation is an executive function, and adjudication is a quasi-judicial function. A conflation of these two functions in the same individual raises concerns about the separation of powers.
In summary, there is no clear separation of power between the three functions of the regulator. The same regulator is empowered to define the scope of violations and offences, investigate them, enforce them, adjudicate upon them, and impose sanctions for their violations, all under regulations of its own design. This combination blurs the distinction between legislative, executive, and adjudicatory functions and concentrates powers in the same persons.
Proposal:
Remove Clauses 17(4), 92(f), 93(g), and 146(2)(j) from the SMC. Implement strong structural separation between the investigative and adjudicatory functions. One way to do this is to create a distinct career track for adjudicatory officers as Administrative Law Officers (ALO). One SEBI board member should also be designated as an Administrative Law Member, who oversees the functions of ALOs. These officers should be solely responsible for adjudication and must have no involvement in investigative or quasi-legislative functions. Introduce extraordinary safeguards to mandate arm's length operation between investigation and adjudication.
Timelines for investigation and adjudication
Issue: Clauses 13, 16, and 27 introduce timelines for investigation and interim orders. However, provisos allow these timelines to be extended (Clause 27(4), proviso to Clause 13(2)). Additionally, the SMC specifies no timelines for the completion of adjudication proceedings. This allows investigations and adjudications to continue indefinitely, rendering the statutory limits ineffective.
Proposal: Remove the power to extend timelines for investigation. If extensions are retained, mandate the publication of written reasons, subject to mandatory review by the SEBI governing board. Introduce a strict statutory timeline for the conclusion of adjudicatory proceedings. These timelines should be part of the Parliament-specified regulations on the manner of conducting adjudication proceedings that we recommend in our preceding suggestions.
Methodology for calculating unlawful gains
Issue: The SMC requires the determination of unlawful gains by an investigating officer under Clause 13(3), but provides no calculation methodology. This virtually guarantees arbitrary and inconsistent determinations. It defeats the rule of law.
Proposal: Codify standard methods or guidelines for calculating unlawful gains within the SMC. Operationalise these through detailed regulations. Reference the Competition Commission of India (Determination of Monetary Penalty) Guidelines, 2024, as a baseline.
Sanction determination factors
Issue: The SMC lists factors for adjudicating officers to consider while imposing sanctions. Some mirror Section 15J of the SEBI Act, which are unimplementable in practice. Terms like 'impact of the default or contravention on the integrity of the securities markets' (Clause 19(b)(v)) lack precision and invite arbitrariness.
Proposal: Base sanctions strictly on the quantifiable extent of harm caused to specific persons. Codify this methodology. Alternatively, publish binding guidelines detailing specific aggravating and mitigating factors, expanding upon the approach in the SEBI (Settlement Proceedings) Regulations 2018.
Criminal enforcement
Issue: The SMC retains criminal liability, including imprisonment, for some offences. Establishing guilt in Indian criminal law requires proof beyond a reasonable doubt, typically coupled with the requirement to establish intention. This is an inefficient tool for complex financial markets. The boundary between aggressive trading and market manipulation is thin. The threat of criminal sanctions deters contrarian strategies. This reduces market liquidity and harms price discovery. Traditional fraud is adequately covered by the Bharatiya Nyaya Sanhita.
Proposal: Remove all criminal liabilities. Structure sanctions as punitive civil penalties or restorative remedies, scaling to a multiple of the illicit gains. Retain debarment for systemic misconduct.
Power to issue directions
Issue: Clause 23 vests SEBI with open-ended direction-making powers. Moreover, the requirement to record reasons in writing (currently included in Section 11(4) of the SEBI Act) has not been included in Clause 23.
Proposal: Delete Clause 23. Confine non-penal measures to specific, narrowly defined statutory triggers (e.g., immediate asset freezing powers under strict procedural safeguards). All adjudicatory actions must be justified by reasons in writing.
Nominee directors on the SEBI board
Issue: The SMC retains government nominee directors on the SEBI board. Nominee directors prioritise the perspective of their parent departments over market efficiency. They exercise disproportionate influence. Inter-agency coordination should not occur via board representation.
Proposal: Appoint mid-career professionals for fixed terms until a mandatory retirement age. Bind them statutorily to SEBI's specific objectives. Address inter-agency concerns externally through the Financial Stability and Development Council (FSDC).
Commodities markets
Issue: Clause 49 empowers the government to determine commodities eligible for trading. The market must decide which commodities warrant hedging instruments. State determination of eligible commodities is equivalent to the government deciding which firm is permitted to issue equity.
Proposal: Delete Clause 49. Empower SEBI to draft regulations defining objective eligibility criteria for commodity derivatives, identical to the framework for eligible scrips.
Ombudsperson
Issue: Clause 73 empowers SEBI to designate an Ombudsperson. This creates a conflict of interest. The SMC lacks an appeals mechanism for decisions made by the Ombudsperson.
Proposal: Mandate statutory independence for the Ombudsperson. Ensure job security separate from SEBI management. Define a clear appellate process.
Exemptions for PSUs
Issue: Clause 65(2) empowers the Central Government to exempt listed public sector companies from listing and disclosure requirements. This violates Article 14 of the Constitution. State-owned enterprises must face the identical market discipline applied to private enterprises.
Proposal: Delete Clause 65(2). Mandate equal treatment for all market participants.
References
Natasha Aggarwal and others, "'Balancing Power and Accountability: An Evaluation of SEBI's Adjudication of Insider Trading'" (Working Papers, TrustBridge Rule of Law Foundation, 2025).
In Re: The Delhi Laws Act, 1912 (AIR 1951 SC 332).
M S Sahoo and V Anantha Nageswaran, 'Regulatory architecture 2.0: Securities Markets Code marks a decisive shift' (Business Standard, 25 December 2025).
M.S. Sahoo and Sumit Agrawal, "Reimagining SEBI's Consent Settlement Framework" (Chartered Secretary, January 2026).
C.K. Takwani, Lectures on Administrative Law (7th edition, 2023) at page 100.
Bhargavi Zaveri-Shah, 'SEBI does not need unlimited powers – here's what's wrong with the Securities Markets Code' (ThePrint, 5 January 2026).
Bhargavi Zaveri-Shah and Harsh Vardhan, 'Ghost of the Commodities Controller—why India's new financial law feels like the 1970s' (ThePrint, 19 January 2026).
