Securities Market Code, 2025
The Indian capital markets have operated under a fragmented legal framework for decades. The introduction of the Securities Market Code, 2025 (the Code) in the Lok Sabha on December 18, 2025, marks the end of this era. This legislation is a foundational reset. It seeks to consolidate and replace the three pillars of Indian securities law: the Securities Contracts (Regulation) Act, 1956 (SCRA), the Securities and Exchange Board of India Act, 1992 (SEBI Act), and the Depositories Act, 1996.
Understanding this Code is essential because it fundamentally alters the compliance landscape, the powers of the regulator, and the rights of market participants. This note outlines the critical changes through an analysis of specific sections, their interpretation, and the operational balance sheet of advantages versus challenges.
1. Unified Definitions and Scope (Sections 2 and 3)
Sections 2 and 3 of the Code provide a unified definition clause that applies across all market activities. Unlike the previous regime where “securities” was defined in the SCRA but regulated under the SEBI Act, the Code creates a singular “financial instrument” definition that encompasses traditional equity, debt, hybrids, and modern investment contracts.
This eliminates the interpretative grey zones that existed between the jurisdiction of SEBI and the central government. The Code explicitly brings “investment schemes” and “digital assets” under the ambit of the regulator without requiring separate notifications. It treats the nature of the contract as paramount rather than the form of the instrument.
The primary benefit is the reduction of regulatory arbitrage. Issuers can no longer structure products to technically fall outside the definition of “securities” to avoid compliance. It streamlines the registration process for intermediaries who previously had to navigate conflicting definitions of “broker” and “depository participant” across different acts.
The challenge lies in the transitional phase. Existing contracts drafted under the SCRA definitions may face validity questions if they do not align with the new, broader definitions. Legal teams will need to review all outstanding hybrid instrument contracts to ensure they do not inadvertently trigger new compliance obligations under Section 3.
2. Restructuring the Regulator (Section 4 and Section 11)
Section 4 expands the Securities and Exchange Board of India from nine to fifteen members. It mandates that at least three members must be independent experts with no prior government service in the preceding three years. Section 11 codifies strict conflict of interest norms, requiring members to disclose all pecuniary interests held by themselves and their immediate relatives.
This moves SEBI from being a government-dominated body to a more pluralistic regulatory authority. The inclusion of mandatory independent experts is designed to bring market specialization directly into the boardroom. The conflict-of-interest clause in Section 11 is rigorous, mandating recusal from any proceeding where a member has even an indirect interest.
By legally enforcing recusal, the Code insulates the Board from allegations of bias, which is critical for foreign investor confidence. The expanded Board size allows for the formation of specialized sub-committees for complex areas like derivatives or algorithmic trading, leading to better policy formulation. This enhances the credibility of the regulator.
Finding “truly independent” experts who have the requisite market knowledge but no conflicting pecuniary interests is difficult in a concentrated market like India. Furthermore, a larger Board may lead to decision paralysis or slower consensus building, potentially delaying urgent regulatory interventions during market volatility.
3. Decriminalization and Civil Penalties (Section 180 to Section 195)
The Code fundamentally shifts the enforcement mechanism. Sections 180 through 195 categorize offenses into “administrative contraventions” and “market frauds.” Administrative lapses, such as late filings or technical non-compliance, are removed from the purview of criminal courts. Instead, they attract “financial disincentives” or civil penalties adjudicated by an internal executive officer.
This is the formal decoupling of procedural errors from criminal liability. The threat of imprisonment is now exclusively reserved for serious economic offenses like insider trading, front-running, and manipulation. For corporate India, this means a director cannot be threatened with jail for a secretarial failure.
Ease of doing business is thus significantly improved. It reduces the “fear of law” for honest mistakes and allows companies to settle minor issues quickly through monetary payments. It also decongests the special courts, allowing judges to focus on high-stakes fraud cases rather than routine compliance failures.
The primary challenge is the calibration of the penalty. If the civil penalties are too low, they become a “cost of doing business,” and large entities may prefer paying fines over strict compliance. Conversely, if the adjudicating officer has unchecked discretion to levy massive fines, it could lead to a new form of “administrative harassment” without the protection of a judicial trial.
4. The Statute of Limitation (Section 210)
Section 210 introduces a hard limitation period for regulatory action. It states that no investigation or inquiry can be initiated by the Board for any contravention after the expiry of eight years from the date of the alleged violation.
This provision brings finality to regulatory exposure. Previously, SEBI could open cases dating back 15 or 20 years, forcing companies to maintain records indefinitely. The eight-year rule aligns with the Income Tax Act and the Companies Act, creating a uniform document retention policy for corporate India.
It provides certainty to market participants. Mergers and acquisitions can proceed with greater confidence, knowing that a target company does not carry hidden regulatory liabilities from decades ago. It forces the regulator to be agile and complete investigations within a reasonable timeframe.
The rigidity of this section is a double-edged sword. Sophisticated financial frauds often take years to surface. By placing a hard stop at eight years, the Code may inadvertently allow perpetrators of complex, long-gestation frauds to escape liability if they successfully conceal the crime for the statutory period.
5. The Statutory Ombudsperson (Section 145)
Section 145 establishes the office of the “Securities Market Ombudsperson.” Unlike the current SCORES system which acts as a mailbox for grievances, the Ombudsperson is a statutory authority with the power to pass binding awards for compensation up to a specified limit.
This decentralizes grievance redressal. The Ombudsperson operates independently of SEBI’s enforcement wing, focusing solely on dispute resolution between the retail investor and the intermediary. It functions similarly to the Banking Ombudsman, offering a fast-track, cost-free legal remedy for small investors.
It significantly empowers the retail investor. Currently, if an investor loses money due to a broker’s technical glitch, the legal route is expensive arbitration. The Ombudsperson provides an accessible forum for immediate relief. It also reduces the administrative burden on SEBI, allowing the regulator to focus on systemic risks rather than individual complaints.
The operational scale is the main hurdle. With millions of active investors, the volume of complaints regarding technical glitches, non-allotment of shares, or dividend delays is massive. If the Ombudsperson’s office is not adequately staffed and digitized, it will suffer from the same backlog that plagues the current system, rendering the statutory power ineffective.
6. Duties of Market Infrastructure Institutions (Section 45)
Section 45 formally designates Stock Exchanges and Depositories as “First-Level Regulators” with statutory immunity for their regulatory actions. It empowers SEBI to delegate the power of inspection and penalty imposition to these institutions for specific operational violations.
This provision acknowledges that exchanges are better positioned to monitor real-time compliance than a distant central regulator. It grants them the teeth to penalize members without waiting for SEBI’s approval.
It enables real-time enforcement. Exchanges can instantly freeze terminals or levy fines for margin defaults, preventing systemic contagion. It creates a multi-layered defense system where the exchange handles operational compliance, and SEBI handles market integrity.
This creates a conflict of interest for the exchanges, which are for-profit entities. There is an inherent tension between their commercial goal of increasing trading volume and their regulatory duty to police their members. Strict oversight is required to ensure exchanges do not relax norms to attract volume or penalize members selectively.
The Securities Market Code, 2025 is a pro-business yet pro-discipline legislation. It offers the industry what it has long demanded: clarity, finality (via the limitation period), and proportionality (via decriminalization). In exchange, it demands higher standards of internal governance and transparency. The Code is attempts to balance the need for strict oversight with the demand for operational freedom. The inclusion of sections like the Statute of Limitation (Section 210) and the Conflict-of-Interest norms (Section 11) signals a maturity in the Indian regulatory mindset. The days of fragmented compliance are over; the market is moving towards a unified and strictly monitored ecosystem.
See Also
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Rajiv Tuli is the Managing Partner at LEGALLANDS LLP, based in New Delhi, with over three decades of professional experience. Having begun his career as a Chartered Accountant and then transitioned into legal practice, he brings a unique blend of financial, tax, and legal expertise.
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