Securities Markets Code (SMC) Bill 2025: Unified Securities Law in the Making

Why in News ?

The Union Finance Minister has tabled the Securities Markets Code (SMC) Bill, 2025 in the Lok Sabha. The Bill, first proposed in the Union Budget 2021–22, has been referred to the Standing Committee on Finance for detailed scrutiny. The Bill seeks to consolidate, rationalise and modernise India’s securities market laws, aligning regulation with a technology-driven, rapidly evolving financial ecosystem.

Background and Context

India’s securities market has expanded rapidly in recent decades, driven by digital trading platforms, algorithmic trading, retail investor participation, and fintech innovations. However, the legal framework governing these markets evolved in a piecemeal manner, spread across multiple legislations enacted at different points in time.

This fragmentation led to:

• Overlapping provisions and regulatory duplication
• Compliance complexity for market participants
• Gaps in enforcement and investor protection

Recognising these challenges, the government proposed a principle-based, unified securities law, culminating in the Securities Markets Code Bill, 2025.

Securities Market in India

• A critical component of India’s financial system, channelising savings into productive investments
• Enables capital formation, risk-sharing, and economic growth
• Largely technology-driven, with electronic trading, dematerialised securities, and real-time settlement
• Regulated primarily by the Securities and Exchange Board of India (SEBI)

Core Features of the Securities Markets Code Bill, 2025

1. Consolidation of Securities Laws

The Bill replaces three major legislations:

• SEBI Act, 1992 – Established SEBI as the statutory regulator with enforcement powers
• Securities Contracts (Regulation) Act, 1956 – Regulated stock exchanges and securities contracts
• Depositories Act, 1996 – Enabled dematerialisation and electronic transfer of securities
• Objective: Create a single, coherent securities law by removing obsolete provisions, overlaps, and inconsistencies.

2. Expanded and Strengthened SEBI Board

• Board strength increased from 9 to 15 members
• Composition includes:
  • Chairperson
  • 2 Central Government nominees
  • 1 RBI nominee (ex-officio)
  • 11 other members (minimum 5 whole-time members, up from 3)
• Purpose: Enhance institutional capacity, regulatory expertise, and governance effectiveness.

3. Decriminalisation and Rationalisation of Offences

• Minor, technical and procedural violations shifted to civil penalties
• Criminal sanctions limited to serious offences such as:
  • Insider trading
  • Trading on material non-public information
• This aligns with the government’s broader ease of doing business and decriminalisation agenda.

4. Classification of Contraventions

• Category I: Fraudulent and unfair trade practices – civil penalties only
• Category II: Market abuse impacting market integrity and public interest – civil and/or criminal liability
• This risk-based classification ensures proportional regulation.

5. Time Limitation on Inspection

• No inspection allowed if 8 years have elapsed since the date of contravention
• Ensures legal certainty and closure for market participants.

6. Conflict of Interest and Accountability

• Mandatory disclosure of direct and indirect interests, including family interests
• Compulsory recusal in cases of conflict
• SEBI empowered to remove board members for non-compliance
• These provisions strengthen ethical governance and transparency.

7. Investor Protection Measures

• Mandatory Investor Charter to be issued by SEBI
• Institutionalised investor grievance redressal mechanism
• Market intermediaries and issuers directed to adopt similar systems
• Aims to boost investor confidence and retail participation.

8. Delegation and Regulatory Coordination

• SEBI may delegate registration-related functions to:
  • Market Infrastructure Institutions (MIIs)
  • Self-Regulatory Organisations (SROs)
• Framework for inter-regulatory coordination, especially for new and “other regulated instruments”
• Supports market deepening, innovation, and fintech integration.

Key Challenges and Way Forward

Concerns Raised:

• Potential over-concentration of powers in SEBI
• Possible dilution of separation of powers
• Ambiguity in subordinate legislation (rules, regulations, circulars)

Way Forward:

• Strong parliamentary scrutiny by the Standing Committee
• Clear checks and balances on SEBI’s discretionary powers
• Transparent and consultative rule-making
• Capacity building for effective enforcement
• Periodic review of delegated functions to MIIs and SROs