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The Securities Markets Code, 2025: Strengthened Enforcement, Weakened Accountability?

Published: Jan 29, 2026

By Lav Kush

Introduction

LAST month, the Government introduced the Securities Markets Code, 2025 with the aim to consolidate and amend the India's securities market framework. The proposed Code seeks to repeal and Integrate the Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as the "SCRA"), the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the "SEBI Act,"), and the Depositories Act, 1996 (hereinafter referred to as the "Depositories Act, 1996") thereby creating a unified legal framework governing securities markets and related matters. The Securities Markets Code, 2025 represents a long-pending legislative reform of the Government of India, which was first articulated in the Union Budget for 2021–22. ¹The statutes proposed to be repealed under the Code were enacted decades ago and no longer adequately reflect the evolving realities and complexities of modern capital markets. As of now the bill has been sent to the Standing Committee on Finance for detailed examination.

Salient Features of the New Market Code Bill

The Securities Markets Code is all about making things simpler and more streamlined for everyone involved in India's financial markets. Instead of dealing with a complicated mix of old laws, this new Code brings everything together under one roof. It can be noticed especially from how penalties have been handled, and how enforcement and appeals have been managed. But before we dive into what's changed with penalties, let's take a look at the bigger picture-how the Code is shaking up the structure and role of the Securities and Exchange Board of India ("the Board").

Currently, Board Consist of consists of nine members: the Chairperson, two officials from the Ministry of Finance and Corporate Affairs, one official of RBI, and five other members appointed by the central government of whom at least three must be whole-time members. ²Under the Code, the Board's size has been expanded to a maximum of fifteen members and among them there has been increase in the number of other members appointed by the central government to 11, of whom, at least five must be whole-time members. This move is likely to give the Central Government a greater say in SEBI's day-to-day functioning. The Code also introduces more rigorous disclosure and conflict-of-interest requirements for Board members. Under the SEBI Act, any member of SEBI who also serves as a director of a company is required to disclose any direct or indirect pecuniary interest in a matter and must recuse himself from deliberations and decision-making on such matters. The Bill broadens this safeguard by extending the restriction to all members who have any direct or indirect interest, as may be prescribed by regulations, including interests held by family members. Further, it empowers the Central Government to remove a member who acquires any financial or other interest that is likely to compromise the impartial discharge of his functions.³ These changes are intended to improve governance standards and enhance accountability within the regulator.

Clause 13 of the proposed Code authorises the Board to investigate not only the primary wrongdoer but also any person who has assisted or facilitated a contravention. While similar powers could earlier be inferred from the SEBI Act through judicial interpretation, their express recognition in the Code provides much-needed clarity. This is especially relevant in today's capital market, where the role of third-party actors and intermediaries has expanded, and regulatory responsibility often extends beyond the direct market participant.

In addition, the Code brings in an important procedural safeguard by placing a time limit on the Board's power to initiate inspections or investigations. Under Clause 16, such action must be commenced within eight years from the date of the default or contravention. Also, a requirement has been imposed to complete the investigations within 180 days. With these changes, the Code introduces greater procedural discipline into the enforcement process. These changes aim to ensure timely regulatory action while also providing legal certainty and fairness to market participants. The Code also places strong emphasis on procedural fairness by requiring a clear separation between investigative and adjudicatory roles. Under Clause 17, any person involved in the inspection or investigation of a matter is disqualified from acting as an adjudicating officer or from dealing with interim or settlement applications in the same case. This ensures greater impartiality in regulatory decision-making.

Further, the Code adopts a more balanced approach to enforcement by decriminalising several minor and procedural defaults that earlier could lead to criminal prosecution. Such contraventions are now generally treated as civil violations and dealt with through monetary penalties under Clauses 97 to 102, signalling a move towards proportionate regulation. At the same time, the Code draws a clear line by retaining criminal liability for serious forms of market misconduct, such as fraud, market manipulation, and insider trading. These offences continue to attract stringent penalties and prosecution before special courts, underscoring the regulator's commitment to maintaining market integrity.

Another important reform introduced by the Code is the widening of the statutory definition of "securities." The earlier definition under the SCRA, as adopted by the SEBI Act, was relatively narrow. In contrast, Clause 2(zi) of the proposed Bill expressly brings within its scope hybrid instruments, electronic gold receipts, zero-coupon zero-principal instruments, and onshore rupee bonds issued by multilateral institutions. This expansion better reflects the evolving nature of modern financial products.

Focus On The Penalty Provisions.

The proposed Securities Markets Code, 2025 brings together the penalty regime under a single, dedicated Chapter XIII, replacing the earlier fragmented framework spread across various provisions of the SEBI Act, 1992. This consolidation improves the overall structure of the law and makes the penalty framework clearer and more coherent. At the same time, the Code strengthens the substance of the regime by setting out detailed factors that must be considered while determining penalties, thereby bringing India's enforcement approach closer to that followed in mature capital market jurisdictions such as the United States and the United Kingdom. Unlike the earlier SEBI Act, which contained only a limited reference to such considerations, the Code adopts a more detailed and mandatory framework, promoting greater proportionality, consistency, and transparency in enforcement outcomes. The Code also expressly provides for disgorgement and restitution as statutory remedies, recognising their importance in protecting investors. Under the previous regime, disgorgement largely developed through judicial interpretation of SEBI's broad regulatory powers and was often challenged on the ground that it lacked clear statutory backing. By formally incorporating disgorgement and restitution into the statute, the Code reorients enforcement away from purely punitive measures and towards correcting economic harm and restoring losses suffered by investors.

Further, the Code recalibrates the rules on corporate liability under proposed section 110, introducing an important governance safeguard. Independent directors and non-executive directors are no longer exposed to automatic penal liability unless their specific involvement or culpability is clearly established. This change is intended to avoid discouraging independent board oversight, while ensuring that responsibility continues to rest with those who are actually in control of, or responsible for, the misconduct.

In relation to punishment for non-compliance with regulatory orders, the Code largely retains the existing maximum penalty under Section 94. However, it departs from the earlier regime by introducing a statutory minimum punishment - either imprisonment for at least one month or a fine of not less than ten lakh rupees for punishment for failure to comply orders, punishment for market abuse etc. This marks a clear shift from the wide judicial discretion earlier available under Section 24 of the SEBI Act and reflects a legislative intent to deal with serious market violations in a more consistent and stringent manner. In addition, Clause 104 significantly strengthens the enforcement toolkit by empowering adjudicating officers to impose penalties of up to Rs.100 crore in specified cases. Finally, the Code meaningfully refines the settlement framework by expanding and clarifying the Board's power to resolve enforcement proceedings through settlement. By placing settlement mechanisms on a firmer statutory footing, the Code promotes early resolution and regulatory efficiency. At the same time, it brings to the fore important considerations around transparency and consistency in negotiated outcomes, which will shape how these powers are exercised in practice.

Critical Analysis

The Code seeks to resolve several long-standing concerns in India's securities law framework, including the consolidation of fragmented legislation, a clear move towards decriminalisation, and the formal expansion of SEBI's statutory enforcement powers. At the same time, a number of important issues warrant closer scrutiny and possible correction. These include: (i) the wide delegation of rule-making and regulatory powers to the Central Government and, in turn, to SEBI; (ii) the continued concentration of investigative and adjudicatory functions within the same authority, which raises questions about institutional neutrality; and (iii) the absence of a comprehensive framework to deal with emerging regulatory challenges such as cybersecurity obligations and the oversight of market infrastructure institutions.

The Government continues to exercise significant control over the regulator, particularly through its powers to appoint and remove members of the SEBI Board. While some degree of democratic oversight over an independent regulator is both legitimate and necessary - and strong intervention may be justified in cases of institutional failure - the breadth of these powers raises concerns about safeguarding SEBI's functional autonomy.

In addition, the Code substantially enhances adjudicatory powers by permitting the imposition of penalties of up to Rs.100 crore across a wide range of violations. The penalties are based on multiple grounds, some of which are vague and broadly framed. For instance, Clause 104, which deals with penalties for failure to conduct business in accordance with the Code, empowers the adjudicating authority to impose fines of up to Rs.100 crore on market infrastructure institutions. Although these sanctions are formally described as civil in nature, their scale and reach may, in practice, have a punitive effect, blurring the traditional line between civil penalties and criminal punishment. Such an expansion of SEBI's powers must be viewed in light of recent judicial decisions that have highlighted instances of SEBI's non-compliance with court orders.⁴

In certain respects, the Code may also be seen as a missed opportunity. It expands regulatory powers without a corresponding strengthening of accountability mechanisms to govern how those powers are exercised. That said, the referral of the Bill to the Standing Parliamentary Committee provides an opportunity to address these concerns through targeted legislative refinements. Possible measures could include prescribing statutory penalty bands linked to clearly defined categories of violations, requiring independent valuation or audit processes for high-value disgorgement orders, and introducing limited personal accountability or surcharge mechanisms in cases of demonstrable bad faith or abusive enforcement. The creation of independent oversight structures could further strengthen checks and balances within the regulatory framework.

[The author is an intern at Chanakya National Law University and the views expressed are strictly personal.]

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¹ https://www.pib.gov.in/Pressreleaseshare.aspx?PRID=1693901&reg=3&lang=2

² https://prsindia.org/billtrack/the-securities-markets-code-2025

³ https://prsindia.org/billtrack/the-securities-markets-code-2025

⁴ Para 26, https://www.sebi.gov.in/enforcement/orders/dec-2023/judgment-in-the-matter-of-ashok-dayabhai-shah-and-ors-vs-securities-and-exchange-board-of-india-and-ors_80037.html