The Securities Markets Code, 2025, A Milestone in Consolidation, A Pause in Transformation

The Securities Markets Code, 2025, A Milestone in Consolidation, A Pause in Transformation

India’s financial landscape witnessed a significant legislative event in 2025 with the enactment of the Securities Markets Code. This ambitious piece of legislation, born from the recommendations of the Financial Sector Legislative Reforms Commission (FSLRC) and subsequent expert committees, aims to be the foundational bedrock for the country’s rapidly evolving capital markets. Its primary objective is to “simplify, modernise and rationalise” a regulatory environment that had grown complex and fragmented over decades. As legal expert Ravi Varanasi critically assesses, the Code largely succeeds in its core mission of consolidation, weaving together disparate statutes into a single, coherent tapestry. However, it stops conspicuously short of being the transformative, forward-looking market-design charter that many proponents of deep financial reform had hoped for. It is, in essence, an act of impressive administrative tidying rather than visionary architectural redesign.

The Triumph of Consolidation: Ending Statutory Fragmentation

The Code’s most undeniable and praiseworthy achievement is its unification of a historically fragmented legal regime. For years, the securities market was governed by a tripod of statutes:

1. The Securities and Exchange Board of India (SEBI) Act, 1992, which established the regulator.

2. The Securities Contracts (Regulation) Act, 1956 (SCRA), which governed the recognition of stock exchanges and the regulation of contracts.

3. The Depositories Act, 1996, which provided the legal framework for dematerialization and settlement.
   This tripartite structure, as Varanasi notes, led to “interpretive complexity,” particularly in enforcement, where overlapping jurisdictions and legal seams created ambiguity. Courts were often forced into “complex construction” to reconcile these laws.

The 2025 Code subsumes these acts (along with relevant provisions from other laws like the Companies Act) into a single, comprehensive legislative framework. It now seamlessly covers:

• Market Actors: Intermediaries, brokers, investment advisors, mutual funds, alternative investment funds.

• Market Infrastructure: Stock exchanges, clearing corporations, depositories.

• Issuers: Companies raising capital.

• Market Contracts and Products: From equities and bonds to complex derivatives.

• The Enforcement Lifecycle: Investigation, adjudication, penalties, and appeals.

This consolidation is not mere bureaucratic neatness. It promises to enhance legal certainty, reduce litigation over jurisdictional ambiguities, and create a more predictable environment for both regulators and market participants. By presenting a unified statute, it simplifies compliance and understanding, a boon for domestic and international investors navigating India’s markets.

Refinements Within the Existing Architecture

Beyond consolidation, the Code introduces several meaningful refinements that improve the operational and procedural robustness of market regulation:

1. Functional Classification of Market Actors: Moving beyond the rigid, entity-centric silos of the past, the Code introduces a more logical, functional classification: Market Infrastructure Institutions (MIIs), Securities Market Service Providers, Market Participants, and Self-Regulatory Organizations (SROs). This acknowledges that a single entity (e.g., a large financial conglomerate) can play multiple roles, and regulation should follow the function, not just the corporate form. The statutory recognition of SROs is a significant step toward a more collaborative, principles-based regulatory model.

2. Strengthened Due Process in Enforcement: The Code statutorily enshrines a clearer separation of powers within SEBI’s enforcement machinery. It formally separates the functions of inspection, investigation, adjudication, and settlement. Crucially, it excludes adjudicating officers from the investigative and settlement stages, addressing long-standing concerns about procedural fairness and bias. The prescription of timelines for investigations and interim orders is a welcome check against regulatory inertia and a move toward greater accountability.

3. Introduction of Proportionality: In a major shift toward global best practices, the Code expressly incorporates the principle of proportionality into enforcement actions. Penalties and sanctions are to be calibrated based on factors such as intent, duration of violation, gains made or losses avoided, harm to investors, cooperation with authorities, and past conduct. This moves away from a one-size-fits-all punitive approach to a more nuanced, justice-oriented model.

4. Settlement Finality and Netting Certainty: Perhaps its most critical contribution to financial stability is the Code’s robust strengthening of the legal foundation for settlement finality and netting. By clearly prioritizing the rights of clearing corporations in the event of a member default and providing ironclad statutory certainty to netting agreements, the Code drastically reduces residual insolvency risk. This is indispensable for the systemic resilience of India’s markets as they grow in scale, complexity, and interconnectedness with global financial systems.

The Missed Opportunities: Where the Code Falls Short of Transformation

Despite these advancements, the Code’s cautious approach leaves several fundamental, structural issues unaddressed, leading to what Varanasi terms “foundational limitations.”

1. Perpetuating an Outdated Contract Framework: The Code’s most significant conceptual conservatism lies in its treatment of market contracts. Rather than boldly reimagining regulation for the 21st century, it retains the antiquated, prohibition-based framework of the 1956 SCRA. It continues to classify contracts rigidly as “spot,” “forward,” or “derivative,” a categorization ill-suited for modern, complex financial instruments. A transformative statute would have moved to a principles-based approach, anchoring regulation on core objectives like transparency, exchange trading where appropriate, central clearing, and robust risk management, regardless of the legal label of the contract. This missed opportunity may stifle innovation in new product design.

2. Excessive Delegation and Executive Discretion: The Code leaves a staggering number of crucial market-structure decisions to future regulations, bye-laws, and subordinate legislation. While some delegation is necessary in a technical field, the extent here is concerning. Core issues such as the precise rules governing market structure, competition between trading venues, standards for investor classification (retail vs. sophisticated), and the contours of permissible innovation are left to the discretion of SEBI and, implicitly, the Finance Ministry. This creates regulatory uncertainty and raises the risk of policy being shaped by executive fiat rather than through transparent, legislatively debated principles.

3. An Ambiguous Vision for Investor Protection: The Code rightly emphasizes investor protection but frames it primarily through a lens of post-facto grievance redressal (ombudsman, penalties). It offers limited clarity on the proactive alignment of protection with the intrinsic risk-taking nature of capital markets. There is minimal statutory differentiation among investor categories (e.g., retail, accredited, institutional), which is crucial for tailoring disclosure and suitability requirements. This orientation risks fostering an overly paternalistic regulator, potentially constraining market depth, discouraging sophisticated products, and hampering the development of a vibrant alternative investment ecosystem.

4. Lack of a Clear, First-Principles Vision: Unlike landmark financial laws in other jurisdictions, the Securities Markets Code does not articulate a bold, philosophical vision for what Indian capital markets should be and do. It is silent on recognizing liquidity as a public good, on the legitimate role of speculation in price discovery, and on derivatives as essential tools for risk transfer and capital formation. Innovation is treated as something to be “accommodated” rather than actively fostered as a regulatory objective. This lack of a North Star means the Code is better at administering the market we have than designing the market we need for the future.

5. Insufficient Buffers Against Political Influence: The Code largely replicates the existing governance framework between SEBI and the Central Government, retaining key executive powers over appointments, terminations, and even the issuance of binding directions. In an era where deep and influential capital markets are gaining “political salience,” the failure to erect stronger statutory firewalls between the regulator and the political executive is a notable omission. It leaves open the door for long-term institutional risks to SEBI’s operational autonomy, a concern the Code does little to assuage.

Conclusion: A Foundation, Not a Fountainhead

The Securities Markets Code, 2025, is a law of its time—cautious, incremental, and administrative. As Ravi Varanasi concludes, it is “a law well suited to administering existing markets more coherently rather than shaping future markets in new ways.” Its success in consolidation and procedural refinement should not be understated; it creates a cleaner, more certain, and more stable platform from which to operate.

However, its conservatism means that the truly hard questions of market design—how to foster competition among exchanges and clearinghouses, how to regulate vertically integrated financial behemoths, how to empower sophisticated investors while robustly protecting retail participants, and how to champion innovation while ensuring systemic safety—remain unanswered, left to future regulatory discretion. The Code is a necessary and largely successful step in India’s financial regulatory evolution. But it is a step that consolidates the past more boldly than it charts the future. The task of transformative, visionary market design now falls to the regulators who must flesh out this framework and to future legislatures that may one day find the courage for a more radical rewrite.

Q&A on the Securities Markets Code, 2025

Q1: What was the biggest problem with the old securities laws that the 2025 Code fixes?

A1: The biggest problem was statutory fragmentation and complexity. The regulatory landscape was split across three main laws: the SEBI Act (1992), the Securities Contracts Regulation Act (1956), and the Depositories Act (1996). This created overlapping jurisdictions, interpretive ambiguities, and legal seams that often led to prolonged litigation as courts struggled to reconcile these separate statutes. The Code’s primary achievement is consolidation—merging these and other related provisions into a single, unified legislative framework. This simplifies the law, enhances legal certainty for market participants, streamlines enforcement for the regulator, and should reduce avoidable legal disputes.

Q2: How does the Code improve the fairness and effectiveness of SEBI’s enforcement process?

A2: The Code introduces several critical due process safeguards:

• Separation of Powers: It statutorily separates the functions of investigation, adjudication (passing orders), and settlement. Importantly, it excludes the adjudicating officer from being involved in the investigation or settlement stages, preventing bias and ensuring a fair hearing.

• Timelines: It prescribes timelines for completing investigations and passing interim orders, addressing the problem of inordinate delays that can leave cases in limbo and prejudice both the accused and investors.

• Principle of Proportionality: Penalties and sanctions must now be proportional to the violation, considering factors like intent, harm caused, gains made, and cooperation shown. This moves enforcement away from arbitrary, maximum penalties toward a more just and nuanced system aligned with global best practices.

Q3: Why is the Code’s approach to regulating contracts like derivatives considered “conservative” or a missed opportunity?

A3: The Code retains the outdated, restrictive framework of the 1956 SCRA. It continues to define and regulate contracts based on the rigid legal categories of “spot,” “forward,” and “derivative.” This is a 20th-century approach ill-suited for modern, complex financial engineering. A transformative code would have adopted a principles-based and objectives-based approach. Instead of asking “Is this a derivative?”, regulation should be anchored on principles like: Is the contract traded on a transparent platform? Is it centrally cleared to manage counterparty risk? Does it serve a genuine economic purpose for risk transfer or price discovery? By clinging to the old prohibitive framework, the Code may inadvertently stifle financial innovation and the development of new products that could benefit the Indian economy.

Q4: What is the concern regarding “excessive delegation” in the Code?

A4: While the Code sets the broad framework, it delegates an extraordinary amount of detail and substantive policy-making to subordinate legislation—namely, future regulations and bye-laws to be issued by SEBI and the government. This means crucial decisions about market structure, competition policy, investor classification, and the precise rules for new products are left to regulatory discretion, not debated and codified by Parliament. This creates uncertainty for market participants, who must wait for regulatory clarifications, and concentrates significant power in the hands of the executive branch, potentially reducing transparency and legislative oversight over the shape of India’s capital markets.

Q5: The Code strengthens “settlement finality.” Why is this so important for financial stability?

A5: Settlement finality is the legal principle that once a trade is cleared and settled through a central counterparty (CCP) like a clearing corporation, that settlement is irrevocable and unconditional, even if one of the parties goes bankrupt later. The Code provides ironclad statutory backing for this principle and for the netting of obligations (offsetting what you owe against what you are owed). This is the bedrock of systemic resilience. It ensures that the failure of one major market participant (like a large broker) does not trigger a domino effect of failures throughout the system, as counterparties can be confident their settled trades are safe. By eliminating this “residual insolvency risk,” the Code protects the entire financial system, encourages participation, and is essential as Indian markets grow larger and more interconnected with global finance.