Securities Market Code: Consolidation, principled regulation-making, and decriminalisation
– Payal Agarwal, Partner | Vinod Kothari & Company | corplaw@vinodkothari.com
Year 2025 will go down in the history of independent India as the year of the most brisk legislative activity – mostly by way of consolidation of some of the major laws. Income Tax Act, labour laws, securities markets, IBC, RBI Regulations etc – everywhere, we find the lawmakers have been quite busy themselves, of course making the subjects and companies even busier. The Securities Market Code (SMC) has been introduced in the Lok Sabha, pursuant to the announcement in the Union Budget 21-22. Divided into a total of 18 chapters, the SMC seeks to consolidate and repeal the following:
- SEBI Act, 1992,
- Depositories Act, 1996, and
- Securities Contracts (Regulation) Act, 1956
The Code reflects a structural consolidation exercise, however, also with an underpinning attempt to make rule making more practical and principled, providing for investor protection by reintroducing ombudsman, providing legal sanctity to inter-regulatory coordination, covering complex securities transactions, etc. Further, the gazette notifications issued in relation to the aforesaid Acts are also proposed to be made a part of the Code.
Major proposals
- Providing timelines & limitation period for investigations and validity of interim orders, with scope of extension in some cases
- Classification between fraudulent/ unfair practices and market abuse, towards better clarity with powers to order cease and desist, authorisation for seizure of books etc. in case of market abuse
- Strengthening powers and functions of SEBI by enabling power to issue subsidiary instructions, undertaking periodic research and regulatory impact assessment studies etc.
- Issue of new regulations in relation to SEBI Ombudsperson, restitution to persons suffering losses on account of contravention etc.
- Introduction of new terms such as – market participants (issuers and investors), Securities Market Service Providers (Intermediary + MII + SRO) etc.
- Clarity in the scope of securities and recognition to “other regulated instruments”
- Clarifications in relation to scope of investment vehicles, title over securities held with depository etc.
Time-bound investigations and interim orders
- Limitation period for investigation: eight years from the date of default or contravention
- Extension permitted in case of matters referred by Investigating Officer or matters having systemic impact on the securities market [Clause 16]
- Investigation to be completed within 180 days
- In case of delay, status to be provided along with the reasons for delay in writing, and extension to be sought from a Whole-time Member [Clause 13]
- Interim orders to be valid for upto 180 days
- Extension may be granted for upto 2 years pending adjudication/ completion of inspection/ investigation [Clause 27]
Adjudication of penalties
- Maximum penalty to be linked with whether or not the default results in unlawful gain or losses to the investors or other persons, and whether such gain or loss is quantifiable
- Decriminalisation of offences, provisions in relation to fines limited to offences such as market abuse, failure of compliance with orders of SEBI etc.
- Additional factors to be considered for adjudication of penalty incorporated based on judicial precedents
Clarity in the scope of securities
- Securities to include notes or papers issued for the purpose of raising of capital, which are listed or proposed to be listed, other regulated instruments etc.
Classification between fraudulent/ unfair practices and market abuse
- To classify grave acts adversely affecting the integrity of securities market as “market abuse”
- Powers of SEBI to order cease and desist, authorisation for seizure of books etc. in case of market abuse
Re-introduction of SEBI Ombudsperson
- In case of non-redressal of grievances through GRM within specified period (180 days from receipt of grievance), may file a complaint with Ombudsperson within 30 days
- Manner to be specified through regulations [Clause 73]
- was repealed pursuant to SEBI (Ombudsperson) (Repeal) Regulations, 2023
Introduction of new terms
- Market participant – a person or its agent participating in the securities markets as an issuer or an investor; SEBI may issue instructions, call for information, etc from market participants
- Securities market service provider – Intermediary + Market Infrastructure Intermediary (stock exchange, depository & clearing corporation) + SRO.
- Obligations of SMSP given under Clause 35 – includes fair disclosure of information, investment of money collected by it in the manner as specified, furnishing information etc.
- To be specified by the regulations
- Obligations of SMSP given under Clause 35 – includes fair disclosure of information, investment of money collected by it in the manner as specified, furnishing information etc.
- Subsidiary instructions
- Power to issue to be with Chairperson along with WTM or by two WTMs of Board
- To clarify ambiguity or laying down procedural requirements
- Contravention to be considered as contravention of the primary regulations
- Power to issue to be with Chairperson along with WTM or by two WTMs of Board
Clarifications proposed
- Records of depository to act as conclusive proof of title over security [Clause 58(2)]
- Issuance and holding of securities in dematerialised form only [Clause 55(2) & (3)]
- Option with the holder for holding in physical form has been omitted
- Right to be consulted or to give directions not a safeguard from being considered as investment scheme [Clause 32]
- This is in line with the definition of investment schemes in other countries – UK, Hong Kong, etc. See an article on Law relating to collective investment schemes on shared ownership of real assets
Dear Mr. Agrawal,
Your query touches upon one of the m
ost consequential interpretive tensions in the Securities Markets Code (SMC), 2025, and I think it merits a structured response for the benefit of fellow readers.
The core of your concern is well-founded: Clause 2(1)(zi) of the SMC has significantly expanded the definition of ‘securities’ to now include rights and interests arising from shareholders’ agreements, joint venture agreements, tag-along/drag-along rights in PE deals, ESOPs, sweat equity, convertible instruments, and rights of renunciation in rights issues. This is a material departure from the narrower definition under Section 2(h) of SCRA, 1956, which the SMC seeks to replace.
On your specific sub-questions:
A) Impact under Companies Act, 2013:
Section 2(81) of CA 2013 defines ‘securities’ by reference to the SCRA definition. Since SMC will repeal SCRA, the cross-reference in CA 2013 will need a consequential amendment or clarification — otherwise a definitional vacuum arises for unlisted companies. Rules under CA 2013 governing issue and transfer of securities of private and unlisted public companies (e.g., Companies (Share Capital and Debentures) Rules, 2014; PAS-4 framework for private placements) will need realignment. If the expanded SMC definition is read into CA 2013 by operation of law, instruments like tag-along rights under a SHA or ESOP schemes could technically become ‘securities’ for the purposes of CA 2013 as well — significantly widening the compliance net for private companies.
B) Applicability of SMC provisions to unlisted companies:
You are correct that Clause 2(1)(t) defines ‘issuer’ in a manner that appears to limit the full issuer-focused compliance framework to listed and ‘proposed to be listed’ entities. However, the following provisions of the SMC raise genuine questions of partial applicability to unlisted companies:
(a) Investor Protection & Grievance Redressal: SEBI has been empowered to direct ‘service providers’ and ‘issuers’ to establish grievance mechanisms. The term ‘issuer’ in the grievance context may not be restricted to listed companies, particularly if debt instruments of unlisted companies are held by public investors.
(b) Investor Charter (Clause 71): This is framed broadly and could apply to any entity dealing with investors. It is unclear whether SEBI intends to enforce this only against listed entities or also against unlisted companies that have issued securities to a wide set of investors.
(c) Ombudsperson (Clauses 73–78): The Ombudsperson mechanism is triggered when a grievance remains unresolved for 180 days through internal mechanisms. Since unlisted companies issuing NCDs or bonds to institutional investors also have ‘investors’ who could approach the Ombudsperson, this provision may have a wider reach than the issuer definition suggests.
(d) Fraudulent & Unfair Trade Practices (Chapter XII): This chapter is arguably the broadest in its reach. The FUTP provisions under SEBI (PFUTP) Regulations have historically been applied not just to listed company dealings, but to any person dealing in ‘securities’ — and with the expanded definition under Clause 2(1)(zi), private company share transactions (especially those involving SHAs and PE rights) could now be scrutinised under Chapter XII.
(e) Dematerialisation (Clauses 55–63): This is an area of direct relevance to unlisted companies. Even under existing MCA rules, unlisted public companies are mandatorily required to dematerialise their securities. Clauses 55–63 of SMC regulate dematerialisation and depositories. The interaction between SEBI’s powers under these clauses and MCA’s existing rules for unlisted public companies will need to be harmonised, especially for instruments newly brought under the definition of ‘securities’.
(f) Penalties (Clauses 94–110): Since SEBI’s penalty jurisdiction under these clauses is linked to contraventions of the Code, and the Code’s definition of ‘securities’ now captures a wider range of instruments, any fraud or unfair practice involving these instruments — even in a private company context — could attract SEBI penalties, regardless of listing status.
Overall Take:
The definitional expansion in Clause 2(1)(zi) creates a structural ambiguity: the SMC appears to limit the full compliance framework to listed entities via Clause 2(1)(t), yet the expanded definition of ‘securities’ — if read consistently across all chapters — pulls private and unlisted company transactions into SEBI’s regulatory perimeter through the back door, particularly for FUTP, dematerialisation, and investor grievance provisions. Without an explicit carve-out or savings clause protecting purely private transactions, litigation on this jurisdictional question appears likely.
A clarificatory amendment during the Parliamentary Standing Committee review, or a SEBI circular post-enactment defining the scope of each provision vis-à-vis unlisted companies, would be the most practical resolution.
Thank you to Payal for the excellent foundational analysis, and to Mr. Agrawal for raising such a precise and forward-looking question.
Warm regards,
Sidhartha Tyagi
Dear Payalji,
Glad to see your prompt analysis of new SMC Bill 2025 which is the first one as usual.
The question that arises here is whether SEBI will have its jurisdiction over private companies also under the Bill and they will also come under its radar?
Presently Sec.24 of CA 2013 provides for SEBI jurisdiction in case of listed and to be listed companies. Applicability of SEBI LODR is also on similar lines.
However, Clause 2(1)(zi) has substantially increased definition of securities. It not only includes several new instruments, but even rights or interest in securities has been included in the definition. Rights arising under the following may now be covered under the definition of ‘securities’:
Shareholders Agreements,
Joint Venture Agreements
Private equity deals (e.g. tag-along rights, drag-along rights, preferential rights etc.)
ESOPs
Sweat equity
Convertible instruments
Right of renunciation in case of rights issue etc.
What will be its impact both under CA 2013 [Ref.Sec.2(81)] as well as under the Bill?
A) CA 2013:
How it will affect issue and transfer of securities of unlisted companies? Relevant Rules might require alignment with SMC Bill.
B) SMC Bill 2025:
Provisions applicable to issuer of securities may not apply to unlisted companies in view of Clause 2(1)(t). However, to what extent following provisions of the Bill will apply to unlisted companies?
a) Investor protection and grievance redressal
b) Investor Charter (Clause 71)
c) Ombudsperson (Clauses 73-78)
d) Fraudulent & Unfair Trade Practices (Ch.XII)
e) Dematerialisation (Clauses 55-63)
f) Penalties (Clauses 94-110)
You may like to analyse and cover the same in your next article for the benefit of your readers.
Regards,
PC Agrawal
Chh. Sambhajinagar
9371109336