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 
• 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 

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