Market regulator Securities and Exchange Board of India (SEBI) will soon issue guidelines for the responsible use of artificial intelligence (AI) and machine learning (ML) in the securities market, with proposed safeguards including 'kill switch' mechanisms, human oversight and tighter data controls, says chairman Tuhin Kanta Pandey.
Addressing the 23rd FICCI Annual Capital Markets Conference in Mumbai, Mr Pandey said every SEBI-regulated entity would remain accountable for AI or ML tools used in their operations, irrespective of whether the technology is developed internally or procured from an external provider.
"Every SEBI-regulated entity remains fully responsible for any AI or machine-learning tool it uses," Mr Pandey said, adding that this responsibility would extend to the privacy, security and integrity of investor data as well as the outputs produced by such systems.
The SEBI chief said AI could strengthen market surveillance, risk assessment, fraud detection and investor services, but its growing use also brought risks relating to opacity, bias, cybersecurity, data protection and accountability.
‘Humans in the Loop’ To Be Part of AI Framework
Mr Pandey said SEBI's forthcoming AI/ML framework would adopt a tiered regulatory approach, with the emphasis on clearly assigning responsibility and establishing governance controls.
The proposed framework will require regulated entities to maintain kill-switch mechanisms and 'humans in the loop' controls, along with appropriate safeguards around data.
The objective, he said, is to allow financial-market participants to benefit from technological innovation without weakening investor protection.
"Every SEBI-regulated entity remains fully responsible for any AI or machine-learning tool it uses, whether developed in-house or procured from a third party," Mr Pandey said.
The regulator has already begun deploying AI for supervisory purposes. Through Project SUDARSAN and R(AI)DAR, SEBI has used AI to identify suspicious financial promotions and potentially misleading advertisements.
SEBI has also created a 'cyber suraksha' portal to improve information-sharing and strengthen cyber resilience across the market ecosystem.
SEBI Examining IT Resilience Index
Mr Pandey also said the market regulator is considering an IT resilience index for market infrastructure institutions (MIIs). The proposed index would provide an objective mechanism to assess the resilience of critical technology systems supporting the securities market.
"We are examining an IT Resilience Index for MIIs to provide an objective framework for assessing the resilience of critical systems," he said.
SEBI is also working with market infrastructure institutions to expand application programming interface (API)-based connectivity and interoperability.
The focus on technology resilience comes as trading, clearing, settlement and investor services become increasingly dependent on digital infrastructure.
Mr Pandey said India's capital markets have moved beyond their traditional role as an indicator of economic activity and have increasingly become a source of financing and economic growth.
"India's capital markets have transformed and are no longer merely a barometer of economic activity. They are an important driver of it," he said.
The scale of the market has expanded significantly. According to Mr Pandey, equity issuances crossed ₹4.5tn (trillion) in FY25-26, including about Rs1.9tn raised through 366 initial public offerings (IPOs).
In the first four months of FY26-27, through July, companies had raised about ₹260bn (billion) through 79 IPOs, with potentially around Rs2tn more that could be raised going forward.
Corporate bond issuances exceeded ₹9tn in FY25-26, while another ₹2.7tn had been raised in the first four months of the current financial year.
Alternative investment fund (AIF) investments had reached about Rs7tn by the end of July 2026, Mr Pandey said.
Market-capitalisation stood at around 132% of GDP, while India had about 149mn (million) unique investors.
Household Financialisation Gathers Pace
The SEBI chairman said the transformation is also visible in the way households were allocating their savings.
Mutual fund assets had reached around ₹86tn, with assets through systematic investment plans accounting for more than one-fifth of the industry's assets.
Mr Pandey said mutual funds and systematic investment plans (SIPs) had brought more households into market-linked investments and helped strengthen domestic market resilience. However, he stressed that there was substantial scope to broaden participation across geographies, demographic groups and investor segments.
"Financialisation must become broader and deeper," he said, adding, SEBI's focus, therefore, would be on expanding participation while ensuring that a wider range of regulated products and appropriate investor safeguards are available.
New Investment Frontiers Emerging
Mr Pandey said India's expanding economy would generate demand for capital across infrastructure, technology, advanced manufacturing, energy transition, data centres and new-age enterprises, particularly those operating in AI.
He said the market would need to support both hard infrastructure and AI applications.
Efficient public markets, deeper corporate bond markets, REITs, InvITs, AIFs and new fund-management products would all have a role in meeting these financing requirements.
"The central question is: how do we build markets that are deeper and more innovative, yet fairer, safer and more trusted?" Mr Pandey said.
SEBI Pushes ‘Optimum Regulation’
Mr Pandey said SEBI's regulatory philosophy was based on 'optimum regulation' — proportionate and forward-looking rules that facilitate market development while preserving investor protection and market integrity.
He highlighted several recent and proposed measures across different segments of the capital market.
In primary markets, SEBI has brought back open-market buy-backs through stock exchanges, simplified the process and made the appointment of a merchant banker optional.
To facilitate greater retail participation in IPOs, a concise and standardised abridged prospectus will be available at the draft red herring prospectus stage, with simpler disclosures for investors.
For AIFs, the GARUDA framework has reduced the launch timeline for regular schemes from 30 days to 10 working days. Funds restricted to accredited investors and angel funds can launch immediately after registration or filing, subject to the applicable framework.
Easier Route for Foreign Investors
SEBI is also seeking to make India's markets more accessible to foreign investors. Under SWAGAT-FI, a simplified investment route has been introduced for objectively identified low-risk foreign portfolio investors.
SEBI has also permitted netting of funds for FPI transactions to improve operational efficiency and reduce funding costs.
For non-resident Indians (NRIs), the re-KYC process has been eased by removing the requirement for physical presence in India.
Looking ahead, SEBI is considering simpler digital onboarding for persons resident outside India without requiring them to be physically present in India.
It is also examining wider FPI participation in non-agricultural commodity derivatives, subject to safeguards.
Bond, REIT and InvIT Markets in Focus
Mr Pandey said SEBI is also working to deepen corporate bond markets and expand the REIT and InvIT ecosystem.
Debt issuers have been allowed to provide incentives in public issues to certain categories of investors. Online Bond Platform Providers have also been permitted to offer products regulated by the International Financial Services Centres Authority as well as tax-saving bonds issued by government-backed entities.
Several measures have been taken to expand the REIT and InvIT market, including reclassifying REITs as equity and broadening the scope of strategic investors.
SEBI has also permitted privately listed InvITs to invest in greenfield projects.
Further proposals include allowing Depository Receipts against units of REITs and publicly listed InvITs to broaden access to overseas capital.
Credit Risk-o-meter Proposed for Retail Investors
In the debt market, SEBI is reviewing the securities lending and borrowing mechanism and short-selling framework to deepen cash markets.
Other proposals include greater flexibility in International Securities Identification Numbers, support for ESG debt and exploration of corporate-bond tokenisation.
A proposed 'credit risk-o-meter' would help retail investors understand the risk associated with debt investments more easily.
For REITs and InvITs, SEBI is examining greater flexibility for investment in under-construction projects, subject to prudential limits.
Market Supervision To Become More Risk-based
Mr Pandey said SEBI's inspection approach had become increasingly risk-based. Routine and repetitive inspections of compliant entities are being reduced, while supervisory resources are being directed towards entities with higher risk scores, alerts or market intelligence.
He said the approach was aimed at reducing unnecessary regulatory friction while concentrating oversight where risks were greater.
Mr Pandey said SEBI was reviewing several other parts of the regulatory framework.
According to him, the settlement regulations are undergoing a comprehensive overhaul, with the proposed framework intended to be more rational, simpler, faster and less discretionary. The LODR and delisting frameworks are also under review.
SEBI is examining changes to the SME IPO framework to make capital raising easier for genuine small and medium enterprises while maintaining investor protection and market integrity.
The regulator is also working on a proposed common advertisement code that would establish common standards on fairness, disclosure and accountability for regulated entities in an environment increasingly dominated by social media and digital distribution, the SEBI chief said.
Mr Pandey also called on industry associations to help expand India's listed corporate base.
He said industry bodies, with their networks across the country, could identify high-potential enterprises in manufacturing, energy, IT, logistics and other sectors that were ready to access capital markets.
He urged associations to adopt a cluster-based outreach model, identify emerging companies, educate them about the benefits and responsibilities of listing and help them understand the routes available to raise capital. SEBI, he said, would support such initiatives.
Mr Pandey said India's capital markets were entering a new phase after building institutions and achieving scale and the next challenge is to convert that scale into greater depth, resilience and opportunity.
He said AI, financialisation and new investment frontiers should be viewed as interconnected developments that could make markets more efficient, widen participation and connect capital with new businesses and assets.
But he stressed that technological innovation and financial expansion would ultimately depend on maintaining investor confidence. "All of this rests on one foundation — trust," Mr Pandey said.
He said SEBI's responsibility is to ensure that India's capital markets remained an open, efficient, innovative and trusted gateway to the country's future.
