The Securities Markets Code, 2025: Consolidation Without Transformation

One of the most ambitious legislative initiatives in India’s financial regulation history is the Securities Markets Code, 2025. The Code combines a disjointed legislative framework with a uniform legal framework that controls securities markets, aiming to streamline, update, and rationalise securities regulation. The Code is not a revolutionary market-design law, even though it is successful in lowering interpretation complexity and enhancing administrative coherence. It generally maintains the intellectual underpinnings of the previous regime rather than rethinking the goals, structure, and philosophy of securities regulation.

Background: Evolution of Securities Regulation in India

In reaction to market crises, liberalisation, and institutional expansion, India’s securities regulation structure gradually changed. The Capital Issues (Control) Act, 1947, which represented a command-and-control economic model, dominated capital markets until the 1990s. The Securities and Exchange Board of India (SEBI) was established under the SEBI Act, 1992, as a result of the move towards disclosure-based regulation and market monitoring brought about by economic liberalisation.

However, securities regulation continued to operate through three parallel statutes:

• The SEBI Act, 1992 (regulatory authority),
• The Securities Contracts (Regulation) Act, 1956 (market contracts and exchanges), and
• The Depositories Act, 1996 (settlement and dematerialisation).

Overlapping jurisdictions, unclear interpretations, and ineffective enforcement, especially in cross-statute litigation, were the outcomes of this fragmentation. Legal confusion increased because courts were frequently forced to reconcile clauses across statutes. In order to rectify these structural flaws and offer a logical legal framework in line with India’s more intricate capital markets, the Securities Markets Code, 2025 was developed.

Objectives and Core Structure of the Securities Markets Code, 2025

The Code’s main contribution is the consolidation of statutes. The Code greatly streamlines regulatory interpretation by creating a unified legal framework that governs intermediaries, market infrastructure organisations, issuers, securities contracts, settlement systems, enforcement mechanisms, adjudication, and appellate procedures.

Over time, this consolidation is expected to improve legal certainty and lessen the burden on courts to reconcile contradictory statutory requirements. This structural clarity is a significant development from a rule-of-law standpoint, especially in light of the growing intersections between securities enforcement, criminal prosecution, insolvency law, and constitutional concerns.

Functional Classification and Market Architecture

A notable conceptual improvement introduced by the Code is its functional classification of market actors. Instead of entity-centric silos, the Code categorises participants into:

• Market infrastructure institutions,
• Securities market service providers,
• Market participants, and
• Self-regulatory organisations (SROs).

Particularly important is the statutory recognition of SROs. It recognises how industry-led regulation can improve market discipline, professional standards, and compliance. This change brings Indian law closer to global regulatory frameworks that depend on monitored self-regulation, particularly in market sectors with rapid technological advancements.

Enforcement Architecture and Procedural Safeguards

By legally segregating inspection, inquiry, adjudication, settlement, and interim remedies, the Code brings significant procedural improvements. Long-standing concerns about role conflation and procedural bias are addressed by explicitly excluding adjudicating officials from the investigative and settlement phases.

Additionally, mandated timelines for interim orders and investigations are intended to reduce regulatory delays and improve the credibility of enforcement. The Code increases enforcement outcomes before appellate bodies, such as the Securities Appellate Tribunal and constitutional courts, and lessens legal uncertainty by codifying these protections.

Proportionality, Disgorgement, and Restitution

An important conceptual development is the explicit inclusion of proportionality. The length of the wrongdoing, gains or losses, investor harm, cooperation, and past conduct should all be taken into consideration when determining the appropriate penalties. This strategy addresses judicial criticism of disproportionate or arbitrary sanctions and brings Indian securities enforcement closer to global best practices.

The remedial goals of securities legislation are strengthened by the improved integration of disgorgement and restitution within the legal system. However, some parts of the settlement regime raise questions about openness, especially in light of the fact that settlement rulings are not subject to review and that there are no clear criteria for thorough justification or consistency standards.

Settlement Finality, Netting, and Systemic Stability

By giving clearing corporations’ interests top priority and giving settlement outcomes statutory certainty, the Code fortifies the legal underpinnings of settlement finality and netting. This is an important step towards improving systemic resilience and lowering residual insolvency risk, particularly as Indian markets become more integrated with international financial institutions.

From a macroprudential standpoint, these clauses bring Indian law into compliance with global financial stability principles, especially those supported by the Financial Stability Board and the Bank for International Settlements.

Governance of the Regulator and Executive Influence

The Code essentially maintains the current governance framework guiding the relationship between the Central government and the securities regulator, notwithstanding structural modifications. Important executive powers pertaining to immunity, appointment, firing, supersession, and binding directives are kept.

Although the SEBI Act had such provisions, their adoption in a consolidated statute calls for further consideration. The lack of more robust statutory safeguards between the executive and the regulator could create long-term institutional problems as markets become more complex and politically significant. Comparative experience indicates that market credibility depends on regulatory independence, especially when it comes to politically delicate enforcement operations.

Contract Regulation and Conservatism in Market Design

The Code continues to take a cautious stance on contract regulation. It maintains the conventional divisions of spot, forward, and derivative contracts rather than going beyond the Securities Contracts (Regulation) Act’s prohibition-based framework. First concepts, including openness, exchange trading, clearing, and risk management, are not re-anchored in regulation.

Because of this, the fundamental shortcomings of the previous system still exist, albeit in a more logical legal framework. The Code’s ability to adapt quickly to financial innovation and changing market instruments is hampered by this conservatism.

Delegation and Regulatory Discretion

The degree of delegation to rules, bylaws, and subordinate instruments is another structural flaw. The Code leaves numerous fundamental issues, market structure, competition, innovation, and investor classification largely to executive discretion, even though delegation is unavoidable in technical domains.

Legal predictability and democratic accountability are called into question by this. Because courts are required to examine regulatory decisions that lack explicit statutory guidance, an over-reliance on delegated law may also lead to more litigation.

Investor Protection and Paternalism

Through grievance redressal procedures, ombudsman systems, and sanctions, the Code places a strong focus on investor protection. It does not, however, provide much clarity on how protection fits with the capital markets’ innate tendency to take risks. There is no statutory distinction between investor groups, and protection is defined more as post-facto grievance processing than as proactive disclosure, market integrity, and informed participation.

This approach runs the risk of strengthening an unduly cautious, paternalistic regulatory position, which could limit market diversity and innovation.

Missed Opportunities and International Comparisons

The Code lacks a comprehensive first-principles view of securities markets, in contrast to international standards. Liquidity as a public good, speculation as essential to price discovery, and derivatives as instruments for risk transfer and capital formation are all explicitly recognised by jurisdictions including the US, the EU, and the UK.

The Code treats innovation as an accommodation rather than a regulatory goal and only indirectly addresses these concepts. Additionally, it is cautious when addressing discussions about global market structure, such as platform governance, vertical integration, and competition among trading venues.

Role of the Judiciary

Through interpretation, proportionality review, and procedural fairness, Indian courts have historically had a major influence on the development of securities law. The Code’s unification may lessen judicial interpretation duties, but it also gives courts more authority to examine regulatory independence, executive discretion, and settlement opacity.

The judiciary continues to be a vital check on overreach, especially when it comes to enforcement and settlement situations.

Conclusion

Instead of fundamentally altering future markets, the Securities Markets Code, 2025 is a law that is better suited to managing current markets more logically. It is successful in strengthening enforcement architecture, improving procedural clarity, and decreasing fragmentation as a consolidation exercise. However, it is still not a complete generational reform.

Instead of equipping Indian securities markets for the challenges of scale, complexity, and global integration, the Code runs the risk of solidifying current restrictions in the absence of a clearer normative vision, better institutional safeguards, and a more principled approach to market design and innovation.

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