The Securities and Exchange Board of India (Sebi) has unveiled comprehensive proposals to overhaul trading rules for stock exchanges through a consultation paper released on Friday. The market regulator seeks to merge existing trading norms into a single consolidated circular, marking a significant step toward regulatory simplification and enhanced market efficiency.

Key Regulatory Changes Proposed

The consultation paper outlines substantial operational and regulatory modifications across multiple areas. The most significant proposal involves raising the minimum net-worth requirement for brokers offering the margin trading facility (MTF) from the current threshold to a higher benchmark.

Additional proposals include aligning timelines for submission of net-worth statements and auditor certificates, removing market-making provisions no longer in use, and bringing liquidity enhancement schemes under a single, principle-based framework. These schemes are designed to improve liquidity and price discovery in thinly traded securities by ensuring continuous buy-sell quotes and reducing sharp price swings.

Rationale Behind Regulatory Overhaul

Many existing provisions were created for a different market structure and have become redundant over time. Several rules were overtaken by newer frameworks, while others added compliance costs without significantly improving investor protection. Sebi stated the clean-up aligns with its broader push to improve ease of doing business while preserving market integrity.

The initiative follows Finance Minister Nirmala Sitharaman's emphasis in the FY24 Budget on simplifying compliance through stakeholder consultation. This consultation paper represents the second in a series, following an earlier October paper outlining ease-of-doing-business measures for stock exchange administration.

Enhanced Exchange Authority

Sebi proposes moving routine supervision, monitoring and enforcement closer to exchanges, positioning them as the first line of regulation for market participants. Under the new framework, exchanges would gain several enhanced powers:

• Setting and revising net-worth norms for MTF brokers
• Deciding penalties for market-making violations through member committees
• Handling surveillance alerts from pre-open call auctions without sending end-of-day reports to Sebi
• Examining alerts and levying penalties at their disposal

According to KC Jacob, partner at Economic Laws Practice, "Sebi is increasingly focusing on regulatory policymaking, while delegating surveillance responsibilities to stock exchanges. This division of roles enables quicker detection of anomalies and more efficient resolution of potential violations."

Investor Protection Strengthening

The proposed net-worth increase for MTF brokers ensures only financially sound intermediaries can extend leverage to investors, reducing broker default risks. Raj Shah, co-founder and executive director at EPP Securities, noted that "the move is likely to strengthen market integrity by ensuring that only well-capitalized intermediaries extend leverage, thereby providing additional safeguards for retail investors."

Sebi has reiterated the importance of market making for SME-listed companies, where liquidity remains limited due to smaller free floats and lower trading volumes. Mandatory market making helps ensure continuous price discovery, orderly trading, and safeguards retail investors from excessive volatility or manipulation while enhancing SME platform credibility and fund-raising potential.

Additional Regulatory Unification

The regulator seeks to unify rules across equity cash, equity derivatives and commodity derivatives, particularly for market-making and liquidity-enhancement schemes. One proposal aims to replace multiple reviews and approvals with a single half-yearly board review of such schemes.

Sebi has suggested giving exchanges venturing into new market segments greater flexibility to use incentives for building liquidity. In commodity markets, incentivizing farmers and farmer producer organizations to participate in options on futures could help widen market participation.

Public comments on the consultation paper remain open until January 30, 2026, allowing market participants to provide feedback on the proposed changes.

Securities and Exchange Board of India (SEBI) chair Tuhin Kanta Pandey announced comprehensive regulatory initiatives aimed at making India's capital markets more accessible and investor-friendly at the 15th ANMI International Capital Market Convention. The regulator is focusing on streamlined processes, enhanced cybersecurity, and market development to strengthen the financial ecosystem.

Simplified Investor Onboarding Initiatives

SEBI is prioritizing simplified investor onboarding processes, particularly targeting retail clients and Non-Resident Indians (NRIs). The regulator aims to reduce repeat documentation requirements and streamline re-KYC processes by allowing Key Repository Agencies (KRAs) to retain only updated records. This initiative is designed to eliminate redundant paperwork and create a more efficient onboarding experience for investors.

Public consultations on these proposals are expected to commence shortly, allowing stakeholders to provide input on the proposed changes.

Penalty Rationalization and Compliance Framework

The regulator will introduce Phase II of its penalty rationalization initiative, expanding the framework to include newer obligations such as cyber incident reporting and Qualified Stock Broker (QSB) requirements. This move aims to balance compliance enforcement with operational flexibility for market participants.

Depository participant regulations are also under comprehensive review to align with evolving market needs and ensure regulatory frameworks remain relevant to current market conditions.

Cybersecurity and Investor Protection

Pandey emphasized the critical importance of cybersecurity in protecting investors from emerging threats including hacking and unauthorized access. The chairman highlighted the industry's responsibility to strengthen safeguards for client trading accounts and the overall trading environment to ensure long-term market participation.

"The industry must strengthen safeguards to secure client trading accounts and the overall trading environment for long-term participation," Pandey stated during the convention.

Market Development Priorities

SEBI's market development agenda focuses on deepening multiple segments of India's financial markets. The regulator is implementing regulatory reforms and outreach programs across various market segments to enhance liquidity and participation.

Securities Markets Code 2025

Pandey highlighted the Securities Markets Code 2025, currently before Parliament, which seeks to consolidate three separate acts into a unified, principle-based framework. This legislative initiative represents a significant step toward regulatory simplification and modernization.

The chairman called for collaboration between regulators, market intermediaries, and investors to ensure smooth implementation while maintaining market integrity. "Growth has been remarkable, but sustainability will be driven by the convergence of technology, trade, and trust," Pandey noted, urging collective efforts to create a resilient, inclusive, and transparent market ecosystem.