Reform or Repackaging? Examining the procedural accountability and regulatory power under the Securities Markets Code,2025

I. Introduction

The Securities Markets Code,2025 marks a departure from scattered legislation to a unified legislation that would define the functioning of the Indian Capital Market. It is one of the most significant overhauls since the establishment of SEBI post series of stock markets scam in 1992.The Code consolidates the SEBI Act 1992, The Securities Contracts (Regulation) Act 1956 and the Depositories Act 1996 into a unified legislation that would govern the securities market and the investors.

The Code aims to move away from the system that had incentivized the SEBI for open ended investigation and opaque procedural gaps into a framework of timelines, limitation periods and checks and balances within the institution. SMC expands SEBI’s framework while imposing limits on the unlimited power that SEBI exercised in the context of interim orders, investigative timelines and limitation period.

II. Revisiting SEBI's Interim Power: A statutory recalibration under the SMC

SEBI had historically enjoyed wide discretion, with interim orders serving as one of the most formidable enforcement mechanisms. Section 27 of the Securities Markets Code 2025 had appeared to recalibrate this discretion by introducing temporal and procedural constraints. However, the absence of limitation period with the interim order, raises concerns over the longevity and proportionality of such powers. A major concern is about the so called “Quasi-Permanent Orders” that continue for longer periods without final decision. Section 27 allows interim orders to extend up to 24 months without clear limits on such extensions. This creates a risk of “extension problem”, where orders keep getting extended without strong justification.

The primary concern with the SEBI Act's framework was that interim orders often ceased to be truly “interim” in their nature. Instead, they gradually blurred into permanent solutions. Recently, cases like Kailash Auto Finance Limited and Polaris Software Lab Limited case witnessed actions such margin hikes, enhanced surveillance and trading restrictions imposed with the objective of stabilising the market. Section 27 marks a departure from this past practice. The regulator has introduced a definite lifespan of six months for interim orders. Although extension may be granted-up to a maximum period of two years, such extensions must be reviewed by a designated panel and supported by reasons recorded in writing. In Kranti Associates v. Masood Ahmed Khan, the court held that reasoned orders are essential to prevent “arbitrariness,” observing that reasons are the soul of justice.

Section 27 effectively upholds the principle of “non-arbitrariness” as enshrined in Article 14 of the Indian Constitution, which imposes the constitutional obligation of equality before law. Practically, in the NSE-Co location style investigations, SEBI can no longer sustain multi-year market bans through generic invocations of “market integrity.” Article 14 and Article 19(1)g of the Indian Constitution requires implementation of the proportionality dilemma; it must have a legitimate goal, rational nexus and the action must be balanced in its nature. SEBI has not considered less harsher options such as disclosure requirements or the positions limits. This raises questions about the constitutionality of such restrictions.

Another concern arises is the interaction with the Insolvency and Bankruptcy Code. If a company is under a moratorium under Section 14 of the Insolvency and Bankruptcy Code, then SEBI’s actions such as freezing assets may effectively undermine the insolvency process. SEBI’s actions can continue without being limited by the timelines in Section 27. Such differences can raise concerns about equal treatment under the Law. In practice, there should be enough flexibility in the Market based on the existing conditions and volatility. A strict six-month limit might create challenges: lifting restrictions early may harm the market and extending them repeatedly may lead to delays and challenges. However, the new timelines may test crisis management, as short-seller driven volatility often demands sustained regulatory actions beyond six months.

III. Section 26 and Settlement Regime: A regulatory win or a structural trap?

With the Securities Market Code, the Parliament has given “settlement” a clear statutory backbone. Section 26 of the proposed code formally recognises “settlement” as a core enforcement tool, requiring the applicants to make true and vital disclosures while still allowing them to exit proceedings without an admission of guilt. On paper, this appears to be win-win: SEBI gets faster and more efficient enforcement while the regulated entities benefit from the regulatory certainty.

This idea, however, isn’t new. SEBI’s consent mechanism has existed since 2012, In Manoj Gokulchand Seksaria v. State of Maharashtra, Court had stated that “We are of the firm view that only because money has been paid, an accused cannot be exonerated from the criminal liability”. The framework also mirrors the US SEC’s self-reporting model, where early cooperation can reduce penalties up to 50 %. Section 26 similarly seeks to encourage early, self and candid disclosure. However, when read alongside with Section 16 of the Code, which imposes an eight-year bar on initiating fresh investigations, a structural paradox emerges. Disclosures made during the settlement proceedings may later be weaponised in parallel fora, including proceedings before the NCLT, oppression and mismanagement petitions or shareholder actions.

More importantly, it may clash with the Article 20(3) and the principle of nemo debet esse judex in propria causa, which protects against the self-incrimination. Such disclosures can act like compelled statements and may later also be used in criminal cases under Prevention of Money Laundering Act and Section 447 of the Companies Act. This creates a situation whereby settlements can expose companies to future criminal liability.

The rapid growth of settlement as a form of dispute resolution highlights the risk and also their utility. In FY 2024-25, SEBI had received 703 settlement applications, an increase of 62% from the previous financial year. It also showcases the increasing reliance on settlement as an opportunity for the entities to avoid scrutiny and prolonged investigations. It creates the problem of “prisoners dilemma,” where full cooperation is discouraged. While in a settlement process, there needs to be full disclosure of the facts, these disclosures do not vanish after the conclusion of the investigation. It results in a chain of reaction: once disclosures are made, directors may be treated as “officers in default” under section 2(60) of the Companies Act, which can lead to charges of fraud under section 447 of the Companies Act. Further, they generate fresh vulnerabilities, as the same disclosures might be used to question the conduct of board, also exposing the directors to liability. In simple terms, trying to settle a case may attract personal legal liability for directors.

IV. Institutional Challenge: Is Section 80 the solution for the functional decline of the SAT

The Securities Market Code had introduced a different set of permutations and combinations required for the quorum owing to the institutional crisis in the Securities Appellate Tribunal. In 2024, SAT was compelled to operate with a single member for more than three months, resulting in repeated adjournments and forcing the litigants to approach High Courts. SEBI aims to prevent the institutional breakdown by liberalizing the minimum quorum threshold.

Under the existing framework, a judicial member may temporarily act as the presiding officer in event of a vacancy. The Securities Market code expands this arrangement by also addressing the absence of technical member, by permitting the tribunal to function with a reduced quorum consisting of the presidential officer and technical member. However, the draft code does not address the scenarios where only a technical member is available, leaving a residual gap in the quorum framework.

Section 80 seeks to curb procedural delays; it also raises concerns about the dilution of technical scrutiny. The need for calibrated adjudicatory design becomes important in the context of rapidly evolving modern securities markets. Complex corporate disputes involving derivative valuation, algorithmic trading and ESG-linked products demand specialised domain expertise alongside judicial oversight. In Union of India v. Madras Bar Associations, the Supreme court had invalidated tribunal structures that undermined their specialised characters, reaffirming that the specialised tribunals cannot be reduced to generalist fora in line with the principle of specialia generalibus derogant. Further, since SAT as a body adjudicates appeals mostly against the SEBI, the weakened quorum may lead to violation of the principle of nemo judex in causa sua. A reduced quorum may create a reasonable likelihood of institutional bias, particularly in complex cases like algorithmic trading where the regulator’s own framework is under scrutiny.

The calculus is very stark. While the statute might expediate the routine appeal, high stakes technical disputes do have the risk of losing credibility. In the absence of specialised technical members, SAT’s institutional autonomy might see a decline, resulting in it acting as a mere endorsing authority for SEBI’s regulatory friendly findings.

V. Conclusion

The new framework has also noticed different reactions from different stakeholders. Often described as “old wine in the new bottle”, the Government wishes for balance between flexibility and accountability in the functioning of Indian Capital Markets.

Interim orders are necessary for urgent market intervention under Section 27, but they often remain in force for disproportionately long periods. Introducing mandatory three-month reviews and reasoned extensions beyond six months as provided in Kranti Associates with provisions for automatic transition to full adjudication after twelve months would help in ensuring that interim measures are temporary. The requirement of confirmation within 21 days of a hearing would further balance the need for quick action following the principle of audi alteram partem.

Similar reforms are needed in the settlement framework under Section 26 to restore the incentives for cooperation. Introducing statutory “use immunity” to limit settlement disclosures to SEBI proceedings along with redacted disclosure formats for non-essential facts would avoid its weaponization in parallel forums, including NCLT and private litigation.

At the same time, mandatory disclosure of material facts and a posts settlement safe harbour review panel would safeguard regulatory accountability without undermining the efficient resolution of disputes. Finally, the lack of a consistent quorum under Section 80 reduces the effectiveness of the Securities Appellate Tribunal. Allowing two-member benches, enabling time bound appointments, and constituting hybrid benches with the access to expert help would advance the principle of specialisation highlighted by the decision in Madras Bar Association. Ultimately, a framework that balances swift enforcement with procedural safeguard is essential for sustaining investor confidence and ensuring long term market stability.

About the Author

Anmol Lall and Prince Raj are law students at the Gujarat National Law University, Gandhinagar.

Editors

Anjali Sharma, Senior Editor

Megha Chhari, Assistant Editor