Sebi Charts AI Rulebook For Stock Market! A Five-Point Framework to Govern Machine Learning Use in Securities

The Securities and Exchange Board of India (Sebi) has unveiled a draft framework to regulate the use of Artificial Intelligence (AI) and Machine Learning (ML) technologies across the securities market, citing the urgent need for responsible innovation. The move follows growing adoption of algorithmic models by stock exchanges, mutual funds, and brokerages. Sebi released a consultation paper on Friday inviting public feedback by 11 July 2025, outlining five guiding principles aimed at ensuring transparency, fairness, and investor protection.

The guidelines, detailed in the consultation paper titled ‘Guidelines for Responsible Usage of AI/ML in the Indian Securities Market’, were shaped by a Sebi-appointed working group comprising experts who reviewed both Indian and international practices.

“AI and ML are becoming integral to how markets function, but their unchecked use could pose systemic risks,” the paper notes, adding that the proposed framework seeks to ensure that “innovation does not compromise investor trust or market integrity.”

The five-point regulatory framework focuses on:

Model Governance

Entities using AI/ML must establish dedicated internal teams with technical knowledge to supervise and audit models. Senior management will be held directly responsible for the full AI lifecycle—from development to third-party oversight.

Mandatory Disclosures to Investors

If AI/ML systems directly impact investors—such as in advisory services or automated trading—then clear disclosures must be made regarding model purpose, associated risks, accuracy rates, and limitations. Disclosures must use simple, investor-friendly language.

Testing and Monitoring Protocols

Sebi wants firms to conduct thorough model testing in simulated environments before real-world application. Additionally, all model documentation and logs must be preserved for at least five years to ensure traceability.

Bias and Fairness

To prevent discrimination or skewed decision-making, firms are advised to use diverse, high-quality datasets. Staff must be trained to identify and correct biases in algorithmic outputs.

Data Privacy and Cybersecurity

The proposed framework mandates strict data governance protocols, with a focus on robust cybersecurity and user data privacy. Firms must ensure compliance with prevailing data protection laws.

The regulator has clarified that AI/ML models used for internal surveillance or analytics will face lighter scrutiny, while those influencing investor decisions will be subject to tighter regulation.

“Our objective is not to stifle innovation but to ensure that any technology introduced in the market does not compromise investor safety or market stability,” said a Sebi official familiar with the development.

AI and ML are already in use for functions ranging from real-time fraud detection to automated investment advisory. In 2024 alone, the number of brokerages using AI-powered customer services and predictive market tools grew by over 25 per cent, according to Sebi’s internal research. However, concerns have been mounting about the lack of accountability and transparency in model usage—especially when algorithms behave unpredictably.

Earlier, global regulators such as the US Securities and Exchange Commission (SEC) and the UK’s Financial Conduct Authority (FCA) introduced preliminary AI guidelines, with a focus on ethics and fairness. Sebi’s consultation paper draws heavily from those precedents while tailoring recommendations to India's unique investor landscape, which includes a large number of retail participants.

The new draft also complements other recent reforms, such as the easing of delisting norms for public sector undertakings (PSUs) and improved oversight of Initial Public Offerings (IPOs).

What Happens Next

Public comments will be accepted until 11 July. After evaluating stakeholder feedback, Sebi is expected to finalise the regulatory framework later this year, making India one of the first major emerging markets to formally regulate AI/ML usage in its capital markets.

Market participants and industry bodies like the Association of Mutual Funds in India (AMFI) and BSE Brokers Forum are expected to submit their views in the coming weeks.

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