SEBI Proposes AI/ML Governance Framework for Securities Markets

Consultation Paper; dated: 20.06.2025

The Securities and Exchange Board of India (SEBI) has issued a consultation paper proposing a regulatory framework for the responsible usage of Artificial Intelligence (AI) and Machine Learning (ML) tools in the Indian securities markets. This initiative reflects SEBI’s proactive approach in addressing the ethical and operational challenges posed by emerging technologies.

1. Purpose and Scope of the Paper

The consultation paper aims to:

• Ensure safe and accountable deployment of AI/ML models in financial services;
• Promote responsible innovation while safeguarding market integrity and investor interest;
• Introduce a structured framework that governs the use, disclosure, and audit of AI/ML systems across key market functions.

2. Broad Principles for Responsible AI Usage

SEBI has outlined several core principles that should govern the deployment of AI/ML tools by market participants:

1. Equality – Ensure non-discriminatory outcomes and fair access to financial services.
2. Accountability – Assign clear responsibility for decisions and outcomes generated by AI/ML systems.
3. Transparency – Maintain explainability of AI models and ensure auditability of their decisions.
4. Safety and Reliability – Ensure systems are robust, tested, and secure against malfunction and misuse.

3. Disclosure Requirements for Market Participants

To enhance transparency and oversight, SEBI has proposed that all market intermediaries and participants disclose their use of AI/ML tools in the following areas:

• Algorithmic Trading
• Asset Management
• Portfolio Management
• Advisory and Research Services

Participants would need to:

• File periodic disclosure reports with SEBI or designated regulatory bodies;
• Maintain detailed records of AI model development, testing, deployment, and monitoring;
• Implement internal risk controls and governance mechanisms for AI/ML use.

4. Implications for Market Intermediaries

• Firms leveraging AI must enhance compliance and model governance frameworks.
• There will be an increased focus on model validation, ethical considerations, and risk assessments.
• The framework is expected to create investor trust and promote market stability while allowing innovation.

5. Conclusion

SEBI’s consultation paper marks a significant regulatory step towards responsible adoption of AI/ML in the Indian securities markets. Stakeholders are encouraged to provide feedback and suggestions, which will be considered before finalizing the guidelines. The move aligns India’s regulatory landscape with global best practices in AI governance in financial markets.

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