The guidelines detailed in the consultation paper entitled “Guidelines for Responsible Use of AI/ML in the Indian Securities Market” were shaped by a Sebi-appointed working group consisting of experts who reviewed both Indian and international practices.
“AI and ML have become essential to market functioning, but their unidentified use of them can pose systematic risk,” the paper states, adding that the proposed framework is trying to ensure that “innovation does not undermine investor trust or market integrity.”
What Sebi proposes
The five-point regulatory framework focuses on:
Entities using AI/ML must establish dedicated internal teams with technical knowledge to oversee and audit the model. Senior managers are directly responsible for the entire AI lifecycle, from development to third-party monitoring.
AI/ML systems must make clear disclosures regarding the purpose of the model, associated risks, accuracy and limitations when they directly affect investors, such as advisory services or automated trading. Disclosures should use simple investor-friendly language.
Sebi hopes that companies will conduct thorough model testing in a simulated environment before real-world applications. Additionally, all model documents and logs must be kept for at least 5 years to ensure traceability.
To prevent discrimination and decision distortion, companies recommend using diverse, high-quality datasets. Staff should be trained to identify and correct biases in the algorithm output.
The proposed framework mandates strict data governance protocols focusing on robust cybersecurity and user data privacy. Companies need to ensure compliance with general data protection laws.
Regulators have revealed that AI/ML models used for internal surveillance or analysis face lighter scrutiny, but those that affect investor decisions are subject to stricter regulations.
“Our aim is not to curb innovation, but to ensure that technologies introduced in the market will undermine investors' safety and market stability,” said a SEBI official who is familiar with the development.
Why is it important?
AI and ML are already used for features ranging from real-time fraud detection to automated investment advisory. In 2024 alone, the number of brokerages using AI-powered customer service and forecast market tools increased by more than 25%, according to an internal SEBI survey. However, concerns have increased about the lack of accountability and transparency in model usage, especially when algorithms behave unpredictably.
What will happen next
Public comments will be accepted until July 11th. After assessing stakeholder feedback, SEBI is expected to complete its regulatory framework later this year, making India one of the first major emerging markets to formally regulate the use of AI/ML in capital markets.
Market participants and industry associations such as the Mutual Funds Association of India (AMFI) and the BSE Broker Forum are expected to submit their opinions in the coming weeks.
