Key Takeaways
- Short-selling reforms: SEBI is reviewing short-selling and securities lending and borrowing (SLB) rules to improve liquidity and price discovery.
- AI sandbox: The regulator is exploring a controlled testing environment for financial AI tools while finalizing responsible-AI guidelines.
- Corporate bond market: A new market-making framework is being developed to improve secondary-market trading and liquidity.
- Broker compliance: SEBI is considering requirements based on a broker’s scale, client exposure and dependence on technology.
- Faster settlement operations: Automated give-up and take-up facilities are set to expand to custodial clients, including portfolio management services and alternative investment funds.
- Cybersecurity: SEBI is emphasizing stronger safeguards as algorithmic trading and technology-driven investing become more widespread.
Why SEBI Is Reviewing India’s Market Rules
SEBI’s latest proposals address several challenges facing India’s capital markets: limited liquidity in some instruments, operational friction, changing technology and the need to maintain investor confidence.
Speaking at the 16th International Capital Market Convention of the Association of NSE Members of India (ANMI) in Mumbai on October 24, 2026, SEBI Chairman Tuhin Kanta Pandey outlined plans spanning trading rules, artificial intelligence, corporate bonds and broker compliance.
The regulator’s agenda combines two objectives. It wants to make markets more efficient and accessible while ensuring that new technologies and trading practices do not weaken investor protection. The proposals are at different stages, so their final scope and implementation timelines will depend on subsequent regulatory decisions.
SEBI Reviews Short-Selling and SLB Rules
Short selling allows investors to sell securities they do not currently own, typically with the intention of buying them back later. Investors may use it to express a negative view on a stock, hedge other investments or participate in price discovery.
Securities lending and borrowing provides a mechanism through which market participants can borrow securities, including to facilitate the settlement of short sales.
SEBI is reviewing both frameworks to improve liquidity and price discovery and strengthen connections between the cash and derivatives markets. The review could influence how securities are borrowed, how short positions are managed and how efficiently investors can trade across related market segments.
| Area | Purpose | Potential market impact |
|---|---|---|
| Short selling | Allows investors to sell securities they do not currently own | Can support price discovery and hedging |
| Securities lending and borrowing | Enables securities to be borrowed and returned under established arrangements | Can improve the availability of securities for trading |
| Cash and derivatives market linkages | Improves coordination between related trading mechanisms | Could reduce frictions across market segments |
SEBI already has a regulatory framework governing short selling and securities lending and borrowing. Its current review is intended to improve the existing arrangements rather than establish that all current restrictions will be removed.
For investors, the important question is whether any resulting changes improve trading efficiency while maintaining appropriate settlement, disclosure and risk-management safeguards.
Source: SEBI’s short-selling and securities lending framework.
SEBI Plans an AI Sandbox and Responsible-AI Guidelines
Artificial intelligence is becoming increasingly important in financial services, from automated trading and customer support to fraud detection, compliance monitoring and investment research.
SEBI is exploring an AI sandbox where companies and innovators could test new tools in a controlled environment. Such a facility could help participants evaluate new applications while giving the regulator a clearer view of their risks and performance.
A sandbox is not a blanket exemption from regulation. It generally provides a structured setting in which selected products or use cases can be tested under defined conditions and safeguards.
SEBI is also finalizing guidelines for the responsible use of AI in the securities market. According to Pandey, the proposed approach will include:
- Clear accountability: Organizations must establish responsibility for AI-assisted decisions and outcomes.
- Data controls: Sensitive financial and customer information must be handled appropriately.
- Kill switches: Systems should have mechanisms to stop operations when necessary.
- Human oversight: People must retain appropriate supervision over AI-driven processes.
The framework is expected to follow a tiered approach, with safeguards proportionate to the relevant risks and aligned with the International Organization of Securities Commissions’ AI toolkit.
For fintech companies and market intermediaries, this could help clarify expectations for deploying AI in regulated financial activities. However, the final guidelines will determine the precise obligations and implementation requirements.
New Corporate Bond Market-Making Framework
SEBI is also developing a market-making framework intended to increase secondary-market trading in corporate bonds.
A corporate bond is a debt instrument through which a company raises money from investors and agrees to repay the principal under specified terms. Unlike some highly liquid government securities, individual corporate bonds can be difficult to trade after issuance.
Market makers can help address this problem by quoting prices at which they are willing to buy and sell securities. Their participation can make it easier for investors to find counterparties without waiting for another investor to initiate a matching trade.
| Challenge in corporate bonds | How market-making could help |
|---|---|
| Limited trading activity | Encourages more regular two-way quotes |
| Difficulty finding buyers or sellers | Provides additional potential counterparties |
| Wide differences between buying and selling prices | May improve pricing and reduce trading friction |
| Limited exit opportunities | Could make it easier to sell holdings before maturity |
The framework is intended to strengthen secondary-market liquidity, potentially making corporate bonds more practical for investors who want greater flexibility.
However, market-making does not guarantee that every bond will become liquid or that investors will always be able to sell at a favorable price. Results will depend on participation, market conditions, bond quality and the eventual regulatory design.
SEBI Considers Compliance Rules Based on Broker Size
SEBI is exploring a graded compliance framework for stockbrokers. Under this approach, regulatory requirements could reflect a broker’s scale, client exposure and reliance on technology.
The proposal recognizes that brokers differ substantially in size and operational complexity. A firm serving a large customer base through highly automated systems may face different operational risks from a smaller brokerage with a more limited business.
A differentiated framework could help tailor requirements to the risks posed by different intermediaries. At the same time, any approach would need to maintain appropriate minimum protections for investors regardless of which broker they use.
SEBI is also working to simplify requirements for depository participants while strengthening safeguards against fraud. Its Samuhik Prativedan Manch reporting initiative is set to extend to depositories, allowing a single submission to serve both exchanges and depositories.
The objective is to reduce duplicate reporting and administrative work without weakening supervision.
Faster Operations for Institutional and Custodial Clients
Another planned change concerns the automated give-up and take-up facility in the cash market.
The mechanism helps coordinate trades executed through brokers with the custodians responsible for confirming and settling transactions for eligible clients. Extending the facility to custodial clients such as portfolio management services (PMS) and alternative investment funds (AIFs) could reduce operational delays.
SEBI says the measure is intended to free up funds and margins that might otherwise remain tied up while brokers await custodian confirmation.
The regulator is also examining parallel clearing arrangements for tender offers, buybacks and offers for sale. These measures are aimed at improving capital efficiency and reducing compliance costs.
Together, the initiatives address a less visible part of market reform: the operational processes that affect how efficiently funds and securities move through the financial system.
Cybersecurity Becomes a Regulatory Priority
Pandey also warned that increasing reliance on algorithms and technology is creating new risks for market participants.
Automated trading can process large volumes of orders quickly, but a system failure or security breach can affect many investors in a short period. Cyber incidents may disrupt trading, expose sensitive information or undermine confidence in financial infrastructure.
SEBI is working to consolidate its inspection portals into a single digital workflow, which could help make supervision faster and more consistent. It is also developing safeguards to prevent misuse of trading terminals.
For brokers, the message is that cybersecurity needs to be treated as a business priority rather than solely an IT responsibility. Testing systems, preparing for outages and maintaining recovery plans are essential parts of protecting investors and maintaining market continuity.
The Bigger Picture
SEBI’s October 24 agenda brings together market development, regulatory modernization and technology governance. The review of short selling and securities lending aims to improve trading mechanisms, while the corporate bond market-making framework targets liquidity beyond equities. At the same time, the AI sandbox and responsible-use guidelines reflect the need to accommodate innovation without sacrificing accountability.
For investors, the impact will depend on the detailed rules and how effectively they are implemented. More efficient trading and better bond liquidity could expand market opportunities, but they will not remove investment risk. Similarly, AI can improve financial services only when supported by suitable controls, transparent accountability and effective human oversight.
FAQs
1. What is SEBI reviewing in short selling and SLB?
SEBI is reviewing the short-selling and securities lending and borrowing frameworks to improve market liquidity, price discovery and connections between cash and derivatives markets.
2. What is SEBI’s proposed AI sandbox?
An AI sandbox is a controlled environment in which financial technology companies can test AI applications under defined conditions. SEBI is exploring such a facility to encourage innovation while maintaining appropriate safeguards.
3. What is corporate bond market-making?
Market-making involves quoting prices at which participants are willing to buy and sell securities. SEBI is developing a framework intended to improve trading activity and liquidity in the secondary corporate bond market.
4. Will the proposed reforms immediately change trading rules?
No. The announcement describes reviews, plans and frameworks under development. Investors should wait for formal SEBI circulars or regulations before assuming that specific trading requirements have changed.
5. How could the reforms affect retail investors?
Potential benefits include improved liquidity in some instruments, more efficient market operations and stronger technology safeguards. The actual impact will depend on implementation, market participation and the final regulatory provisions.
Looking Ahead
The next milestones will be SEBI’s formal decisions on short-selling and SLB reforms, publication of responsible-AI guidelines and further details of the corporate bond market-making framework. Until those measures are formally issued, the announcement should be treated as a statement of regulatory priorities rather than a list of rules already in effect.
Over time, the combined agenda could influence how brokers operate, how investors trade less-liquid securities and how financial institutions deploy AI. The central challenge for SEBI will be to improve market efficiency while ensuring that faster technology and broader access are matched by effective risk management and investor protection.
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