SEBI Outlines Plans for Demat 2.0, Graded Compliance, and AI Regulations

The Securities and Exchange Board of India (SEBI) is exploring graded compliance requirements for stock brokers based on their scale, client exposure, and dependence on technology. Speaking on regulatory developments, Chairman Tuhin Kanta Pandey stated that the market regulator is also working on a framework to enable secondary-market trading in tokenised corporate bonds.

As part of its market development initiatives, SEBI is reviewing the short-selling and securities lending and borrowing (SLB) framework. It is also developing a market-making framework aimed at improving liquidity in the corporate bond market. The regulator plans to launch Demat 2.0, which will feature tokenised corporate bonds available for secondary-market trading.

On the technology front, SEBI plans to establish an artificial intelligence (AI) sandbox to allow tools to be tested in a controlled environment. The regulator is working on guidelines for responsible AI use, which will include safeguards such as kill-switches, data controls, and human oversight. Pandey emphasized that market infrastructure must evolve alongside technological changes, noting that tomorrow's markets require proactive definition.

To streamline operations, SEBI is looking to simplify compliance for depository participants by revising existing rules and expanding the Samuhik Prativedan Manch, a common reporting platform, to depositories. Efforts are also underway to consolidate broker inspection portals into a unified digital workflow.

To improve capital efficiency, SEBI is addressing parallel clearing requirements for tender offers, buybacks, and offers for sale (OFS), which currently add costs. Additionally, the regulator plans to extend automated give-up and take-up facilities to custodian clients, including portfolio management services (PMS) and alternative investment funds (AIFs), to prevent funds from being blocked while awaiting custodian confirmation.

Pandey highlighted that expanding participation beyond major cities will be central to the next phase of market growth, stating that the upcoming wave in retail broking will originate from towns and villages.

India currently has more than 15 crore unique investors, an equity market capitalisation of about ₹470 lakh crore, and mutual fund assets under management of nearly ₹83 lakh crore. Outstanding corporate bonds stand at approximately ₹61 lakh crore, while foreign portfolio investors hold assets worth about ₹74 lakh crore.

Regarding investor protection, SEBI is intensifying its actions against unregistered investment advisers and fraudulent trading platforms. Measures include validated UPI handles and verified labels for trading applications. The regulator's Project Jagruk investor-awareness campaign, launched on October 5, has generated over 15 crore social media views and nearly 110 crore WhatsApp messages.

SEBI has also urged market intermediaries to treat cybersecurity as a business priority, warning that system outages and breaches can undermine investor confidence. Furthermore, the regulator is working toward digital onboarding, simpler KYC processes, and reduced paperwork for global investors, including non-resident Indians.

"SEBI's proactive focus on graded compliance, technology integration, and capital efficiency marks a progressive step for the Indian financial ecosystem. Introducing frameworks like Demat 2.0 and the AI sandbox will help modernize market infrastructure while balancing innovation with robust risk management. For fintech startups and market intermediaries, aligning operations with these upcoming digital workflows, cybersecurity priorities, and simplified compliance norms will be essential for sustainable growth as retail participation expands beyond major urban centres." — Dr. Shishir Gupta, Founder & CEO, StartupLanes