SEBI Reviews Short-Selling, SLB Rules; Plans AI Sandbox and Bond Market-Making

Sebi’s Reform Agenda Targets Liquidity, Oversight and Market Resilience

The regulator is pairing market-access reforms with tighter safeguards as technology reshapes trading.

Liquidity is the focus of the trading-rule review

Sebi is reviewing the rules governing short selling and securities lending and borrowing, or SLB, with the stated aim of improving liquidity and price discovery. The review matters because these mechanisms affect how investors can take positions and lend securities, and therefore how readily trading interest can be expressed in the market.

The regulator has not yet announced the outcome of the review. Any eventual changes will need to balance easier market participation against safeguards against misuse. For investors, the practical significance will depend on the final rules, including how they affect access, operational requirements and the ability to manage positions.

Corporate bonds could get a market-making framework

Sebi is also developing a market-making framework intended to boost secondary trading in corporate bonds. A more active secondary market could make it easier for investors to buy or sell bonds after issuance, although the effect will depend on the framework’s design and how market participants use it.

This is a market-structure initiative rather than a change to the terms of any particular bond. Its potential benefit is improved trading flexibility; it does not remove the need for investors to assess an issuer’s ability to meet its obligations or the risks of selling before maturity. The announcement provides no implementation timetable or specific details on the proposed framework.

AI rules and cyber resilience move up the agenda

The regulator is exploring an AI sandbox where new tools could be tested with safeguards and greater regulatory certainty for innovators. Separately, it is finalising responsible-use guidelines built around a tiered approach, accountability, data controls, kill switches and human oversight, aligned with the International Organization of Securities Commissions’ toolkit.

The emphasis reflects a changing risk profile: algorithms already account for a growing share of trades, while AI is changing how people invest. Sebi chairman Tuhin Kanta Pandey also warned that outages and cyber breaches can harm investors and undermine trust. For market firms, the message is that technology controls and contingency planning are part of business resilience, not merely back-office concerns.

Operational changes aim to reduce friction without weakening safeguards

Sebi plans to bring inspection portals into a single digital workflow and is considering graded compliance requirements for brokers, calibrated to their scale, client exposure and reliance on technology. It is also reworking rules for depository participants and extending the Samuhik Prativedan Manch to depositories, so one submission can serve exchanges and depositories.

The automated give-up and take-up facility is set to extend to custodial clients, including portfolio management services and alternative investment funds, in the cash segment. The stated purpose is to free funds and margins while brokers wait for custodian confirmation. Sebi is also addressing parallel clearing in tender offers, buybacks and offers for sale to improve capital efficiency and reduce compliance costs. Together, these steps could streamline processes, but their value will depend on implementation and effective fraud controls.

Key Highlights

• Sebi is reviewing short-selling and SLB rules to support liquidity and price discovery.
• A corporate-bond market-making framework is in development to encourage secondary trading.
• AI safeguards are expected to include accountability, data controls, kill switches and human oversight.
• Inspection and reporting processes are being consolidated, with possible graded broker compliance.
• Custodial clients are due to gain access to automated give-up and take-up in the cash segment.

Investor Note: These are regulatory initiatives at different stages, not completed market changes. Investors should watch for final rules and implementation details, particularly on trading access, bond liquidity and technology safeguards, before drawing conclusions about their effects.