SEBI Reviews Short Selling and SLB Norms, Outlines AI Sandbox and Bond Market-Making Plans — October 24, 2026

In a bid to enhance market liquidity and strengthen technological governance, the Securities and Exchange Board of India (SEBI) is undertaking a comprehensive review of the frameworks governing short selling and securities lending and borrowing (SLB). Addressing the 16th International Capital Market Convention organised by the Association of NSE Members of India (ANMI) in Mumbai, SEBI Chairman Tuhin Kanta Pandey outlined a multi-pronged regulatory roadmap designed to deepen cash and debt markets while insulating market infrastructure from systemic risks.

Revamping Short Selling and SLB Mechanisms

The market regulator's review of the SLB and short-selling framework is primarily aimed at improving liquidity, enhancing price discovery, and building stronger inter-linkages between the cash and derivatives segments. At the same time, SEBI is formulating safeguards to prevent the unauthorised access and misuse of trading terminals across brokerages.

To improve capital efficiency for institutional participants, SEBI plans to extend the automated give-up and take-up facility to custodial clients, such as Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs), in the cash segment. This mechanism is intended to release blocked funds and margins while intermediaries await execution confirmations from custodians.

AI Sandbox and Tiered Technology Controls

Recognising the rapid integration of emerging technologies into market infrastructure, the regulator is exploring an artificial intelligence (AI) sandbox. The facility will allow financial market intermediaries to test algorithmic and AI-driven tools in a controlled environment, providing innovators with regulatory certainty while helping authorities evaluate potential risks.

SEBI is also finalising guidelines for the responsible deployment of AI by market participants. Modeled on the International Organization of Securities Commissions (IOSCO) toolkit, the framework will adopt a tiered structure and mandate:

• Clear organisational accountability and governance
• Strict data security and input controls
• Mandatory "kill switches" to halt malfunctioning automated systems
• Continuous human oversight over automated decision-making

Deepening Secondary Corporate Bond Markets

To address the longstanding issue of thin liquidity in India's corporate debt space, SEBI is developing a formal market-making framework for corporate bonds. The initiative aims to provide two-way quotes in secondary debt markets, improving investor exit options and dampening bid-ask spreads.

This complements the regulator's broader fixed-income reforms, which include expanding retail debt access through Fixed Income Channel Partners on regulated online bond platforms, modernising municipal bond markets, and testing secondary-market trading of tokenised corporate bonds under Demat 2.0.

Graded Broker Compliance and Unified Supervision

For stockbrokers and market intermediaries, SEBI is moving toward a proportionate regulatory structure. The regulator is working on graded compliance requirements tailored to a broker's operational scale, retail client exposure, and degree of technological dependency.

To streamline oversight, SEBI intends to consolidate its various inspection and reporting portals into a single digital workflow. The unified platform is expected to eliminate duplicate paperwork, reduce regulatory overhead for market members, and accelerate supervisory turnaround times.

Tags: SEBI NSE ANMI Corporate Bonds Capital Markets Artificial Intelligence