SEBI to Issue AI Guidelines for Capital Markets with Human Oversight and Kill Switch Mandates — November 15, 2026

The Securities and Exchange Board of India (SEBI) is set to roll out comprehensive guidelines governing the deployment and responsible use of Artificial Intelligence (AI) and Machine Learning (ML) across capital markets. Announcing the move at the inauguration of the SEBI pavilion during the 45th India International Trade Fair (IITF) in New Delhi, SEBI Chairman Tuhin Kanta Pandey highlighted that the regulator aims to balance rapid technological innovation with strict safeguards for investor protection and market integrity.

The forthcoming regulatory framework will introduce a tiered risk-based structure. Tools directly affecting retail investors—such as algorithmic trading systems, portfolio-rebalancing models, and robo-advisory engines—will face heightened regulatory scrutiny compared to back-office operational systems.

Key Guardrails in the Upcoming AI Framework

• Non-Delegable Entity Liability: Regulated intermediaries—including stock brokers, asset management companies (AMCs), depositories, and exchanges—will bear sole accountability for the outputs of AI tools, regardless of whether the models were developed in-house or licensed from third-party tech vendors.
• Kill-Switch Mechanisms: AI and algorithmic execution tools will be required to have technical kill switches that allow immediate manual shutdowns if models encounter erratic data or produce aberrant market behaviors.
• Human-in-the-Loop Oversight: High-stakes processes and client-facing decisions must retain meaningful human supervision rather than running on unchecked autonomous execution.
• Disclosures and Model Auditing: Firms will need to maintain complete records of model architecture, training data sets, bias audits, and client disclosures regarding the extent of AI use in trade recommendations and execution.

Building on the 2025 Consultation Blueprint

The upcoming rules operationalize the foundational principles introduced in SEBI's June 2025 consultation paper, which proposed seven governance pillars for AI/ML adoption. The regulatory framework also aligns with supervisory standards developed by the International Organization of Securities Commissions (IOSCO), ensuring domestic market infrastructure remains in step with international compliance standards.

The regulator has already implemented internal AI technologies in market surveillance. SEBI's proprietary systems, including Project SUDARSAN and R(AI)DAR, are actively used to scan digital channels, social media platforms, and advertising networks for fraudulent investment schemes, front-running operations, and misleading financial promotions.

Addressing Emerging Cyber Threats and Deep-Tech Startups

Alongside AI regulation, the market watchdog is reinforcing cybersecurity standards across Indian market infrastructure institutions. SEBI has expanded its structured incident response mechanisms and established the Cyber Suraksha Portal to facilitate real-time threat intelligence sharing. Pandey noted that the regulator is also evaluating long-term systemic risks, including encryption vulnerabilities posed by quantum computing advancements.

To encourage domestic technology innovation within formal market avenues, the regulator is reviewing the Innovators Growth Platform (IGP). The review focuses on easing capital-raising norms and making market listings significantly more accessible for Indian deep-tech, artificial intelligence, and biotechnology startups looking to raise domestic risk capital.

Significance for Indian Market Participants

India's securities market has experienced exponential retail expansion, with overall market capitalization hovering near ₹472 lakh crore and individual investor counts exceeding 15 crore. As mutual fund assets surpass ₹87 lakh crore and automated order execution increases, unsupervised algorithms pose potential risks ranging from flash anomalies to systematic recommendation bias.

By codifying institutional accountability and forbidding intermediaries from blaming algorithmic glitches on software vendors, SEBI aims to ensure that capital efficiency does not come at the expense of market stability or retail investor trust.