The proposed Securities Markets Code Bill, 2025, is facing scrutiny over Clause 21, which allows SEBI to unilaterally increase penalties. Lawmakers and experts are debating whether this grants the regulator too much power, potentially undermining judicial fairness for market entities.
The Securities Markets Code Bill, 2025, which aims to consolidate major market laws into a single framework, has sparked a debate over regulatory fairness. At the heart of the discussion is Clause 21, a provision that would grant the Securities and Exchange Board of India (SEBI) the authority to review and unilaterally increase penalties or directions previously set by its own adjudicating officers. As the bill currently sits with the Parliamentary Standing Committee on Finance for review, the clause has drawn significant attention from legal experts and lawmakers who warn against the potential for an institutional conflict of interest.
The Controversy Around Clause 21
Under the current structure, SEBI acts as the primary regulator for India's securities markets. Clause 21 proposes to give the regulator the power to reopen cases where it believes the initial penalty handed down by its officers was too lenient. Critics of the bill argue that this creates a fundamental imbalance, essentially allowing the regulator to act as both the prosecutor and the judge.
Legal experts point out that this power is currently one-sided. While the regulator can choose to increase a penalty, there is no corresponding mechanism within this proposed framework for the regulator to reduce an order it deems too harsh. This lack of symmetry raises concerns about procedural fairness. For market participants—including listed companies, intermediaries, and investors—this creates uncertainty, as finalized orders could potentially be challenged and tightened by the regulator long after the initial process has concluded.
The Push for Independent Oversight
In place of these expanded internal revisionary powers, critics are advocating for a system of independent oversight. The proposed alternative is to require SEBI to utilize the Securities Appellate Tribunal (SAT) if it believes a penalty is insufficient. By moving such reviews to an independent body, the process would mirror other regulatory frameworks in India, such as those governing tax or customs, where the government or authority must appeal to a third-party tribunal rather than modifying orders internally.
Advocates of this change argue that independent adjudication is essential to maintain trust in the regulatory environment. They suggest that forcing the regulator to seek relief through the SAT would ensure that both the regulator and the entities being investigated operate on a level playing field, avoiding the appearance of bias or internal pressure to deliver stricter outcomes.
Status of the Legislation
The Securities Markets Code Bill was introduced in the Lok Sabha in December 2025 with the intention of merging the SEBI Act, 1992, the Securities Contracts (Regulation) Act, 1956, and the Depositories Act, 1996. While the bill aims to modernize India’s financial enforcement, its progress is currently dependent on the ongoing deliberations of the Parliamentary Standing Committee on Finance.
As of October 2026, the legislation has not been enacted. The primary monitorable for market participants will be whether the committee suggests amendments to Clause 21 to align it with independent judicial principles or whether the government proceeds with the clause in its current form. Investors and companies are watching the committee's final recommendations, as any changes to these powers will dictate how regulatory enforcement and disputes are handled in the future.