SEBI plans to launch a new regulatory framework for AI and machine learning tools in financial markets. The upcoming rules will focus on a tiered approach with mandatory kill-switches and human oversight to ensure investor protection. This initiative aims to balance technological innovation with market integrity as the regulator also reviews SME IPO and settlement norms.
The Securities and Exchange Board of India (SEBI) is set to introduce a formal framework governing the use of Artificial Intelligence (AI) and Machine Learning (ML) in the country’s financial markets. SEBI Chairman Tuhin Kanta Pandey announced these upcoming guidelines during the 23rd FICCI Capital Markets Conference held in Mumbai on August 19, 2026.
As AI tools become more common in trading strategies and financial service delivery, the regulator aims to ensure that these technologies operate safely. The new framework will adopt a tiered structure, meaning that regulations may vary based on the level of risk and the complexity of the AI system being used by market participants. A central focus of these rules is accountability, ensuring that entities using these technologies remain responsible for their outcomes.
The upcoming guidelines will mandate specific safety features, including the implementation of kill-switch mechanisms and humans-in-the-loop controls. A kill-switch allows an entity to immediately halt automated systems if they start behaving unpredictably, preventing potential market instability. The humans-in-the-loop requirement ensures that critical decisions or automated actions are subject to manual review or intervention, reducing the risk of unchecked machine errors or unintended market volatility.
This regulatory update comes at a time when the Indian capital markets are experiencing significant growth. Chairman Pandey noted that in the current financial year, FY26, the market has seen substantial activity, with over ₹4.5 lakh crore raised through Initial Public Offerings (IPOs) and more than ₹9 lakh crore raised through corporate bonds. Given this scale, maintaining investor trust is a top priority for the regulator.
Beyond AI, SEBI is also working on a broader overhaul of the current system. This includes a review of the framework for SME IPOs, which are essential for smaller businesses looking to raise capital, as well as a comprehensive revision of settlement regulations to make them faster and more efficient. By simplifying these processes and standardizing rules, the regulator hopes to reduce the room for discretion and improve market transparency.
The primary goal behind these changes is to foster an environment where innovation can flourish without compromising the integrity of the market. As the official guidelines are finalized and released, market participants, including brokers, tech vendors, and financial institutions, will need to align their internal data management and governance protocols with these new requirements. Investors should monitor for the official notification from SEBI, which will detail the specific implementation timelines and compliance obligations for regulated entities.