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The Securities and Exchange Board of India (SEBI) is set to issue guidelines for the responsible use of artificial intelligence and machine learning in India’s capital markets, SEBI Chairman Tuhin Kanta Pandey said on Wednesday.
The proposed SEBI AI Guidelines will focus on human oversight, data controls and “kill-switch” mechanisms to ensure that the growing use of artificial intelligence does not compromise market integrity, investor protection or accountability.
Pandey made the remarks while speaking at the 23rd FICCI Capital Markets Conference 2026 in Mumbai.
He said the framework would adopt a tiered approach based on the nature and risks associated with different uses of AI and machine learning.
SEBI AI Guidelines to Require Human Oversight
A key feature of the proposed SEBI AI Guidelines will be the requirement for humans to remain involved in important AI-driven processes.
Pandey said the framework would include “humans-in-the-loop controls” along with data controls and kill-switch mechanisms.
Human oversight is intended to ensure that automated systems do not operate without appropriate supervision, particularly when decisions could affect investors or the functioning of financial markets.
The proposed framework is expected to establish clear accountability and governance requirements for entities using AI and machine learning.
Kill-Switch Mechanism to Be Part of AI Framework
The inclusion of kill-switch mechanisms is another important element of the proposed SEBI AI Guidelines.
A kill switch can allow an AI-based system to be stopped or disabled quickly if it behaves unexpectedly or creates a significant risk.
Such controls could be particularly important in capital markets, where automated systems may operate at high speed and influence trading, surveillance, risk management and other financial activities.
SEBI’s proposed approach indicates that technological innovation will need to operate alongside strong safeguards.
AI Could Strengthen Market Surveillance
Pandey said artificial intelligence could provide significant benefits to India’s financial markets.
AI and machine learning can potentially strengthen market surveillance, risk assessment, fraud detection and investor servicing.
Automated systems can process large volumes of information rapidly, allowing regulators and market participants to identify unusual patterns and potential risks more efficiently.
However, the SEBI AI Guidelines will seek to balance these advantages with concerns surrounding the responsible deployment of the technology.
SEBI Highlights Risks From Artificial Intelligence
While AI offers major opportunities, Pandey highlighted several risks associated with its use.
These include opacity, bias, cybersecurity threats, data protection concerns and questions surrounding accountability.
AI systems can sometimes produce decisions or outputs that are difficult for users to understand. This creates challenges when financial decisions need to be explained or reviewed.
Bias can also affect the quality and fairness of automated systems if the data used to train them is incomplete or unsuitable.
The proposed SEBI AI Guidelines are therefore expected to address both technological opportunities and potential risks.
“Responsible Use” at the Centre of New Framework
Pandey said the central question was not whether capital markets would use AI, but how the technology could be used responsibly while preserving trust.
This approach reflects the growing importance of artificial intelligence across financial services.
As financial institutions, exchanges, brokers and other market participants increasingly adopt automated technologies, regulators face the challenge of encouraging innovation without weakening investor protection.
The SEBI AI Guidelines are expected to provide greater clarity on how market entities can use AI while maintaining appropriate governance standards.
India’s Capital Markets Continue to Expand
The proposed AI framework comes at a time when India’s capital markets have expanded significantly.
Pandey said equity issuances crossed Rs 4.5 lakh crore in FY25-26, including approximately Rs 1.9 lakh crore raised through 366 initial public offerings (IPOs).
The figures highlight the increasing scale of India’s equity market and the growing number of companies accessing capital through public markets.
As market activity expands, the need for effective surveillance, risk management and investor protection also becomes more important.
The SEBI AI Guidelines could therefore play a significant role in shaping how technology is used within India’s rapidly expanding capital markets.
Corporate Bond Market Also Sees Strong Growth
Growth has extended beyond equity markets.
Pandey said corporate bond issuances exceeded Rs 9 lakh crore in FY26, while around Rs 2.7 lakh crore had already been raised during the first four months of the current financial year.
The expansion of debt markets creates additional areas where technology and AI could potentially be used for analysis, risk assessment and market surveillance.
SEBI’s regulatory approach will therefore need to cover an increasingly diverse financial ecosystem.
AIF Investments Reach Rs 7 Lakh Crore
Alternative Investment Fund investments have also grown substantially.
According to Pandey, AIF investments had reached approximately Rs 7 lakh crore by the end of July 2026.
India’s market capitalisation was around 132 per cent of GDP, while the country had approximately 14.9 crore unique investors.
The growing number of investors and increasing financial participation underline the importance of robust regulatory safeguards.
The SEBI AI Guidelines could help ensure that technological developments keep pace with the rapid expansion of India’s financial markets.
Household Participation in Financial Markets Increases
Household participation has also increased, with mutual fund assets reaching approximately Rs 86 lakh crore.
Systematic Investment Plan (SIP) assets accounted for more than one-fifth of industry assets, according to Pandey.
The growing participation of individual investors makes investor protection an increasingly important regulatory priority.
As more retail investors participate in financial markets, the use of AI for investor servicing and other functions will need to be carefully managed.
The proposed SEBI AI Guidelines could establish safeguards to ensure that technology supports investors without creating new risks.
India Needs Capital for New Growth Areas
Pandey said India’s next phase of financial development should focus not only on scale but also on deeper financialisation, wider participation and new investment frontiers.
The country will require substantial capital for infrastructure, technology, advanced manufacturing and energy transition.
Data centres and new-age enterprises, particularly those working in artificial intelligence, are also expected to require significant investment.
The development of appropriate capital-market infrastructure will therefore be important for supporting India’s future economic growth.
SEBI Considers Wider Investment Channels
SEBI is also examining proposals that could broaden investment opportunities.
According to Pandey, the regulator is considering allowing client funds under the proposed Portfolio Managers framework to invest in foreign securities.
A framework to support global fund management activities from India is also being considered.
These initiatives could provide investors and asset managers with wider opportunities while strengthening India’s position as a financial services hub.
Securities Lending and Short-Selling Framework Under Review
SEBI is reviewing the securities lending and borrowing framework as well as rules relating to short selling.
The objective is to deepen cash markets and improve their functioning.
These reforms are part of a broader regulatory approach focused on developing India’s capital markets while maintaining appropriate safeguards.
Alongside the SEBI AI Guidelines, such measures indicate that the regulator is preparing for a more technologically advanced and globally connected financial system.
New Opportunities in Debt Markets
The regulator is also examining proposals related to debt markets.
These include ESG debt and the exploration of corporate bond tokenisation.
Tokenisation could potentially introduce new methods of issuing and managing financial assets using digital technologies.
However, such developments also require clear regulatory frameworks to address operational, technological and investor-protection risks.
SEBI’s approach is expected to focus on encouraging innovation while ensuring that market safeguards remain strong.
SEBI Wants Risk-Based Regulation
Pandey said SEBI’s approach would be to simplify regulations where possible, calibrate regulation according to risk and sophistication, enable capital formation and maintain strong safeguards.
This risk-based approach could become increasingly important as financial technologies become more sophisticated.
The SEBI AI Guidelines are expected to reflect this philosophy by applying governance requirements based on the potential risks associated with different AI applications.
Not every AI system will necessarily carry the same level of market or investor risk. A tiered framework could therefore allow innovation while applying stronger controls to higher-risk applications.
AI and India’s Next Capital Market Phase
India’s capital markets are entering a new phase in which AI, financialisation and new investment opportunities could connect capital with emerging businesses, assets and technologies.
The SEBI AI Guidelines will be an important part of this transition.
The challenge for the regulator will be to encourage useful applications of AI while preventing problems related to bias, data security, opaque decision-making and uncontrolled automated processes.
Human oversight, data controls and kill-switch mechanisms could provide important safeguards as market participants increasingly rely on AI.
SEBI AI Guidelines Could Shape India’s Financial Future
The upcoming SEBI AI Guidelines represent a significant step towards establishing a regulatory framework for artificial intelligence in India’s capital markets.
With equity issuances, corporate bonds, mutual funds and alternative investments all expanding, technology is likely to play an increasingly important role in the financial ecosystem.
SEBI’s proposed framework aims to ensure that innovation does not come at the cost of investor confidence or market integrity.
By combining human oversight, data controls, accountability and emergency mechanisms, the regulator is seeking to create a safer environment for responsible AI adoption.
As India’s capital markets continue to expand, the way AI is governed could become an important factor in determining how effectively technology contributes to future financial growth.
Key Takeaways
- SEBI will shortly issue AI and machine learning guidelines for India’s capital markets.
- The framework will require human oversight.
- Data controls will be included in the proposed framework.
- AI systems may also require kill-switch mechanisms.
- SEBI sees opportunities for AI in surveillance, risk assessment and fraud detection.
- The regulator has highlighted risks involving bias, cybersecurity, data protection and accountability.
- Equity issuances crossed Rs 4.5 lakh crore in FY25-26.
- Around Rs 1.9 lakh crore was raised through 366 IPOs.
- Corporate bond issuances exceeded Rs 9 lakh crore in FY26.
- AIF investments reached around Rs 7 lakh crore by July 2026.
- India had approximately 14.9 crore unique investors.
- SEBI is also reviewing securities lending, short selling, ESG debt and corporate bond tokenisation.
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