Securities and Exchange Board of India Consultation Paper: An Extraordinary Action to overhaul the trading-related regulatory framework

In the second week of January 2026, the Securities and Exchange Board of India (SEBI) released a consultation paper proposing a significant overhaul of the trading-related regulatory framework for stock exchanges. The move aims to simplify existing rules, remove redundancies, and reduce compliance requirements for market participants. These proposals are part of SEBI’s broader initiative to improve the ease of doing business across all exchange platforms, including those dealing in commodity derivatives. The current consultation paper is the second in a series, following the October 2025 paper that proposed ease-of-doing-business measures for stock exchange administration.

A central objective of the Securities and Exchange Board of India’s consultation paper is to propose a significant overhaul of the trading-related regulatory framework for stock exchanges. The exercise is to consolidate the current trading regulations into a single, unified circular, an important step toward regulatory clarity and improved market efficiency. This consolidation will be carried out through revisions to the Master Circular for Stock Exchanges and Clearing Corporations (MSECC) and the Master Circular for Commodity Derivatives (MCCD), with an emphasis on simplifying compliance, eliminating obsolete provisions, and updating rules that are more than ten years old.

Many existing provisions were designed for an earlier market structure and are now outdated. Several regulations have been rendered obsolete by newer frameworks, while others have increased compliance costs without materially enhancing investor protection. SEBI said the rationalization exercise is part of its broader effort to improve the ease of doing business while maintaining market integrity.

The move follows Finance Minister Nirmala Sitharaman’s FY24 Budget emphasis on simplifying compliance through stakeholder consultations. The current consultation paper is the second in a series, following the October 2025 paper that proposed ease-of-doing-business measures for stock exchange administration.

SEBI has suggested increasing the minimum net-worth requirement for brokers offering MTF from the existing ₹3 crore to ₹5 crore, or higher if exchanges choose to prescribe more stringent criteria. The current threshold, originally introduced in 2004 and last reviewed in 2022, is considered outdated given the growth and risk profile of margin trading activity.

Key Regulatory Changes

SEBI’s consultation paper proposes a wide-ranging overhaul of the regulatory framework governing stock exchanges, covering both equity and commodity derivative markets. The objective is to simplify regulations, eliminate overlaps, and reduce compliance burdens by consolidating fragmented provisions into a single, unified framework. One of the most consequential proposals relates to the margin trading facility (MTF).

SEBI has suggested increasing the minimum net-worth requirement for brokers offering MTF from the existing ₹3 crore to ₹5 crore, or higher if exchanges choose to prescribe more stringent criteria. The current threshold, originally introduced in 2004 and last reviewed in 2022, is considered outdated given the growth and risk profile of margin trading activity. The regulator has also proposed aligning the timelines for the submission of net-worth statements and auditor certificates with standard financial reporting cycles, while removing redundant due diligence requirements.

The consultation paper recommends rationalising liquidity-related mechanisms by removing obsolete market-making provisions in the cash segment and subsuming them under a unified, principle-based Liquidity Enhancement Scheme (LES). These schemes are intended to improve liquidity and price discovery in thinly traded securities by ensuring continuous buy-sell quotes and limiting excessive price volatility. Under the proposed framework, exchanges would have greater flexibility to design LES structures, conduct half-yearly board reviews, and offer incentives, with higher incentive caps envisaged for new exchanges or newly launched segments.

SEBI has also proposed consolidating numerous operational provisions—such as trading operations, price bands, circuit breakers, call auction mechanisms, bulk and block deal disclosures, MTF norms, unique client codes (UCC), PAN requirements, trading hours, and daily price limits—into a single master circular applicable across market segments. To improve clarity and reduce interpretational ambiguity, certain elements such as market-wide circuit breakers, dynamic price band flexing, IPO price bands, and call auction procedures may be presented in a tabular format, with outdated operational illustrations removed.

To enhance transparency while reducing manual compliance, the regulator has suggested merging bulk and block deal disclosure requirements and shifting dissemination from the UCC level to the client PAN level. Provisions specific to clearing corporations would be segregated and moved to a separate master circular to avoid regulatory overlap and clearly delineate responsibilities between exchanges and clearing entities. The paper further proposes removing several outdated or redundant provisions, including negotiated-deal exemptions, guidelines for dedicated debt segments, forward contracts in commodities, MOU-based trading arrangements, and superfluous reporting obligations.

Trading hours across equities, derivatives, commodities, currency derivatives, RFQ platforms, EGR, and the Social Stock Exchange would be consolidated into a single section for ease of reference. Client Code Modification (CCM) norms are also proposed to be liberalised to allow genuine error corrections, permit PAN-linked multiple UCCs for specified client categories, ease obligation transfers among family accounts of foreign portfolio investors, increase waiver frequency to once a month, and discontinue quarterly waiver reporting to SEBI. In addition, SEBI has proposed harmonising penalty structures across exchanges and clearing corporations.

Provisions governing short-selling and securities lending and borrowing (SLB) would be clarified and integrated into the main framework, with mandatory daily disclosures and a clearer allocation of responsibilities between exchanges and clearing corporations. Commodity-specific disclosures—such as hedge delivery intent, open interest data, and risk disclosures by listed entities—would also be incorporated into the unified circular. Finally, norms governing UPI-based trading with blocked funds in the secondary market would be updated, while settlement-related aspects would be moved to the clearing corporation master circular.

Smart Regulation

SEBI’s approach of shifting routine supervisory, monitoring, and enforcement functions closer to stock exchanges reflects a pragmatic evolution in regulatory design. By positioning exchanges as the primary frontline regulators for day-to-day market oversight, the regulator is enabling faster, more context-driven decision-making. Exchanges, given their proximity to trading activity and real-time data, are better placed to respond swiftly to emerging issues, whether involving MTFs, market-making obligations, or surveillance alerts generated during trading sessions.

Allowing exchanges to determine and periodically revise net-worth thresholds for MTF brokers introduces a more dynamic, risk-sensitive framework. Such flexibility ensures that leverage is extended only by intermediaries with adequate financial resilience, thereby reducing systemic risk and the likelihood of broker failures that could adversely impact retail investors. Similarly, empowering member committees of exchanges to adjudicate market-making violations and impose penalties streamlines enforcement, avoiding procedural delays associated with multiple layers of regulatory reporting and approvals.

SEBI’s increasing emphasis on policy formulation and macro-level regulatory oversight, while delegating operational surveillance to exchanges, creates a clear and efficient division of responsibilities. This model enhances early detection of irregularities and enables quicker resolution of compliance issues, ultimately strengthening market discipline. By ensuring that only well-capitalised intermediaries participate in leveraged products, the framework adds a layer of protection for investors and reinforces overall market integrity.

Role of Market Making in SME Segment

In parallel, SEBI has underscored the critical role of market making in the SME segment, where limited free float and lower trading volumes often constrain liquidity. Structured and mandatory market-making mechanisms help sustain continuous price discovery, reduce sharp price swings, and mitigate the risk of manipulation. This, in turn, improves investor confidence, enhances the credibility of SME listings, and supports the fundraising objectives of smaller enterprises that rely heavily on efficient secondary markets.

Another important aspect of the regulator’s reform agenda is the harmonisation of rules across equity cash, equity derivatives, and commodity derivatives markets, particularly with respect to market-making and liquidity-enhancement frameworks. By moving towards a unified regulatory approach, SEBI aims to eliminate fragmentation and ensure consistency in compliance expectations across asset classes. The proposal to replace multiple, segment-specific approvals with a single half-yearly board-level review of liquidity schemes reflects an intent to simplify governance while maintaining accountability.

SEBI has also indicated a willingness to grant exchanges greater latitude in deploying incentives when entering new market segments or deepening liquidity in existing ones. This flexibility is especially relevant in commodity derivatives, where broader participation remains a challenge. Encouraging the involvement of farmers and farmer-producer organisations in options linked to futures contracts could meaningfully expand market depth, improve hedging effectiveness, and align derivative markets more closely with the needs of the real economy.

Overall, the proposed regulatory recalibration balances decentralisation with accountability, promotes faster enforcement, and supports liquidity development across market segments—while preserving SEBI’s role as the architect of market structure and policy direction.