SEBI's New AI Regulations: Accountability for Financial Entities

SEBI Makes Regulated Entities Fully Accountable for AI Usage in Financial Markets

In a decisive regulatory shift, the Securities and Exchange Board of India (SEBI) has introduced a framework that places full responsibility for the use of Artificial Intelligence (AI) tools squarely on the shoulders of regulated entities. Approved during its board meeting on December 18, 2024, the move underscores SEBI’s growing focus on technology governance amid rapid digital transformation across India’s capital markets.

What’s Changing?

The regulator has amended three key regulations to codify AI-related obligations:

SEBI (Intermediaries) Regulations, 2008
Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018
SEBI (Depositories and Participants) Regulations, 2018

These changes apply to a wide range of institutions, including stock exchanges, clearing corporations, depositories, registered intermediaries, asset managers, and pooled investment vehicles. The unambiguous message: whether the AI tools are built in-house or procured externally, the regulated entity remains entirely accountable for how those tools operate and what outcomes they produce.

What Does Accountability Mean in Practice?

SEBI’s new framework lays down three core pillars of responsibility:

1. Data Security and Privacy Are Non-Negotiable

Entities must take all necessary steps to safeguard sensitive investor and market data processed or interpreted by AI systems. This includes protection against misuse, unauthorised access, and data leakage. The expectation is that firms implement not just technical security, but also ethical data stewardship.

2. No Shifting Blame to the Algorithm

SEBI has clarified that accountability cannot be delegated or outsourced. Whether a recommendation, decision, or insight comes from a human advisor or an AI model, the entity using the tool bears full liability. This is especially relevant for areas like robo-advisory, algorithmic execution, or automated compliance functions.

3. Adherence to Securities Law Remains Paramount

All AI applications must operate within the boundaries of Indian securities law, including fair disclosure, investor protection, and market integrity norms. The regulator has left little room for ambiguity—technology is no excuse for regulatory lapses.

Broader Implications for the Financial Ecosystem

✔ Covers All AI Use Cases, Including Pilot Projects

SEBI’s framework does not differentiate between large-scale deployments and experimental or limited-scope AI tools. Even sandbox initiatives must now be accompanied by oversight frameworks.

✔ Culture of Proactive Oversight

This shift places the onus on firms to build robust internal governance around AI. It’s a nudge towards forming dedicated committees, third-party audits, and board-level accountability for automated decision systems.

✔ Enhanced Investor Protection

By clearly stating that regulated firms cannot hide behind algorithmic opacity, SEBI aims to build trust in digital finance. The move is especially timely as AI-powered tools play an increasingly visible role in investor interactions, portfolio management, and risk detection.

A Regulatory Tightrope: Innovation Meets Accountability

SEBI’s approach reflects a maturing regulatory stance—one that encourages the benefits of AI adoption, while setting clear red lines to prevent misuse or abdication of responsibility. In an environment where black-box models can potentially distort transparency or introduce hidden biases, these guardrails could prove essential in maintaining market integrity.

For financial firms, the real challenge now lies in developing internal AI governance mechanisms that are not only compliant, but also auditable, explainable, and investor-friendly.

Conclusion

SEBI’s AI accountability framework is a milestone in India's digital finance evolution. By ensuring that regulated entities remain answerable for every algorithm they deploy, the regulator has taken a firm step toward future-proofing India’s capital markets. As firms increasingly turn to machine-driven tools, this accountability-first approach may well become the standard for global best practices.