C&M E-Alert: SEBI fixes responsibility for use of Artificial Intelligence and Machine Learning Tools in recent amendments

INTRODUCTION

Considering the growing adoption of Artificial Intelligence (“AI”) and Machine Learning (“ML”) in products involving investor interactions, the Securities and Exchange Board of India (“SEBI”) issued several circulars in 2019. These circulars mandated that entities such as stockbrokers, depository participants, stock exchanges, depositories, clearing corporations, mutual funds, asset management companies, trustee companies, and boards of trustees for mutual funds must report their use of AI and ML technologies. This requirement applies to activities conducted within the securities market aimed at servicing clients.

SEBI with an intent to assign responsibility to the aforesaid entities who are using or intend to use AI and ML wanted to bring changes to the existing framework to ensure the privacy, security and integrity of the investors and stakeholders’ data (including the data maintained in fiduciary capacity).

For this purpose, SEBI issued a consultation paper soliciting comments and inputs from the public on amending the Relevant Regulations (as defined below) with respect to assigning responsibility for the use of AI and ML by the regulated entities.

After the comments and inputs received by SEBI from the public on the proposed amendment, draft amendments were proposed in the Relevant Regulations to the Board of SEBI.

In the 208th Meeting of the Board of SEBI, the Board approved the proposal to amend the Relevant Regulations. The Board decided that the Amended Regulations (as defined below) shall be applicable irrespective of the scale and scenario of adoption of such tools for conducting its business and servicing its investors.

SEBI AMENDS REGULATION ON AI USAGE BY INTERMEDIARIES

On 10 February 2025, the SEBI published and notified the SEBI (Intermediaries) (Amendment) Regulations, 2025 (“Intermediaries Amendment Regulations”), the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) (Amendment) Regulations, 2025 (“SECC Amendment Regulations”) and the SEBI (Depositories and Participants) (Amendment) Regulations, 2025 (“DP Amendment Regulations”) (collectively referred to as “Amended Regulations”) amending the SEBI (Intermediaries) Regulations 2008, Securities Contracts (Regulation) (Stock Exchange and Clearing Corporation) Regulations, 2018 and SEBI (Depositories and Participants) Regulations, 2018 respectively (collectively referred to as “Relevant Regulations”).

The Intermediaries Amendment Regulations and SECC Amendment Regulations came into force on the date of publication in the Official Gazette, i.e., 10 February 2025, whereas the DP Amendment Regulations shall come into force on 1 April 2025.

The Amended Regulations were introduced to enhance regulatory oversight and to adapt to technological advancements in the securities market. As per the Amended Regulations, people regulated by SEBI who use AI and ML tools and techniques will be responsible for the privacy of investor data and the output of such AI / ML usage.

According to the Amended Regulations, people regulated by the Board recognised stock exchanges, recognised clearing corporations, or depositories which use AI / ML tools and techniques, either designed by them or procured from third-party technology service providers, irrespective of the scale and scenario of adoption of such tools for conducting their business and servicing their investors, clients / constituents, shall be solely responsible.

1. For the privacy, security and integrity of investors and stakeholders’ data including data maintained by it in fiduciary capacity throughout the process involved.

2. For the output arising from the usage of such tools and techniques it relies upon or deals with; and

3. For compliance with applicable law in force.

   
   

The Amended Regulations for the purpose of clarity have defined the expression “artificial intelligence and machine learning tools and techniques” to include any application or software program or executable system or a combination thereof, offered by, the person regulated by the Board, a recognized stock exchange or a recognized clearing corporation or the depository to investors / stakeholders or used internally by it to facilitate, investing and trading or to disseminate investment strategies and advice, trading and settlement, or to carry out its activities including compliance requirements and the same are portrayed as part of the products offered to the public or under usage for compliance or management or other business purposes.

The other changes proposed by DP Amendment Regulations, relate to the interest on non-payment, belated payment or short payment of the annual fee, annual charges etc. by the depositories.

For specific guidance on how these changes affect your business or ongoing practice, please contact our Securities Litigation and TMT team: