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With the rise of artificial intelligence (AI) and machine learning (ML) tools, a number of companies have adopted AI/ML tools to increase their operational and business efficiency. According to the AI Index Report 2023, more than 55% of companies in the Asia-Pacific region have adopted AI/ML tools to raise their business efficacy. Similarly, entities supplying investor-facing products have begun to increase their use of AI/ML tools.

To maintain checks and balances in relationships with such entities, the Securities and Exchange Board of India (SEBI) asked all investment advisers and research analysts to disclose to their clients their use of AI tools when they provided investment-related services. Subsequently, the SEBI issued a consultation paper in November 2024. Finally, it approved in its December 2024 board meeting, a proposal that would assign responsibilities for the use of AI/ML tools by regulated entities.

The SEBI took these steps because it had a number of concerns. Regulated entities were making use of AI/ML tools to make informed decisions in market analysis, stock selection, investment strategies and the preparation of investment portfolios. Such tools were also being used to ensure compliance and timely reporting under securities market regulations. The SEBI explained that while AI/ML tools had enabled regulated entities to carry out their business operations with ease and efficiency, it was equally important to ensure that the rights of investors and stakeholders were not compromised in the rapid takeup of such programmes.

To ensure that such rights were protected, the SEBI had specified, through its many circulars, what the reporting requirements were when stock brokers and depositary participants, market infrastructure institutions, mutual funds, asset management companies, trustee companies and boards of trustees of mutual funds used AI/ML tools.

At its December 2024 board meeting, the SEBI proposed amending the Securities and Exchange Board of India (Intermediaries) Regulations, 2008, the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018, and the Securities and Exchange Board of India (Depositories and Participants) Regulations, 2018 (collectively SEBI regulations). Under the proposed amendments, all SEBI-regulated entities using AI/ML tools and programmes either designed by them or procured from third-party technology service suppliers will be solely responsible for enforcing certain requirements that protect investors and stakeholders. They will be accountable for the privacy, security and integrity of investors’ and stakeholders’ data, including data maintained by them in a fiduciary capacity, throughout all the processes involved. They will be answerable for the output produced from such tools and techniques they rely on or deal with and they must comply with all the applicable laws.

The SEBI has further clarified that the amendments to the SEBI regulations will apply to all regulated entities that use AI/ML tools irrespective of the scale and the circumstances in which such AI/ML programmes are adopted when they provide services to their investors and stakeholders.

Looking to the future, the proposed amendments to the SEBI regulations were a much-needed step to assuage the concerns surrounding the rapid adoption of AI/ML tools and programmes where investor and stakeholder data were concerned.

Government departments, such as the Ministry of Electronics and Information Technology, are either undertaking or assisting projects to ensure AI/ML tools and programmes are used responsibly. Taking into consideration the risks associated with the increased use of AI/ML tools, the step taken by the SEBI strikes a balance between promoting innovation and maintaining strict compliance that ensures the protection of the rights of investors and stakeholders.

However, since regulated entities will become solely responsible for ensuring compliance with the SEBI regulations in a timely manner, the amendments are likely to affect the commercial relationships between regulated entities and the third-party service providers from whom they obtain AI/ML tools. They must ensure that those third parties will indemnify and protect them from losses arising from data breaches or leaks caused by such products.

Ashima Obhan is the senior partner and Devendra Bankar is An associate at Obhan & Associates.

Obhan & associates
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Ashima Obhan
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