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In a pioneering step, the Securities and Exchange Board of India (SEBI) has suggested a detailed five-point regulation to monitor the application of Artificial Intelligence (AI) and Machine Learning (ML) in the Indian capital market. The suggestions, introduced through a consultation paper, are geared to harness the potential of AI/ML while protecting market integrity and investors' interests as algorithmic trading and auto advisory tools find a place on Dalal Street.
SEBI's AI/ML Framework: Important Points
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Five Guiding Principles SEBI's draft guidelines focus on Model Governance, Investor Protection & Disclosure, Robust Testing Framework, Fairness & Prevention of Bias, and Data Privacy & Cybersecurity.
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Model Governance: All participants in the market applying AI/ML will need to have qualified in-house personnel to manage, validate, and audit the AI models. The senior management will be held directly responsible for the entire AI life cycle, including third-party vendors.
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Compulsory Disclosures: Firms employing AI/ML systems that have a direct effect on investors—e.g., algo trading or investment recommendation—will be required to explain model use, risks, accuracy, and boundaries in simple language.
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Testing & Monitoring: AI/ML models will need to be thoroughly tested in simulation environments initially before going live. All data logs and documentation must be stored for a minimum of five years to enable traceability and explainability.
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Fairness & Bias: Companies must employ diversified data sets and train staff to identify and correct algorithmic bias so that no segment of customers is discriminated against.
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Data Security & Cybersecurity: Strict data governance must be implemented along with encryption and privacy regulations. Data breach and technical failure management policy must be robust with well-formulated directions, reporting the same to SEBI and concerned authorities.
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Regulatory-Lite Approach: AI/ML models used for in-house monitoring or analysis will be less regulated, and those impacting investors will be very highly regulated.
Public Consultation:
SEBI invited public feedback on the draft guidelines until July 11, 2025. The final framework will be issued later this year, and India will be the leader among emerging markets for the regulation of AI/ML. Why It Matters: AI/ML deployment in Indian capital markets increased by over 25% in 2024, powering everything from anti-fraud to customer support. But concerns about transparency, accountability, and systemic risk prompted SEBI to act, drawing on best international practices to ensure that technological innovation does not threaten investor confidence or market stability. "Our intention is not to stifle innovation but to ensure that any technology introduced in the market does not compromise investor safety or market stability," an SEBI official explained.
Source: Times of India, Economic Times, Times Now News, Moneycontrol, Business Standard
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