SEBI RELEASES CONSULTATION PAPER ON GUIDELINES FOR RESPONSIBLE USAGE OF AI/ML IN INDIAN SECURITIES MARKETS
In light of the growing adoption of Artificial Intelligence (AI)/Machine Learning (ML) systems in the securities market, the Securities Exchange Board of India ("SEBI") constituted a working group to study and develop guidelines for usage of AI/ML applications in the securities market. Pursuant to the findings and recommendations of the working group, SEBI, on June 20, 2025, released a consultation paper titled 'Guidelines for Responsible Usage of AI/ML in Indian Securities Markets' ("AI/ML Guidelines") to invite public comments on the proposed guiding principles for the responsible use of AI/ML models in the Indian securities ecosystem. The last date for submitting comments is July 11, 2025.
Background
Previously, in 2019, SEBI introduced reporting requirements for AI/ML applications and systems, covering those offered and used by stock exchanges, clearing corporations, depositories, intermediaries, and mutual funds.
The present AI/ML Guidelines have been notified by the SEBI considering the increased use of AI and ML-based applications and models in the securities market. Pertinently, it is expected that this uptake is likely to increase with the advent and adoption of Large Language Models (LLMs) and generative AI, enabling diverse use cases. To prepare the AI/ML Guidelines, SEBI constituted a working group which studied existing AI/ML guidelines in India and globally, including but not limited to, NITI Aayog's "Approach Document for India Part 1 - Principal for Responsible AI' and the consultation paper by the International Organisation of Securities Commissions.
Importantly, SEBI also engaged with market participants to understand AI/ML deployment in the securities market. Current use cases of AI/ML applications across the Indian securities market include:
- By exchanges - primarily for surveillance, member support, data input tasks, and advanced cybersecurity;
- By brokers - primarily for KYC/document processing, chatbots, digital account opening, order execution, and product propensity; and
- By mutual funds - primarily for cybersecurity, chatbots, and surveillance tools.
Recommendations of the Working Group
The working group constituted by SEBI has provided the following guiding principles under the AI/ML Guidelines for the responsible usage of AI/ML:
- Model Governance: Market participants using AI/ML should establish skilled teams to ensure effective human oversight of algorithmic performance, control, testing, and efficacy throughout their lifecycle, and to implement robust risk control measures and governance frameworks. These teams must also ensure the auditability and explainability/interpretability of AI/ML-based models. Importantly, these teams must also establish backup/fallback plans in the event of an AI-based application failure.
- Investor Protection Disclosure: Market participants that use AI/ML models for their business operations, which directly impact their customers/clients, should disclose the same to their respective customers/clients. The disclosure should be made in clear language that is comprehensible to customers/clients.
MADRAS HIGH COURT UPHOLDS VALIDITY OF THE TAMIL NADU ONLINE GAMING AUTHORITY (REAL MONEY GAMES) REGULATIONS, 2025
On June 03, 2025, the Madras High Court ("High Court") in Play Games 24x7 Private Limited & Anr. vs State of Tamil Nadu & Ors.("Play Games Case") upheld the constitutionality of the Tamil Nadu Prohibition of Online Gambling and Regulations of Online Games Act, 2022 ("TNOG Act") and the Tamil Nadu Online Gaming Authority (Real Money Games) Regulations, 2025 ("RMG Regulations"). The High Court affirmed the competency of the state to impose regulatory measures on online real money games, including restrictions on playing hours and mandatory age-verification requirements.
Tamil Nadu and Real Money Gaming: A Complex History
Online real money gaming regulation in Tamil Nadu has evolved rapidly over the past few years. In 2021, the State Government amended the Tamil Nadu Gaming Act, 1930, by way of the Tamil Nadu Gaming and Police Law (Amendment) Act, 2021 ("2021 Amendment"), thereby banning online gaming and wagering, including on games of skill. The High Court subsequently struck down amendments introduced by the 2021 Amendment in respect of the blanket prohibition on online games of skill as unconstitutional, in the case of Junglee Games India Pvt. Ltd. v. State of Tamil Nadu, on the grounds of the same being unreasonable, excessive, and manifestly arbitrary - thereby infringing Article 19(1)(g) of the Constitution.
In 2022, the State Government enacted the TNOG Act, the validity of which was challenged by several gaming platforms in the case of All India Gaming Federation v. State of Tamil Nadu & Others ("AIGF Case"). In the AIGF Case, the High Court, upheld the validity of the TNOG Act but struck down Schedule II of the TNOG Act, which classified rummy and poker as games of chance. Further, in February 2025, the State Government notified the RMG Regulations, which were contested before the High Court in the Play Games Case.
High Court's Verdict
On Legislative Competence
One of the primary contentions of the petitioners in the
Play Games Case was that the State Government lacked legislative
competence to regulate internet-based activities, since this would
fall under the exclusive domain of the Union Government under the
Information Technology Act, 2000.
In the Play Games Case, the High Court held that the State Government was well within its powers to legislate on matters concerning public health and trade and commerce within the state. It observed that online real money games in their true essence constituted trade activity, thereby warranting regulation through state legislation. The High Court further relied on Articles 39 and 47 of the Constitution, which empower the state to take steps to improve public health and welfare. Consequently, the challenge on the ground of legislative incompetence was dismissed as untenable.
On Night Ban
Notably, the RMG Regulations require all online real‑money
games to enforce "blank hours" from 12 to 5A.M., during
which login and play are prohibited. The petitioners challenged
such a blanket ban as arbitrary and without empirical
justification. The petitioners contended, inter alia, that
such a ban infringed their fundamental right to carry on a trade or
business under Article19(1)(g) of the Constitution. The High Court,
in the present case, upheld the validity of the night‑time
ban, finding that the potential harm to public well‑being,
including but not limited to impaired cognitive function, disrupted
circadian rhythms, outweighed the petitioners' right under
Article19(1)(g) and justified regulatory intervention.
Read more on RMG Regulations here.
On Aadhar-Based KYC
Under the RMG Regulations, online real‑money gaming platforms
are required to conduct mandatory KYC verification, with initial
login via Aadhaar and a second layer of authentication through OTP
verification linked to the registered Aadhaar number. The
petitioners challenged this requirement, arguing, inter alia, that
it violated Section 4(7) of the Aadhaar Act, 2016 ("Aadhaar
Act") and the Supreme Court's decision in
'Justice K.S. Puttaswamy (Retd.) v. Union of
India', which held that Aadhaar authentication can
only be mandated by a law enacted by Parliament.
The High Court upheld the State Government's decision, noting that while other forms of identification are valid, they lack the infrastructure for real-time verification. Aadhaar, in contrast, provides a reliable mechanism for verifying age, which is critical for regulating access to real‑money games. Relying on Section 4(4) (b)(i) of the Aadhaar Act, the Court held that Aadhaar authentication may be used where permitted by the Central Government in the interest of the State. The Central Government, through its counter-affidavit, confirmed that it is permitted for online gaming service providers.
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