Securities and Exchange Board of India (Sebi) is considering preparing guidelines for the responsible usage of Artificial Intelligence or Machine Learning in securities markets. The market regulator on Friday released a consultation paper seeking public feedback on five broad-based guiding principles that could be part of the regulatory framework.

With AI/ML use growing across exchanges, brokers, and mutual funds, Sebi aims to strike a balance between innovation and regulation. The proposed framework covers governance, data security, bias prevention, investor protection, and risk controls.

The last date to send comments/suggestions is July 11.

Earlier, Sebi constituted a working group to study Indian, global best practices in AI/ML, mandating it to prepare guidelines for the usage of AI/ML applications. The working group was also tasked with providing recommendations to address concerns and issues related to the use of AI/ML applications.

Also Read: Sebi eases delisting norms for PSUs with over 90% government holding

Here are 5 guiding principles:

1) Model governanceMarket participants must set up internal teams with the technical expertise to monitor AI/ML models, document model development, and handle exceptions. Senior management will be held accountable for the entire AI lifecycle, including oversight of third-party vendors.

2) Mandatory disclosure

If AI/ML tools directly impact investors—like in algo trading or advisory services—firms must clearly disclose their use, including model purpose, risks, accuracy, and limitations. Language must be simple and client-friendly.

3) Robust testing & monitoring norms

Sebi proposes rigorous model testing in simulated environments before live deployment, and ongoing monitoring thereafter. Firms must retain data logs and documentation for a minimum of five years to ensure explainability and traceability.

4) Fairness and bias

To prevent discrimination, Sebi suggests using diverse, high-quality datasets and training staff to identify bias.

5) Data security

Companies must follow strong data governance, privacy, and cybersecurity protocols.

Also Read: Sebi board meeting: Regulator approves PSU delisting, IPO reforms, dematerialisation of Securities. 10 key takeaways

Sebi has suggested a lighter regulatory approach for internal-use models (e.g., surveillance), while models affecting clients would face stricter controls.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)