REGULATING ONLINE SHARE TRADING AND INVESTMENT PLATFORMS IN INDIA: A SEBI-LED FRAMEWORK

Regulating Online Share Trading and Investment Platforms in India: A SEBI-Led Framework

1. Abstract
   The rapid rise of online share trading platforms in India has transformed retail participation in capital markets, but it has also exposed investors to significant risks of fraud, misuse, and regulatory gaps. This paper critically examines the regulatory framework developed by the Securities and Exchange Board of India (SEBI) to govern online trading platforms. It traces the evolution of SEBI’s role, from early disclosure-based regulations to recent reforms prompted by scandals such as the Karvy Stock Broking case. Key investor protection measures—including segregation of client funds, restrictions on broker powers of attorney, daily reporting mandates, and UPI-based fund blocking—are analyzed for their effectiveness. The paper further explores SEBI’s enforcement actions, case law developments, and the adoption of fintech-driven innovations through regulatory sandboxes. By situating these reforms within the broader legal-financial ecosystem, the study highlights both the strengths and the continuing challenges in balancing innovation, transparency, and investor protection in India’s online trading sector.

2. Introduction

Online share trading in India has surged dramatically in recent years, fueled by easy-to-use mobile platforms and a growing appetite for equities among the public. The number of dematerialized (demat) accounts – required to hold securities electronically – crossed 17 crore (170 million) by August 2024, with over 6 crore new accounts added since January 2023 alone.[1] This boom underscores the significance of a robust regulatory framework to protect investors and ensure fair, orderly markets. In India, the Securities and Exchange Board of India (SEBI), established as a statutory regulator in 1992, leads the governmental oversight of securities markets and intermediaries. SEBI operates under key statutes like the SEBI Act, 1992 and the Securities Contracts (Regulation) Act, 1956 (SCRA), which together empower it to regulate stock exchanges, brokers, and market transactions in the interest of investors These laws mandate that trading of securities occur only on recognized stock exchanges and through registered intermediaries, making off-market or unregistered trading platforms illegal[2]

3. Background:

 Indian capital markets have evolved from open-outcry trading to a highly digital infrastructure. The National Stock Exchange (NSE) introduced fully electronic trading in the 1990s, and by 1996 the introduction of demat accounts eliminated paper share certificates. [3]SEBI permitted Internet-based trading in 2000 with strict guidelines to ensure security, transparency, and KYC [4]Over time, online platforms run by registered stock brokers have become the primary medium for investors to trade stocks, bonds, and other securities. This regulatory framework has been continually refined – through statutes, SEBI regulations, and circulars – to address emerging challenges such as algorithmic trading, digital advisory services, and fintech innovations, all while safeguarding investors. In the following sections, we analyze how SEBI’s regulations and the Indian legal framework govern online trading platforms, the specific rules for various market participants, and recent regulatory measures to tackle new-age issues.

4. Legal and Regulatory Framework for Online Trading Platforms

4.1 SEBI’s Mandate and Statutory Powers

SEBI’s primary mandate under the SEBI Act, 1992, is to safeguard investor interests and regulate the securities markets. Section 11 of the Act authorizes SEBI to register and oversee market intermediaries (such as stockbrokers, sub-brokers, investment advisers, stock exchanges, etc.) and frame regulations to govern their conduct. The Securities Contracts (Regulation) Act, 1956, reinforces this by prohibiting securities trading outside recognized exchanges. SEBI has consistently emphasized that only recognized stock exchanges are permitted to provide trading platforms or fund-raising avenues for securities of listed or soon-to-be-listed companies[5]. Conducting securities transactions on unauthorized online platforms violates both the SCRA, 1956, and the SEBI Act, 1992, laws designed to protect investors and uphold market integrity.nnWithin this framework, all online share trading platforms must either be registered stock exchanges or SEBI-registered brokers offering exchange access. Major exchanges like NSE and BSE fall under SEBI’s regulation through the SEBI (Stock Exchanges and Clearing Corporations) Regulations, ensuring they maintain strong trading systems, surveillance mechanisms, and investor protection funds. Similarly, brokers and trading members who run online platforms are regulated under the SEBI (Stock Brokers) Regulations, 1992, which specify requirements for registration, financial stability, risk management, investor grievance redressal, and more—including those operating through mobile apps or web platforms. SEBI has effectively extended the traditional responsibilities of brokers, such as maintaining proper accounts, adhering to capital adequacy norms, and complying with exchange by-laws, into the digital ecosystem.nnEqually significant are know-your-customer (KYC) and anti-money laundering (AML) rules, which apply to online trading accounts just as they do offline. SEBI requires either in-person or verified digital KYC for opening demat and trading accounts, with centralized KYC Registration Agencies maintaining investor records. The Depositories Act, 1996, along with SEBI’s Depository Regulations, ensures that securities are held in demat form with depositories like NSDL and CDSL, preventing brokers from accessing client securities without proper authorization. The legal structure mandates that any entity offering securities trading online must be within SEBI’s regulatory ambit—as a registered exchange, broker, or investment advisor—or discontinue its operations[6]

5. Regulation of Stock Exchanges and Brokers in the Online Era

SEBI’s primary mandate under the SEBI Act, 1992, is to safeguard investor interests and regulate the securities markets. Section 11 of the Act authorizes SEBI to register and oversee market intermediaries (such as stockbrokers, sub-brokers, investment advisers, stock exchanges, etc.) and frame regulations to govern their conduct. The Securities Contracts (Regulation) Act, 1956, reinforces this by prohibiting securities trading outside recognized exchanges. SEBI has consistently emphasized that only recognized stock exchanges are permitted to provide trading platforms or fund-raising avenues for securities of listed or soon-to-be-listed companies. [7]Conducting securities transactions on unauthorized online platforms violates both the SCRA, 1956, and the SEBI Act, 1992, laws designed to protect investors and uphold market integrity. Within this framework, all online share trading platforms must either be registered stock exchanges or SEBI-registered brokers offering exchange access. Major exchanges like NSE and BSE fall under SEBI’s regulation through the SEBI (Stock Exchanges and Clearing Corporations) Regulations, ensuring they maintain strong trading systems, surveillance mechanisms, and investor protection funds. Similarly, brokers and trading members who run online platforms are regulated under the SEBI (Stock Brokers) Regulations, 1992, which specify requirements for registration, financial stability, risk management, investor grievance redressed, and more—including those operating through mobile apps or web platforms. SEBI has effectively extended the traditional responsibilities of brokers, such as maintaining proper accounts, adhering to capital adequacy norms, and complying with exchange by-laws, into the digital ecosystem. Equally significant are known-your-customer (KYC) and anti-money laundering (AML) rules, which apply to online trading accounts just as they do offline. SEBI requires either in-person or verified digital KYC for opening demat and trading accounts, with centralized KYC Registration Agencies maintaining investor records[8]. The Depositories Act, 1996, along with SEBI’s Depository Regulations, ensures that securities are held in demat form with depositories like NSDL and CDSL, preventing brokers from accessing client securities without proper authorization. In short, the legal structure mandates that any entity offering securities trading online must be within SEBI’s regulatory ambit—as a registered exchange, broker, or investment advisor—or discontinue its operations[9]

6. Investor Protection Measures for Online Trading: An Analysis

As apps drew in millions of first-time investors, SEBI emphasized investor protection in online trading. A major regulatory action was triggered by the Karvy Stock Broking scandal (2019), which exposed how a large stockbroker had exploited clients’ securities. [10]Karvy had illegally shifted securities worth ₹2,300 crore owned by about 95,000 clients in its own name and hypothecated those securities for borrowing monies. When this was noticed, SEBI took action: it prevented Karvy in 2019 from on-boarding fresh clients and directed depositories for repatriating their shares in names of proper clients. SEBI in its later action de-licensed Karvy and barred its promoters (in 2023) for serious violations of SEBI Act and SCRA. Much more importantly, SEBI undertook sweeping reforms so no such exploitation by brokers would ever recur:[11]

• Segregation of Client Assets: SEBI in June 2019 prohibited brokers from pledging client securities for brokers’ own borrowing needs and instructed for proper segregation of client funds as well as securities. By September 2019, brokers had to relocate all client securities out of their own accounts. A February 2020 circular introduced a pledge-and-repledge system for margins – clients now pledge securities in their own demat account, which are re-pledged with clearing corporations, leaving a full audit trail visible to the client. This ensures clients always know if their securities are being used.[12]
• Restricted Power of Attorney (PoA): Traditionally, brokers took PoA from clients to operate accounts, which Karvy misused. In August 2020, SEBI ruled that granting PoA is optional and cannot be a condition for opening an account. Even when given, its use is restricted to specific purposes like placing trade orders or pledging for margin, not transferring securities to a broker’s account.
• Monitoring and Transparency: By July 2021, SEBI required brokers to report client-wise collateral daily to exchanges and clearing corporations. Portals were created for clients to directly check their collateral and usage. Collateral can only be used for the client’s own obligations, ending the pooling of one client’s assets to cover another’s trades.
• Settlement and Fund Blocking: To limit broker involvement in handling client money, SEBI in 2023 proposed a UPI-based block mechanism for trades. Similar to IPOs, funds remain blocked in the client’s bank until settlement, reducing the float with brokers and the risk of misuse.[13]

Additionally, Investor Protection Funds (IPFs) run by exchanges compensate investors if a broker defaults, with rising compensation limits over time. Brokers also contribute to a Trade Guarantee Fund to cover settlement shortages.

7. Regulation of New-Age Online Platforms and Services

Whereas SEBI’s core regulations govern exchanges and brokers, the digital era has given rise to new types of “investment platforms” – ranging from fantasy stock games to unlisted securities exchanges, bond trading portals, robo-advisors, and algorithmic trading services. SEBI has actively expanded its regulatory reach (often in coordination with other regulators) into these areas, as outlined below.[14]

7.1 Unregulated Platforms for Unlisted Securities: A Critical Analysis                 

Recently, online platforms have emerged offering investors the chance to buy unlisted shares (pre-IPO stock, startup ESOPs, etc.) outside stock exchanges. These platforms promote “exclusive” stock access and pool investors, but such activity can amount to an illegal public issue that bypasses disclosure norms.[15]

In December 2024, SEBI issued a public advisory warning against trading in unlisted securities on such platforms, clarifying that they fall outside the regulatory framework and violate the Companies Act’s private placement rules as well as securities laws.[16]

By law, any offer of securities to more than 200 investors is deemed a public offer requiring SEBI approval and exchange-based trading. SEBI noted some fintechs tried to evade this by creating “secondary sales” (first subscribing privately, then reselling shares to multiple users). This effectively creates a grey market stock exchange without oversight. SEBI and the Ministry of Corporate Affairs have already acted against such platforms.

A key precedent is the Sahara case (2012), where the Supreme Court upheld SEBI’s power to stop Sahara from raising funds through bonds disguised as private placements. The Court ruled SEBI can regulate any de facto public offer, closing loopholes.[17] SEBI’s 2024 advisory reiterates: only recognized stock exchanges can facilitate fundraising or trading of listed or to-be-listed securities. Investors were cautioned not to buy such shares—or even share personal data—on unregulated apps, as no legal recourse exists there[18].

• Online Bond Trading Platforms: An Analysis of SEBI’s Role

Online bond trading apps have made corporate bonds accessible to retail investors, leading to a sharp rise in participation since 2020. To regulate this, SEBI in 2022 proposed that all such platforms must register as stockbrokers and restrict offerings to listed bonds. It also mandated routing trades through exchanges and introduced a lock-in on privately placed bonds to prevent misuse.[19]
By 2023, SEBI created a new category of Online Bond Platform Providers (OBPP), requiring registration and compliance with exchange norms. While industry concerns remain about limited retail access, SEBI prioritizes investor protection and prevention of a grey market. This reflects SEBI’s proactive regulation, stepping in before risks escalate.[20]

7.3 Fantasy Stock Games & Opinion Trading Platforms

Gamified trading apps (like fantasy stock games) raised concerns of misleading investors. SEBI first flagged them in 2016 and by 2024 effectively disabled their operations by barring access to real-time market data. Similarly, in 2025 SEBI cautioned against opinion trading platforms, where users bet on event outcomes. These contracts are not “securities” under law, making such platforms unregulated and akin to gambling. SEBI clarified that no protections or legal recourse apply to users, reinforcing boundaries against speculative online products.

7.4 Algorithmic Trading and API-Based Platforms: An Analytical Perspective

Algorithmic trading, once limited to institutions, has become increasingly popular among retail investors through broker APIs and third-party platforms, but this also led to misuse, with unregulated vendors offering strategies and even “guaranteed returns.” SEBI responded with strict enforcement against brokers enabling such practices and by introducing a comprehensive retail algo trading framework effective August 1, 2025. Under this framework, all algorithms must be approved by exchanges and tagged with unique IDs, with even self-developed algos requiring registration if used extensively.[21] Brokers are made responsible for detecting algo orders, blocking unapproved APIs, enforcing two-factor authentication, vetting third-party algo providers, and monitoring trades for misuse. Algo vendors must register with exchanges, and if their strategies function as “black-box” signal providers, they will be treated as Research Analysts or Investment Advisers under SEBI regulations. Further, approved algos are restricted to the personal use of the investor who created or purchased them, preventing mass distribution without regulation. By tightening these rules, SEBI seeks to balance wider retail access to automation with safeguards for transparency, accountability, and market integrity.[22]

7.5 Online Investment Advice and Social Media “Finfluencers”: Regulatory Analysis

The shift of investment advice to online spaces has created new regulatory challenges for SEBI, especially with the rise of “finfluencers” and unregistered advisory websites that often dispense stock tips or portfolio guidance without authorization. Under the SEBI (Investment Advisers) Regulations, 2013 and (Research Analysts) Regulations, 2014, only registered entities can provide such advice, but enforcing these rules on social media has proven difficult. In response, SEBI has intensified surveillance and enforcement, most notably in its February 2025 interim order against YouTube personality “Asmita Patel – The She Wolf of Stock Market,” who allegedly used trading courses and Telegram groups as a front for unregistered advisory services, earning over ₹104 crore[23]. SEBI impounded part of these gains and barred her from the market, signaling a crackdown on unlicensed “gurus.”[24] In another case, SEBI fined Basant Maheshwari Wealth Advisers LLP for YouTube promotions that violated advertising norms, highlighting issues like exaggerated claims, non-compliant fee structures, and inadequate risk disclosures. Beyond individual actions, SEBI has pushed platforms like Google, Meta, and YouTube to increase traceability of financial promotions and reported removing more than 70,000 misleading posts in just six months. Parallelly, SEBI is working on dedicated guidelines for finfluenc[25]ers, including possible restrictions on real-time market commentary disguised as “education.” Alongside enforcement, SEBI emphasizes investor education, urging reliance only on its published list of registered advisers. This two-pronged strategy—tightening rules while penalizing violators—shows SEBI’s effort to bring the fast-growing world of online financial influence into its regulatory fold.[26]           

8. Case Law:

The legal foundation for SEBI’s crackdown on finfluencers rests on the SEBI Act’s anti-fraud provisions and the specific framework governing investment advisers and research analysts. Courts have consistently backed SEBI’s strict enforcement, emphasizing the need for market integrity. In SEBI v. Kishore Ajmera (2016)[27], the Supreme Court underscored that securities regulation requires a high standard of conduct, allowing even circumstantial evidence to justify SEBI’s intervention in the interest of investors. Applied to the digital era, this principle means that when online advisers or influencers bypass registration and expose investors to risk, SEBI and the Securities Appellate Tribunal (SAT) are likely to support regulatory action. Looking ahead, more formalized rules are expected—possibly requiring influencers paid to promote financial products to register or make mandatory disclosures, mirroring global approaches to “finfluencer” oversight. Until then, SEBI continues to rely on existing tools like the Investment Advisers Regulations and Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations to police dubious online financial promotions.[28]

9. Fintech Innovations and Regulatory Sandboxed Approach

SEBI’s regulatory strategy goes beyond curbing malpractices and actively promotes innovation in a structured manner. In 2020, it introduced the Innovation Sandbox and later the Regulatory Sandbox frameworks, which allow fintech firms and startups to test new products—such as blockchain-based settlement systems, AI-driven advisory tools, or novel trading features—in a controlled environment with limited users and temporary relaxations from certain regulations. The goal is to encourage experimentation while safeguarding investors by ensuring regulatory oversight before any large-scale rollout. Several entities have already used SEBI’s sandbox to pilot solutions like blockchain-enabled e-KYC and algorithmic trading tools with safeguards. Some of these trials have translated into permanent regulatory approvals, for instance, video KYC and online document verification processes that brokers now widely use. Similarly, experiments involving distributed ledger technology for record-keeping could shape future market infrastructure. By providing this safe testing ground, SEBI demonstrates that it is not anti-technology but rather seeks to channel fintech innovation responsibly, reinforcing its dual role as both regulator and enabler of India’s evolving capital markets.[29]

10. Conclusion

Thr SEBI-led Indian regulation has been significantly successful in enabling a strong online trading ecosystem while avert large-scale disasters. The SEBI and legislative machinery have signaled innovation (through approval for fresh service within regulation) as well as resolve for effective intervention where warranted (through enforcement as well as stricter norms).[30]India’s experience thus provides an example of how a government regulator can best make use of the merits of online trading – greater inclusion, efficiency, and innovation – without wishing away investor confidence and integrity in the marketplace. Such a balancing act is based on SEBI-led legislative framework of laws, regulations, and vigilant surveillance. As online trading solutions further evolve, such a framework would itself evolve in line with its dual objectives of building a thriving capital market as also safeguarding the common investor from misuse, thus ensuring a long-term stability and fairness for India’s financial sector.

[1] Demat count exceeds population of Russia, Mexico, Japan, MONEYCONTROL (Aug. 6, 2024), https://www.moneycontrol.com/news/business/earnings/demat-count-exceeds-population-of-russia-mexico-japan-12814777.html.

[2] SEBI warns against unregulated platforms facilitating trade in unlisted securities, OUTLOOK BUS. (Apr. 11, 2024), https://www.outlookbusiness.com/markets/sebi-warns-against-unregulated-platforms-facilitating-trade-in-unlisted-securities.

[3] Algorithmic Trading: Expanding Access to Retail Investors and Regulatory Supervision, ELPLAW (Feb. 4, 2025), https://elplaw.in/leadership/algorithmic-trading-expanding-access-to-retail-investors-and-regulatory-supervision/#:~:text=centuries,February%204%2C%202025%2C%20bearing%20no.

[4] Internet Trading in India, REDIFF.COM (Feb. 2, 2000), https://m.rediff.com/money/2000/feb/02sspe.htm#:~:text=I%20nternet,conditions%20to%20be%20met%20are.

[5] The Securities and Exchange Board of India Act, 1992, No. 15, Acts of Parliament, 1992 (India).

[6] The Securities Contracts (Regulation) Act, 1956, No. 42, Acts of Parliament, 1956 (India).

[7] Securities & Exchange Bd. of India, Circular No. SEBI/HO/ITD-1/ITD_CSC_EXT/P/CIR/2024/113, Cybersecurity and Cyber Resilience Framework for SEBI Regulated Entities (Aug. 20, 2024) (India).

[8] Order in the Matter of Nat’l Stock Exch. of India Ltd., Securities & Exchange Bd. of India (Apr. 30, 2019) (India).

[9] The Depositories Act, 1996, No. 22, Acts of Parliament, 1996 (India)

[10] Debashis Basu, The Karvy Scam: How One of India’s Largest Brokers Misused Client Securities, Moneylife (Nov. 2019).

[11] See Karvy Stock Broking Ltd. v. SEBI, (2023) (holding that Karvy’s license be cancelled for violations of SEBI Act & SCRA).

[12] SEBI, Circular on Online Dispute Resolution (ODR) Mechanism, (2021); NSE, SMART-ODR Platform.

[13] SEBI, Consultation Paper on Blocking of Funds for Secondary Market Transactions (2023).

[14] SEBI Circular on Algo Trading Regulation for Retail Investors, (Aug. 1, 2025), https://www.definedgesecurities.com/blog/definedge-securities/new-era-of-algo-trading-in-india-begins/.

[15] Securities and Exchange Board of India (SEBI), Press Release on Unauthorized Platforms Facilitating Unlisted Securities Transactions (Dec. 9, 2024),

[16] Vinod Kothari, Share Hawkers of the Digital Era: SEBI Cautions Investors Against Unregulated Platforms Offering Unlisted Securities, Dec. 9, 2024, https://vinodkothari.com/2024/12/share-hawkers-of-digital-era/.

[17] Sahara India Real Estate Corp. Ltd. v. SEBI, (2012) 10 SCC 603 (Supreme Court of India)

[18] Securities and Exchange Board of India (SEBI), Press Release on Unauthorized Platforms Facilitating Unlisted Securities Transactions (Dec. 9, 2024),

[19] SEBI, Consultation Paper on Regulatory Framework for Online Bond Platforms, July 21, 2022, https://www.argus-p.com/updates/updates/sebis-consultation-paper-on-regulatory-framework-for-online-bond-trading-platforms/.

[20] Abhirup Ghosh, SEBI Proposes Regulation of Online Bond Trading Platforms, Ikigai Law (Dec. 2023), https://www.ikigailaw.com/article/74/sebi-proposes-regulation-of-online-bond-trading-platforms.

[21] Adyata Mohanty, SEBI Algo Trading Regulations 2025: Key Rules & Impact, Maheshwari & Co. (Mar. 27, 2025), https://www.maheshwariandco.com/blog/sebi-algo-trading-regulations-2025/.

[22] Sheetal Patodiya, Algorithmic Trading: Expanding Access to Retail Investors and Regulatory Supervision, ELP Law (Feb. 2025), https://elplaw.in/leadership/algorithmic-trading-expanding-access-to-retail-investors-and-regulatory-supervision/.

[23] SEBI Bans “She Wolf of Stock Market” YouTuber for ₹104 Crore Unregistered Advisory Scheme, Economic Times (Feb. 2025), https://economictimes.indiatimes.com/markets/stocks/news/sebi-bans-she-wolf-of-stock-market-youtuber-who-made-rs-104-crore-by-selling-tips/articleshow/118007475.cms.

[24] SEBI Imposes ₹4 Lakh Fine on Basant Maheshwari Wealth Advisers for Ad Code Breach, Business Standard (Mar. 2025), https://www.business-standard.com/markets/news/ad-code-breach-sebi-imposes-fine-of-rs-4-lakh-on-basant-maheshwari-wealth-125032601073_1.html.

[25] SEBI’s Crackdown on Finfluencers: Regulatory Circular on Association Restrictions & Real-Time Data Ban, Jan. 29, 2025, https://nliulawreview.nliu.ac.in/blog/sebis-crackdown-on-finfluencers-a-legal-and-regulatory-perspective/.

[26] SEBI Digital Advertising Guidelines & Social Media Monitoring Initiatives, July 2025, https://www.indiratrade.com/blog/sebis-new-digital-ad-rules-a-gamechanger-for-financial-influencers-in-india/9572.

[27] SEBI v. Kishore Ajmera, (2016) 12 SCC 512 (India).

[28] Vinod Kothari, SEBI Proposes To Regulate Finfluencers, Sept. 4, 2023, https://vinodkothari.com/2023/09/sebi-proposes-to-regulate-finfluencers/.

[29] Securities and Exchange Board of India, Framework for Regulatory Sandbox, SEBI/HO/MRD-1/CIR/P/2020/95, June 5, 2020, https://www.sebi.gov.in/legal/circulars/jun-2020/framework-for-regulatory-sandbox_46778.html;

[30] SEBI Regulations 2025: What Algo Traders Need to Know, Share India (July 1, 2025), https://www.shareindia.com/knowledge-center/algo/latest-sebi-regulations-2025-what-algo-traders-need-to-know