2025 (8) TMI 1079 - Board - SEBI

SEBI finds manipulation of BANKNIFTY/NIFTY50 on expiry days, invokes s.12A(a),(b),(c) and PFUTP regs, orders Rs4,843,57,70,168 impoundment

SEBI Board found that a respondent group manipulated BANKNIFTY and NIFTY50 on index expiry days, violating s.12A( a),(b),(c) of the SEBI Act and regs 3, ... Violation of section 12A (a), (b) and(c) of the SEBI Act, 1992; regulations 3(a), (b), (c), (d), 4(1) and 4(2)(a) and (e) of the PFUTP Regulations, 2003 - interrelationship between prices of derivative instruments and the prices of their underlying stocks or indices,unfair and undue advantage of the market structure and sentiments prevailing at the time - series of trades executed by Jane Street Group - Influencing underlying stock and index to profit from index options - Day-Wise profit calculation vis-à-vis BANKNIFTY options and further filtering process SEBI had observed that the JS Group was consistently running what appeared to be by far the largest risks in ‘cash equivalent’ terms in F&O particularly on index option expiry days - leveraged payoff from buying options close to expiry -market participants enjoy enormous ‘leverage’ from options - On expiry day, volumes and participation in index options is far higher than in the underlying constituent stocks and futures HELD THAT:- Leveraged payoff from buying options close to expiry, where one can take on enormous exposure in relation to the size of the capital outlay, with a known and limited downside (to the extent of option premium paid) but with the prospects of high gains if the prices were to move sharply and favourably, appears to attract traders who only trade in index options, and not in the underlying cash markets. Given the above, on weekly index option expiry day, by aggressively influencing the underlying cash and futures market with significant volumes (relative to those markets), a group of entities acting in concert with adequate funds and capital at their disposal, can influence and manipulate the index levels. This in turn can allow them to put on significantly larger and profitable positions in the highly liquid index options market by misleading and enticing large number of smaller individual traders. It could also be used to engineer the closing of the market on expiry day in a manner that benefits enormous index option positions that they may be running to expiry. Such activities would prima facie be in violation of PFUTP regulations. Regulation 4(2)(a) deems any act to be manipulative or fraudulent if it creates false or misleading appearance of trading in the securities market. Regulation 4(2)(e) deems any act to be fraudulent or manipulative if it amounts to manipulation of the price of a security or manipulates the benchmark price of any securities. Indices reflect the price of a basket of securities, and price changes in the underlying securities concomitantly move the benchmark as well. On 15 BANKNIFTY index option expiry days identified with ‘Intra-day Index Manipulation Strategy’ in this Order, in the first patch of the day, as has been clearly demonstrated by data and analysis, JS Group first aggressively bought significant quantities of BANKNIFTY underlying constituent stocks and futures, temporarily pushing up or lending considerable support to the BANKNIFTY index. In the second patch of the day, as has again been demonstrated by data and analysis, JS Group was seen to practically and effectively reverse all of this buying activity from the first patch, by aggressively selling large quantities of BANKNIFTY underlying constituent stocks and futures. There is little or no economic rationale to justify such large and aggressive intraday trading activity in stocks and futures on a standalone basis. In fact, given the sheer size, aggression, manner of trading and transaction costs involved, standalone, such activities could more often than not end with net trading losses. Note that across the 15 days in question, JS Group booked a total intraday trading loss of INR 199.7 crores in their activities in the BANKNIFTY constituent cash stocks and futures markets. By preponderance of probability, the only reasonable explanation for the sharp buying in BANKNIFTY constituent shares and futures in Patch I (with the effective impending reversal of all these trades in Patch 2 later in the day) is that it was designed to artificially manipulate the BANKNIFTY Index during Patch 1, and thereby artificially and temporarily moving the prices of BANKNIFTY calls and puts. JS Group certainly exploited this to the hilt, and as has been clearly demonstrated above in all 15 instances wherein they actively traded BANKNIFTY puts and BANKNIFTY calls during Patch I, at prices that were very advantageous to themselves, and to the detriment of other traders (including many small retail traders). During Patch I, JS Group effectively took on active opposite side positions in BANKNIFTY index that were significantly higher in magnitude than the quantum of their intervention in the underlying cash and futures markets. On the three other days during the examination period (i.e. on October 4, 2023, May 8, 2024, and July 10, 2024) that have been highlighted above, the data and analysis presented clearly shows that the JS Group pursuing an ‘extended marking the close strategy’. 'Extended Marking the close' refers to a manipulative trading practice where an entity aggressively places large buy or sell orders and trades towards the end of a trading session, with the specific intent of influencing the closing price of a security or index to its advantage. This practice is particularly concerning on derivative expiry days, as the closing price directly affects the settlement value of index-based contracts, thereby directly impacting payoffs for all market participants. On all these three days, the JS Group was seen to be moving significant volumes (again, demonstrated clearly by percentage Gross Traded Volume, or GTV) in the underlying index constituent stocks and futures, very aggressively (as clearly demonstrated by the Last Traded Price or LTP analysis), to engineer a close in the index that was wholly favourable to their even larger effective positions in index options expiring the same day. By preponderance of probability, there is no economic rationale that can account for this sudden burst of large and aggressive activity towards the close on expiry day, other than the intent to manipulate the price of securities and index benchmark, so as to engineer a favourable expiry for the even larger positions that the group was running in index options. In addition, outside of the examination period on May 15, 2025, as has been highlighted and described above, JS Group was seen to be indulging prima facie in ‘extended marking the close’ of the NIFTY50 index, in order to benefit in the significant positions that they were carrying in the NIFTY50 index options market. As noted, this was in cynical defiance of the explicit Exchange communication to the JS Group in February 2025, and their own representations made to the Exchange in February 2025. In the instant case, the series of trades executed by Jane Street Group demonstrate a pattern which, when viewed in its totality, indicates a prima facie intent to take unfair and undue advantage of the market structure and sentiments prevailing at the time. While one is not required to demonstrate ‘inducement’ to prove fraud once market manipulation is established, it is evident from the volumes and number of individual PANs that have traded in index options for instance on January 17, 2024 (a BANKNIFTY expiry day) that by manipulating the index on expiry days, large number of participants are likely to have been induced to deal in index options at artificial prices. The massive profits by the JS Group in index options through these egregiously manipulative activities, to the detriment of other participants including many small retail traders, may well account for some part of the conclusions of SEBI’s earlier research report dated September 23, 2024 which revealed that 93% of over 1 crore individual F&O traders incurred losses during the three years from FY22 to FY24. Thus, find that the Entities have violated section 12A (a), (b) and(c) of the SEBI Act, 1992; regulations 3(a), (b), (c), (d), 4(1) and 4(2)(a) and (e) of the PFUTP Regulations, 2003. Computation of illegal gains - As noted earlier in this Order, on 15 BANKNIFTY index option expiry days identified with ‘Intra-day Index Manipulation Strategy’, in the first patch of the day JS Group first aggressively transacted significant quantities of BANKNIFTY underlying constituent stocks and futures, temporarily influencing the BANKNIFTY index. This was followed, in Patch 2, by an effective reversal of positions in BANKNIFTY underlying constituent stocks and futures. This resulted in, JS Group booking an intraday trading loss of a total of INR 199.7 crores across the aforesaid 15 days. This otherwise irrational loss was arising from trades that enabled JS Group to benefit immensely and illegally from the even larger positions that they were creating or carrying in index options. Clearly therefore, this ‘loss’ can only be viewed as a mala fide cost incurred by the JS Group to perpetrate their prima facie manipulative and fraudulent scheme. When computing illegal gains made by the JS Group, I find no reason to set off the losses made by the JS Group in the cash/futures market which were incurred as part of the manipulative device to influence the benchmark indices and profit from the positions taken in the index options. In exercise of the powers conferred upon me under sections 11(1), 11(4), 11B(1) and 11D read with section 19 of the SEBI Act hereby issue by way of this interim ex-parte order, the following directions, which shall be in force until further orders:- 1.The total amount of unlawful gains earned by the JS Group from the alleged violations as provided in Table 44 i.e. ₹4,843,57,70,168/- (Four Thousand Eight Hundred Forty Three Crore Fifty Seven Lakh Seventy Thousand One Hundred and Sixty Eight Rupees only), shall be impounded, jointly and severally. Entities are directed to open escrow account in a Scheduled Commercial Bank in India to deposit jointly and severally the aforesaid amount of unlawful gains with a lien marked in favour of SEBI and the amount kept therein shall not be released without permission from SEBI. 2. Entities are restrained from accessing the securities market and are further prohibited from buying, selling or otherwise dealing in securities, directly or indirectly. 3. Banks, where Entities are holding bank accounts, are directed to ensure that no debits are made, without permission of SEBI, in respect of the bank accounts held individually or jointly by Entities, except for the purpose of complying with this Order. However, credits, if any, into the accounts may be allowed. Further, debits in the bank accounts may also be allowed for amounts available in the account in excess of the amount to be impounded. 4. Custodians of Entities Nos. 3 and 4 are directed to ensure that no debits are made in respect of assets of said entities under their custody, without the permission of SEBI. 5. Depositories are directed to ensure that no debit shall be made, without permission of SEBI, in respect of the demat accounts held by Entities. However, credits, if any, into the accounts may be allowed. 6. Banks, Custodians and the Depositories are directed to ensure that all the aforesaid directions are strictly enforced and complied with. 7. The Registrar and Transfer Agents shall ensure that, they neither permit any transfer nor redemption of securities, including Mutual Funds units, held by Entities. 8. Entities shall not dispose of or alienate any of their assets/properties in India, till such time, the amount of unlawful gains is credited to escrow account except with the prior permission of SEBI. 9. Entities are further directed to provide a full inventory of all their assets in India whether movable or immovable, or any interest or investment or charge in any of such assets, including property, details of all their bank accounts, demat accounts, holdings of shares/securities if held in physical form and mutual fund investments and details of companies in which they hold substantial or controlling interest immediately but not later than 15 days of this Order. 10. If the Entities have any open position(s) in any exchange traded derivative contracts, as on the date of this Interim order, they can close out/square off such open positions within 3 months from the date of order or at the expiry of such contracts, whichever is earlier. The Entities are permitted to settle the pay-in and pay-out obligations in respect of transactions, if any, which have taken place before the close of trading on the date of this order. Banks, Custodians and Depositories are allowed to debit the accounts for the purpose of complying with this direction. 11. The directions stipulated in clauses 62.2, 62.3, 62.4, 62.5, 62.7, 62.8 and 62.10 shall cease to apply upon compliance with directions in clause 62.1 above. 12. The Entities shall cease and desist from directly or indirectly engaging in any fraudulent, manipulative or unfair trade practice or undertaking any activity, either directly or indirectly, that may be in breach of extant regulations, including by dealing in securities using any of the patterns identified or alluded to in this order. 13. Stock Exchanges are directed to closely monitor any future dealings and positions of JS Group on an ongoing basis, to ensure that Entities do not either directly or indirectly indulge in any kind of manipulative activity, including by dealing in securities using any of the patterns identified or alluded to in this order, till the completion of the investigation by SEBI and the consequent proceedings, if any. The prima facie observations contained in this Order are made on the basis of the material available on record. The Entities may within 21 days from the date of receipt of this Order, file their reply/ objections, if any, to this Order and may also indicate whether they desire to avail an opportunity of personal hearing on a date and time to be fixed on a specific request to be made in this regard. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the trading patterns identified (termed 'Intra-day Index Manipulation' and 'Extended Marking the Close') constitute prima facie manipulative, fraudulent or deceptive devices under section 12A of the SEBI Act and regulations 3 and 4 of the PFUTP Regulations. 2. Whether concentrated, time-bound intervention in underlying constituent stocks/futures to influence index levels, combined with disproportionately large index options positions, demonstrates intent to create a false or misleading appearance of trading or to manipulate benchmark/index prices. 3. Whether losses booked in cash/futures by the actors as part of the two-patch strategy can be set off against alleged illicit gains in options when computing disgorgement. 4. Whether interim relief (impounding alleged unlawful gains, market access restraint, account/deposit freezes, monitoring directions) is warranted pending detailed investigation - i.e., whether there exists a prima facie case, risk of irreparable harm, and a favorable balance of convenience. 5. Whether transactions effected through an Indian incorporated entity by a foreign trading group, in the context of FPI regulations prohibiting intraday cash market netting by FPIs, raise additional regulatory concerns including circumvention. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legal framework and whether the identified trading patterns amount to prima facie manipulation Legal framework: Section 12A of the SEBI Act prohibits use of manipulative or deceptive devices, schemes or artifices to defraud in connection with dealing in securities. PFUTP Regulations 3(a)-(d) and 4(1), 4(2)(a) & (e) proscribe fraudulent or unfair trade practices and expressly include creating false or misleading appearance of trading and manipulation of price or benchmark. Precedent treatment: Prior authorities recognize that orchestrated trades, artificiality and non-genuine trades constitute unfair practices; courts and tribunals accept market-integrity rationale justifying regulatory intervention. Interpretation and reasoning: The Order relies on minute-level trade data showing (a) concentrated aggressive buy-patch across multiple high-weight constituents early in day while simultaneously establishing large short index options exposure, followed by (b) reversal sell-patch later that same day, with LTP analyses attributing significant positive then negative LTP impact to the actors, and (c) analogous concentrated end-of-day activity in other instances. The combination of scale (large % of market traded value), timing (expiry days, concentrated patches), directionality and profit/loss patterns (large options profits offsetting intraday cash/futures losses) is used to infer manipulative design - namely, creating temporary artificial index levels to obtain favourable option pricing and realise profit on expiry. Ratio vs. Obiter: Ratio - trading patterns of large, time-bound, cross-segment interventions to influence index levels, supported by order/trade LTP and delta exposure data, constitute prima facie manipulation under PFUTP/SEBI Act. Obiter - illustrative market microstructure explanations and leverage descriptions aiding understanding. Conclusion: Prima facie, the trading patterns described meet statutory definitions of manipulative and deceptive conduct under SEBI Act and PFUTP Regulations. Issue 2 - Whether the strategies (Intra-day Index Manipulation; Extended Marking the Close) are manipulative in purpose and effect Legal framework: PFUTP Regulation 4(2)(a) (false/misleading appearance) and 4(2)(e) (manipulation of price/reference price). Relevant principles include intent or design to influence benchmark at expiry and inducement of other market participants to trade at distorted prices. Precedent treatment: Courts have recognized that deliberate reversal trades producing artificial effects, orchestrated trades and marking-the-close behaviours are actionable as market manipulation. Interpretation and reasoning: The Order methodically decomposes intraday patches: dominant buy footprint in constituents (Patch I) executed at/above LTP coincident with building large short index options exposure; later wholesale reversal selling (Patch II) executed at/below LTP to deflate index and realise options MTM gains. The Extended Marking the Close variants show analogous concentrated end-of-day sell or buy pressure aligned with large same-day options exposure. The recurrence across multiple expiry days, contemporaneous delta swings and disproportionate options profits (with attendant intraday cash/futures losses) supports inference that underlying trades were not independently rational hedging/arbitrage but designed to influence index settlement for options benefit. Ratio vs. Obiter: Ratio - coordinated multi-segment timing and magnitude of trades to influence expiry reference prices and profit from option positions is prima facie manipulative. Obiter - alternative benign explanations (e.g., delta management) were considered and rejected as implausible given scale, timing and losses. Conclusion: By preponderance of probability, the described strategies are prima facie manipulative with the purpose and effect of distorting benchmark index settlement to the actors' advantage. Issue 3 - Computation of illegal gains and treatment of intraday losses Legal framework: SEBI's remedial powers include disgorgement; statutory explanation to section 11B permits disgorgement of wrongful gains without set-off for expenses or losses. SAT precedents confirm disgorgement without offset of losses incurred by violator. Precedent treatment: Regulatory practice and tribunal authority uphold disgorgement based on wrongful gains not netted by legitimate losses incurred in executing the scheme. Interpretation and reasoning: The Order notes substantial options profits across identified days and intraday cash/futures losses that appear to be deliberate costs incurred to effect manipulation. Given statutory explanation and SAT jurisprudence, such losses are not to be set off against disgorgement calculations. Ratio vs. Obiter: Ratio - disgorgement computation need not net off cash/futures losses incurred as part of manipulative scheme; such losses are not an offset to illegal gains. Obiter - methodological annexures explain computational details. Conclusion: Illegal gains computed (aggregate figure provided) are to be impounded without setting off intraday loss amounts. Issue 4 - Need for interim directions (impounding, market access restraint, account freezes, monitoring) Legal framework: SEBI's interim powers under sections 11(1), 11(4), 11B(1), 11D and section 19 permit ex-parte directions to protect investor interests and market integrity pending investigation. Precedent treatment: Courts/tribunals have upheld interim intervention where prima facie manipulation exists and risk of dissipation of proceeds or continued abuse justifies urgent measures. Interpretation and reasoning: The Order applies the tripartite interim test - prima facie case (established as above), irreparable injury (market integrity, investor confidence, risk of repatriation/diversion of funds by multinational entities), and balance of convenience (favoring protective steps). It cites recurrence after prior regulatory caution as aggravating factor. Given FPIs' ability to repatriate funds and the multinational group structure, the risk of frustrating eventual enforcement is found material. Ratio vs. Obiter: Ratio - interim impounding of computed unlawful gains, restraint from dealing, account/demat/depository controls and monitoring of future dealings are appropriate and proportionate pending investigation. Obiter - specific operational modalities and timelines are administrative measures. Conclusion: Interim directions impounding alleged illegal gains and restraining market access were warranted and ordered pending completion of investigation. Issue 5 - FPI regulations, intraday cash transactions and use of an Indian entity Legal framework: FPI Regulations restrict FPIs to delivery-based cash market transactions (no intraday netting); derivatives permitted. Regulation 20(4) prohibits netting in secondary market for FPIs. Precedent treatment: Regulatory scheme bars FPIs from intraday cash trading to prevent circumvention and ensure settlement discipline. Interpretation and reasoning: The Order finds that an Indian incorporated group entity executed intraday cash market trades (including reversals), while FPI affiliates held large derivative positions - suggesting use of the Indian entity to effect intraday cash trades that FPIs could not undertake, raising circumvention concerns. That integration supports treatment of the group as a collective scheme for regulatory purposes and reinforces need for intervention. Ratio vs. Obiter: Ratio - coordinated cross-entity activity that effectively circumvents FPI cash market restrictions strengthens prima facie case of manipulative scheme. Obiter - need for further investigation into corporate control and fund flows. Conclusion: The observed cross-entity structure and conduct raise prima facie issues of circumvention of FPI rules and justify collective treatment of entities for remedial action.