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

In the matter: JSI Investments Private Ltd., JSI2 Investments Private Ltd., Jane Street Singapore Pte. Ltd., Jane Street Asia Trading Ltd.

In the matter: JSI Investments Private Ltd., JSI2 Investments Private Ltd., Jane Street Singapore Pte. Ltd., Jane Street Asia Trading Ltd. - TMI 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.