Harshad Mehta to Jane Street: Why Indian Regulator SEBI Keeps Falling Behind

Whether SEBI has done well in catching questionable transactions by Jane Street depends on who you are talking to.

At the core of all this is the question of whether and how markets can be manipulated in market indices like the NIFTY.

(Photo: Kamran Akhter/The Quint)

If detective icon Sherlock Holmes were to investigate the alleged manipulation of Indian stock markets by New York-based proprietary trading firm Jane Street, the story might well be titled, “The Curious Case of the Half-Asleep Watchdog.” That tallies quite well with the old saying about seeing a glass of water as half-empty or half-full.

Whether the Securities and Exchange Board of India (SEBI) has done well or not in catching questionable transactions by Jane Street and impounding alleged ill-gotten profits depends on who you are talking to, and what the rules of the game are.

As of now, there is insufficient clarity on the issue, with Jane Street telling its 3,000 employees in an email that it plans to contest the regulator’s crackdown because all it did was “arbitrage,” a practice under which price gaps are quickly turned into profits by smart selling. This means that there are sufficient grey areas on what constitutes market manipulation and who decides it, how, and when.

A Fog of Figures, but No Clear Offence

The amounts being cited are serious enough. SEBI itself has impounded more than Rs 4,800 crore as alleged “unlawful gains,” whereas guesswork by market analysts put the figure variously at Rs 36,000 crore or Rs 43,000 crore.

At the core of all this is the question of whether and how markets can be manipulated in market indices like the NIFTY. What emerges is a strange, confusing mix of tonnes of speculative cash, careful timing based on expiry and opening days of a session or settlement period, and a game of perception engineering that results in real profits for Jane Street.

What is “unlawful” is this question, the answer to which is blowing in the monsoon winds of Dalal Street.

As per Mayank Bansal, a Dubai-based trader who complained about Jane Street’s moves to SEBI, the manipulation would involve using both the cash and Futures and Options (F&O) segments to take up heavy positions to create an irrational anomaly between the two segments going against the underlying price of shares in order to book huge profits.

This is a lot like cornering bundles of a commodity in bulk to make it expensive one day and then dumping it the next day to hammer down the price and buying it back in bulk volumes in a manner in which the margins would be in its favour.

Is SEBI Slow or Underpowered?

The real execution of this is a complex process, often involving software algorithms in a humongous electronic market. It poses regulatory puzzles, unless there are clear-cut rules on what constitutes market manipulation. Besides that, there are issues related to whether watchdog SEBI did the right thing at the right speed.

In the Jane Street case, the trading firm used both, real shares as well as index options, much like finding the gap between slip and gully in cricket.

What is glaring to a market watcher is that it has taken nearly 18 months since eyebrows went up on Jane Street for a real regulatory crackdown. Is this because there are no clear rules? Or was SEBI slow? Or did it lack the requisite method to gather data or the technology to monitor violations?

The answer to all this could well be a “Yes”, unless SEBI comes clean. This is where we can say the regulator has been half-asleep.

As an observer of SEBI since its founding days under its first chairman GV Ramakrishna, I can safely say that the regulator, which lacked teeth in its initial days and was empowered later, has more often than not been led indifferently, with convictions of market manipulation rare.

From Harshad to Hindenburg: Old Scams, New Methods

Irrational volatility and scams have been a regular phenomenon. It would be unfair to target the current chief, Tuhin Kant Pandey, or his team, but it can be safely said that SEBI needs to turn from a growth cheerleader (as it has been under recent chiefs) to a no-nonsense supercop.

Pandey’s own predecessor Madhabi Puri Buch—controversial for her alleged indirect links to Adani Group shares—has said SEBI under her watch had acted against index manipulation by Jane Street in early 2024 with “cease and desist” orders. But that only shows that there was a “yellow card” approach to warn the player, not the “red card” that Pandey’s SEBI has shown in impounding profits.

Whether its the Harshad Mehta, Chain Roop Bhansali, or Ketan Parekh scams, brokers or finance wizards have used gaps in the regulatory system— or the naivete of retail investors—to execute Ponzi schemes or rig prices of shares, using money from non-banking finance companies (NBFCs) or accomplice banks.

In the Jane Street instance, things look more complicated because index futures or options are more difficult to manipulate, unlike in individual shares. Jane Street has had its own “combo plan” of shares and options. Much like leg-before-wicket appeals in a cricket test match, which require action replays, this involves technology, vigilance, tonnes of data, and clarity on rules to match wits with Smart Alec traders. 

The stock market is a place where one man’s smart influence is another man’s manipulation. It all depends on who draws the red line and who blows the whistle—and when.

We saw a huge political outcry when US-based short-selling firm Hindenburg Research published negative reports on Adani Group shares that drew Puri Buch into its tentacles. But short-selling is legal, and so is forensic analysis into the operations of a company. Both the valuation of a share and the analysis of a company’s financial linkages are legitimate, even desirable, in market conversations.

Fundamental research based on earnings and balance sheets form part of the game. However, it gets tricky with indices that bunch up shares and bring in other factors such as wars, politics, trade talks, and liquidity cycles that peer into the long term.

SEBI Needs RegTech, Not Red Tape

Apart from firms like Jane Street and hedge funds that play on all kinds of strategies, the market is swarming with self-appointed or half-baked technical chartists who read the tea-leaves of market data and graphs with buy-and-sell calls. They are little more than behaviouralists influencing behaviour in a chaotic, volatile universe.

So, who are the losers when indices are manipulated? They could be punters and fools who regularly lose money by tracking half-blind technical chartists. They could be rivals to firms like Jane Street, whose own options and strategies failed (much like the Bulls vs Bears stories of Dalal Street in the 1980s and 90s).

But the real undeserving losers could be mutual funds, which are supposed to legitimately use F&O to hedge against volatility, but end up wasting retail money when the volatility is engineered to benefit one or two firms.

This is where SEBI needs to be extra vigilant. It needs effective regulatory technology (RegTech) so that it can get red flag alerts with the ease with which Amazon or Flipkart sends you a message when your order gets delivered.

It needs to constantly upgrade technology to get dashboard views of profits and volumes that smell bad. It needs its own vigilance mechanism and an intelligence network for early warnings. Think of it like an air defence system that needs to handle swarms of drones, like India faced in the aftermath of Operation Sindoor.

There are also deeper questions on the depth of a market in which one or two players can manipulate indices that cover a broad spectrum of players and shares.

Above all, SEBI owes us all an explanation on the delays in its investigation, so we know who was half-awake and who was half-asleep. Speed is of the essence where there is a clear chronology of suspicious activity. You cannot blame a policeman for a theft, but you can certainly call out a cop who does not patrol the streets.

(Madhavan Narayanan is a senior journalist and commentator who has worked for Reuters, Economic Times, Business Standard, and Hindustan Times. He can be reached on Twitter @madversity. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)