[Hardik is a graduate of the National Law School of India University, Bengaluru]
Over a year ago, the Securities and Exchange Board of India (SEBI) passed an interim order against Jane Street Group, LLC and related entities (JS Group), directing them to disgorge Rs. 4,843 crores in alleged unlawful gains from index options profits and restraining JS Group from participating in the Indian securities market. However, SEBI allowed Jane Street to resume its operations in Indian stock markets after the firm deposited roughly Rs. 4,843.50 crores into an escrow account. SEBI alleged that Jane Street manipulated the Bank Nifty Index on 21 expiry days between January 2023 and March 2025 using coordinated positions across the cash, futures, and options segments to move the index artificially and profit from its options book. The matter is currently before the Securities Appellate Tribunal (SAT).
This case raises an important question about the computation of disgorgement: what does section 11B of the SEBI Act 1992 require SEBI to establish before it can direct disgorgement against a firm that conducts both legitimate trading and alleged manipulation on the same instruments? This post examines that question by analysing SAT’s interpretation of section 11B and what that interpretation requires SEBI to establish before directing disgorgement.
The Interim Order
SEBI identified two strategies Jane Street used across the 21 impugned days. The first involved buying Bank Nifty constituent stocks and futures to drive the index upward while simultaneously building short options positions and then reversing the stock and futures purchases to drive the index down. SEBI characterised the losses on the Buy and Reverse side as the “mala fide cost”, i.e., the cost of creating artificial prices in the underlying index. The second strategy involved concentrated buying near market close to inflate the settlement price for outstanding index options.
The impounding order of Rs. 4,843 crores represents the gross index options profits attributable to the 21 impugned days. Paragraph 46 of the order states that “genuine trading strategies such as arbitraging or hedging or directional positioning are well accepted” and identifies only the artificial profiteering as unlawful. Paragraph 15.49 reinforces this, stating that dealing across cash equities, stock futures, index futures, and index options simultaneously “is certainly not by itself a breach of any regulation.” The order thus proceeds on the basis that JS Group’s broader trading activity is legitimate, and that the alleged manipulation was something additional and separable from it.
Once the Interim Order recognises that the broader trading strategy was legitimate while alleging that only part of it was manipulative, the relevant question becomes one of attribution: what portion of the profits was produced by the alleged manipulation? Section 11B, as interpreted by SAT, provides the framework for answering that question.
The Causal-Nexus Requirement
The explanation to section 11B governs the computation of disgorgement. It provides that SEBI may direct recovery of “the amount equivalent to the wrongful gain made or loss averted by such contravention.” SAT has interpreted this provision to require more than proof of a contravention.
In National Stock Exchange (NSE) v. SEBI, SAT derived four elements from the explanation to section 11B: (i) the person must have contravened the SEBI Act or the rules or regulations made thereunder; (ii) that contravention must have produced a wrongful gain or averted a loss for that person; (iii) the person must have actually made that profit or averted that loss; and (iv) the amount directed to be disgorged must be equivalent to that gain or loss. It further held that “the direction to disgorge an amount must establish a causal nexus between the wrongful conduct and wrongful gains.” Thus, the phrase “by such contravention” in section 11B makes disgorgement a causal remedy; the amount that can be recovered is the amount that the contravention produced, not the amount that was earned during the period in which the contravention occurred. This distinction matters because a person may earn profit for many reasons simultaneously, only some of which are connected to the alleged wrong.
SAT also held that SEBI bears the burden of establishing the causal nexus between wrongful conduct and the gains it seeks to recover. This means SEBI cannot discharge its burden by establishing a contravention and then pointing to total profits earned over the relevant period; it must show that the specific amount sought to be disgorged is what the contravention produced. The application of these principles can be understood by examining SAT’s decision in Immix Trade, on which SEBI itself relies in the Interim Order.
Immix Trade and the Absence of Legitimate and Illegitimate Divide
In Immix Trade Private Limited v. SEBI, nine connected entities, on a single day, bought Ruchi Soya shares in the cash market solely to inflate the settlement price of futures they held. This activity involved one scrip, one day and entities with no apparent activity other than the coordinated transaction.
On those facts, SAT’s application of the four-step test, along with establishing a causal connection, in NSE v. SEBI was straightforward. The entire profit arose from the settlement-price manipulation, so there was no legitimate profit to separate from the wrongful gain. Having identified the wrongful gain, SAT applied the no-set-off rule in paragraphs 71 and 72 of Immix Trade; it held that the losses on the cash market purchases could not be deducted, since those purchases were themselves the means of carrying out the manipulation. On those facts, identifying the wrongful gain and applying the no-set-off rule were effectively the same exercise.
It is also pertinent to note that SAT in Immix Trade cites the US Supreme Court’s decision in Liu et al. v. SEC for the proposition that legitimate expenses must be deducted before disgorgement is computed. SAT reached the no-set-off conclusion in Immix Trade because the cash purchases were not legitimate expenses; rather, they were instruments of the fraud. Accordingly, Immix Trade should not be read as rejecting the distinction between legitimate and illegitimate expenses. That distinction was simply unnecessary on the facts of that case, but it becomes material where, as in the Jane Street proceedings, the alleged manipulation is said to operate alongside otherwise legitimate trading activity.
Computing Disgorgement Where Legitimate Trading Coexists
The Jane Street case is, however, different from Immix Trade. The Interim Order characterises JS Group’s broader trading as legitimate and identifies only the use of manipulative practices to “artificially profiteer” from JS Group’s existing options positions as unlawful. If that characterisation is accepted, the framework laid down in NSE v. SEBIrequires SEBI to identify what portion of the options profits was produced by the alleged manipulation rather than by the legitimate trading.
This is a different question from whether losses or expenses can be set off against the disgorgement amount. The no-set-off rule in Immix Trade applies only after the wrongful gain has been identified. Before that, SEBI must first determine what amount actually constitutes the wrongful gain caused by the contravention, as required by the framework laid down in NSE v. SEBI. In Immix Trade, that exercise was straightforward because the entire profit arose from the manipulative scheme. In the Jane Street case, however, the alleged manipulation took place alongside trading that SEBI itself describes as legitimate. That makes identifying the wrongful gain a separate question that must first be answered: what portion of JS Group’s options profits belongs to the positions that were legitimate, and what portion belongs to the positions that formed part of the alleged manipulative strategy?
Answering that question is harder for index options than it would be for individual securities. Bank Nifty options derive their value from the underlying index, so an artificial movement in the index can influence the price of every outstanding options contract linked to it. The same index distortion that is said to have produced the wrongful gain may also have inflated the value of JS Group’s other, legitimate positions on the same day. Immix Trade did not have to deal with this difficulty; the manipulation there did not extend beyond the specific positions involved, so the legitimate/wrongful line never had to be drawn at the level of disgorgement. The four-part framework, accordingly, does not resolve whether such market-wide effects on a trader’s entire options book satisfy the causal-nexus requirement, or whether the inquiry must be confined to the specific positions allegedly manipulated.
Conclusion
The Jane Street case, thus, presents a complex issue that the existing case laws had not yet required courts to resolve. While NSE v. SEBI recognised that disgorgement requires a causal nexus between the contravention and the gain, and Immix Trade applied that principle on facts where no attribution issue arose, neither decision considered how wrongful gain should be identified where legitimate trading and alleged manipulation coexist.
One year after SEBI’s Interim Order, the Jane Street case has highlighted an important unanswered question in Indian securities law. When legitimate trading and alleged manipulation occur together, what must SEBI prove before it can say that a particular profit is a “wrongful gain” under section 11B? The appeal will therefore require SAT not merely to apply the causal-nexus requirement recognised in NSE v. SEBI, but to determine how that requirement operates where an alleged manipulation affects the pricing of an entire class of derivative instruments while coexisting with otherwise legitimate trading. The resolution of that question is likely to shape the future application of disgorgement under section 11B to complex algorithmic, high-frequency, and quantitative trading strategies, where legitimate trading and alleged manipulation may operate simultaneously across multiple market segments.
– Hardik