In the aftermath of Sebi’s explosive order against US-based trading giant Jane Street, a glaring question looms over India’s capital markets: Will the vast network of investor protection funds actually help affected traders?
Earlier this month, the Securities and Exchange Board of India (Sebi) impounded ₹4,843 crore from Jane Street for allegedly manipulating Bank Nifty index prices over 21 expiry sessions between August 2023 and May 2025. The firm, according to Sebi, made unlawful gains through sophisticated high-frequency trading.
The market regulator minced no words. “The integrity of the market, and the faith of millions of small investors and traders, can no longer be held hostage to the machinations of such an untrustworthy actor,” Sebi said in its interim order. “Investor protection forms the core of Sebi’s regulatory mandate.”
The IPEF Network: Big on Paper, Untested in Crisis
India’s investor safety framework is sprawling. Sebi manages its own Investor Protection and Education Fund (IPEF), and similar funds operate within stock exchanges and depositories. These are designed to compensate investors when brokers default or when a violation of securities law leads to proven investor losses.
As of March 2024, Sebi’s IPEF held ₹533.2 crore, exchanges collectively held ₹2,793 crore, and depositories held ₹127 crore. Combined with FY25 inflows, the total kitty is expected to top ₹4,000 crore. A separate Ministry of Corporate Affairs-run fund — the Investor Education and Protection Fund (IEPF) — holds thousands of crores from unclaimed dividends and shares, but this cannot be tapped by Sebi.
But despite these protections on paper, there is no clarity on whether or how any of these funds will assist retail investors impacted by Jane Street’s alleged manipulation.
“It is Sebi that has publicised that 90% of individuals make losses in derivatives trading. It is they who are saying now that the derivatives market was manipulated by Jane Street. It is only fair then they use the available mechanisms to return the money to the victims,” a senior governance expert said.
Legal Tangle: Compensation Not So Straightforward
Former Sebi officials say that, technically, Sebi’s IPEF regulations do allow restitution in certain cases. Regulation 4(h) states that disgorged amounts can be used for compensating “eligible and identifiable investors who have suffered losses resulting from violation of securities laws.” But here’s the catch: this provision is regulatory, not statutory.
“Assuming the final order is passed, and it passes the judicial test, where is the provision in the Sebi Act? Legally, there is no provision in Act. ‘Restitution’ is ultra vires the Sebi Act,” said a former official.
The restitution clause was originally introduced when Sebi contemplated appointing an Ombudsman to identify victims and recommend compensation. That never materialised, leaving the clause without enforcement machinery.
This likely explains why Sebi hasn’t executed a major compensation exercise since the IPO scam of 2005.
Lessons from the Past: Long Roads, Mixed Results
In the IPO scam case, Sebi appointed a committee under Justice D P Wadhwa to identify impacted investors. Over a decade later, of the ₹92 crore meant for 12.75 lakh investors, just ₹41 crore was disbursed in two tranches. A third tranche was transferred only recently.
In the Sahara case, despite the Supreme Court directing Sebi to refund ₹25,000 crore raised via illegal bonds in 2012, the saga is still unresolved. As of February 2025, only ₹2,314 crore had been returned to 12.97 lakh investors.
Jane Street Case: Modern Market, Legacy Bottlenecks
The Jane Street case presents a modern challenge. This isn’t an old-school IPO scam or unregulated collective scheme. It involves high-frequency derivatives trades in a market where Sebi already publishes exact data on who made or lost money.
Given the advances in KYC, PAN linkage, and transaction tracking, experts argue that restitution should now be easier than ever.
“Sebi itself tracks derivative market performance down to individual investor categories. If there is political and regulatory will, identifying victims and estimating losses should not be a tall order,” said a regulatory consultant.
What Next?
For now, Sebi’s order remains interim. Compensation — if it happens — can only come after a final order confirms the manipulation and survives legal scrutiny. That process could take months, if not years, given the usual trajectory through SAT and the Supreme Court.
Still, retail investors and market observers will be watching Sebi’s next move carefully. After years of investor protection frameworks being built and billions collected, this may be the system’s most crucial test yet.
If not now, when?
Byline: Sourabh Yadav
