No recourse for investors as Jane Street disgorgement will not yield compensation

Sebi issued an interim order against Jane Street on July 3.

Indian retail traders who may have suffered losses due to alleged manipulative trades by Jane Street will receive no compensation for their losses despite the Securities and Exchange Board of India (SEBI) impounding a staggering Rs 4,800 crore through a disgorgement order.

The lack of a clear restitution mechanism in India means that any proceeds from such orders will instead be directed towards the Investor Protection and Education Fund (IPEF) or the Consolidated Fund of India, earmarked for broader market welfare initiatives.

In contrast, developed markets like the United States and the European Union have robust restitution mechanisms that allows investors who have lost money due to market manipulation to apply to regulators for compensation.

Disgorgement is a mechanism through which regulators claw back illegal gains made by entities which manipulated markets. Restitution is a mechanism through which such clawed back gains may be provided to affected investors based on potential losses they faced.

“Similar to the US securities laws’ framework, the applicable IPEF regulations do contemplate disgorged amounts being restituted to affected investors. However, such restitution power has been left to the discretion of SEBI under the applicable regulations – to be used in such cases where Sebi deems fit,” said Vaibhav Kakkar, senior partner at Saraf and Partners.

In the past, Sebi has ordered restitution in a few cases pertaining to scams in initial public offering (IPO) markets but these instances date back to 2006. There have not been any major restitution cases after that, legal experts said.

Market participants say the IPEF has little expenditure and most of the fund remains in the accounts of the government, seemingly in reserve for a rainy day.

The IEPF had Rs 533 crore balance in FY24, while Rs 2.8 crore was used towards various investor initiatives.

While Sebi by itself cannot provide any relief to the investors who made losses due to Jane Street trades, courts and tribunals have powers to order restitution.

“Sebi may not be able to directly provide restitution, but through court process and deposit of amounts to Investor Education and Protection Fund, Sebi can distribute any disgorged amount among eligible and identifiable applicants who have suffered losses due to wrong actions by any person,” said Kinjal Champaneria, partner, Solomon & Co.

“There have been past judicial precedents, where the courts have ordered and implemented restitution mechanism in case of any identified manipulation.”

One of the major hurdles in both disgorgement and restitution is calculation of potential gains made by the market manipulator due to whose actions others suffered losses. There are no straightforward ways to determine these numbers and Sebi often relies on calculations that are often turned down by courts and tribunals.