New Code Consolidates Rules

India's Securities Markets Code Bill, 2025, overhauls capital market rules by consolidating various laws into a single framework. This move is expected to improve regulatory coherence and boost the Securities and Exchange Board of India's (SEBI) enforcement powers. However, a significant gap exists regarding a clear definition of 'market abuse,' especially for complex strategies involving large institutional trading that can move prices.

Ambiguity Over Market Abuse

SEBI gains enhanced authority under the new Code, with statutory backing for disgorgement and a stipulated limitation period for investigations. Yet, the core issue of distinguishing legitimate institutional arbitrage from manipulative trading strategies remains undefined by the Code itself. The interim order against Jane Street, a prominent US-based proprietary trading firm, highlights this challenge. SEBI alleged manipulation of the Bank Nifty index, seeking ₹4,843.57 crore in claimed unlawful gains. Jane Street argues its actions were standard index arbitrage and hedging, crucial for market liquidity. This dispute exposes a lack of clarity in Indian securities law regarding a legal standard for actors whose hedging activities can influence prices. The Code broadly defines 'market abuse' but leaves specific details, especially for algorithmic strategies and multi-entity structures, to future guidance and rules, creating immediate practical risk.

SEBI's Evolving Oversight

India's regulatory landscape has seen SEBI grow from a nascent body in the 1990s into a robust overseer. The Securities Markets Code, 2025, consolidates laws like the SEBI Act, 1992, aiming for clarity and efficiency. However, clear standards for navigating complex trading strategies are still developing. SEBI has been refining rules for algorithmic trading to balance innovation with oversight and curb potential manipulation, especially after concerns about retail participation rose. Recent measures to tighten controls on index derivatives, such as increased margins, aim to curb excessive speculation and ensure derivatives are used for hedging. This aligns with India's strategy to attract global capital through liberalization while adopting a stronger enforcement stance. The challenge lies in defining clear standards that match this dual objective. Foreign Portfolio Investors (FPIs) are increasingly watchful of regulatory changes, with SEBI implementing measures to reduce arbitrage and improve the ease of doing business. However, the ambiguity in defining market abuse for sophisticated strategies creates an uneven playing field where SEBI's stronger powers apply immediately, but interpretations of the rules will take time to develop, potentially inconsistently.

Investor Risks Amid Interpretive Gaps

For large-value participants, the primary risk from the Code lies in its interpretations. The Securities Appellate Tribunal's (SAT) upcoming ruling in the Jane Street case is expected to define the market abuse standard for algorithmic strategies more than the Code itself. Jane Street's appeal questions SEBI's reliance on inferred intent and its refusal to provide crucial documents, raising concerns about procedural fairness. SEBI is relying on case law to set standards for complex trading, rather than clear statutory rules. This means institutional investors must watch for evolving interpretations. Unlike other major markets with well-established principles for distinguishing arbitrage from manipulation in complex strategies, India's framework is still evolving through legal proceedings. This uncertainty could make India less attractive to global capital, as the line between legitimate flexibility and enforcement risk becomes blurred. The potential for SEBI to use broad powers without a widely understood framework for complex strategies introduces significant compliance and operational hazards.

Clarity to Emerge Through Adjudication

As the Securities Markets Code is enacted, the practical application of 'market abuse' will continue to be shaped by ongoing court decisions, including the significant Jane Street case at the SAT. SEBI is expected to issue further subordinate legislation and regulatory guidance to detail the Code's framework. Institutional investors and Indian corporates need to maintain meticulous records of their economic rationale and hedging strategies, as methods for calculating 'unlawful gains' are still debated and SEBI's enforcement approach develops. The eight-year limitation period introduced by the Code offers some certainty, but exceptions for systemic impact remain broad, preventing absolute reliance on this cap. Ultimately, India's journey towards a reliable regulatory environment for global capital depends on the gradual emergence of clear analytical standards, a process that may prove lengthy and costly for market participants.