Welcome to India Edition, I’m Menaka Doshi. Join me each week for a ringside view of the billionaires, businesses and policy decisions behind India’s rise as an emerging economic powerhouse.

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This week: Prepare for the next chapter in the Jane Street saga, a new frequent flyers club and Modi’s made-in-India fever spreads to services.

Courtside View

It’s all anyone can talk about this week in India’s equity markets — the big derivatives hustle. So far the focus has been on market regulator SEBI’s allegations of price manipulation by Jane Street, which led to a temporary market ban and recovery of profits. Soon it will be the Wall Street firm’s turn to put the regulator in the dock. 

As the matter inevitably heads to court, it will test SEBI’s most intensive investigation ever of complex trade and risk data across cash and derivative markets, according to a person close to the matter who preferred to remain anonymous for confidentiality reasons. 

For over a year, a cross-functional team of investigators drawn from SEBI’s surveillance and regulation departments and supported by officials from the National Stock Exchange worked to extract relevant data from over billions of trades to understand Jane Street’s trading patterns.

The team narrowed their scrutiny to Jan. 17, 2024, the most profitable day for the trader in a two-year period. To understand how Jane Street made a profit of close to $86 million that day, they plotted minute-by-minute values of the delta and profit and loss of its index options portfolio, alongside the Bank Nifty Index price and activity in the cash, futures and options market. It’s the first time the regulator has undertaken such visualization, helping it identify patches of prima facie manipulation across market segments, the person said.

As the investigation expanded to more days and manipulative patterns, in February the regulator asked the NSE to issue a caution letter to Jane Street, advising it to refrain from taking large positions and undertaking certain trading patterns. 

The effect of that letter lasted two months. By May Jane Street was back to running large positions across market segments. That’s when SEBI officials decided to bar the trader even though the investigation is unfinished and Jane Street’s defense unheard. To make up for that, SEBI, in an uncommon and smart legal move, allowed for the market ban on Jane Street to be lifted if the firm deposits the so-called illegal profits of manipulation in an escrow account. 

It took another month of several long nights, the person said, to write up an 105-page interim order with 500 pages of annexures and QR codes to access the charts. 

But the hard part is yet to come.

SEBI’s preliminary findings will be put to the test when Jane Street files an appeal in court against the market ban and having to pay 48.4 billion rupees ($570 million).

Typically at this stage, such a plea is focused on interim relief from an interim order — such as a suspension of the ban until the investigation is completed. Though even to decide that judges may seek to understand the gravity of the alleged offenses.

That will come down to SEBI’s claim of manipulation versus what Jane Street may describe as arbitrage trades. The two can look pretty similar, writes Bloomberg Opinion’s Matt Levine. Even market experts I’ve spoken to are divided over this — imagine how tough it will be for judges.

Both sides may have to deploy other arguments to sway the judges.

SEBI could argue that Jane Street had been warned by NSE but didn’t change its trading patterns. The regulator may also spotlight the need for strict enforcement in a distorted market where derivatives turnover is more than 300 times larger than cash equities due to the outsized presence of retail investors. Especially as these small traders persistently lose money — a total $12 billion last fiscal — even as the big boys clean up. Jane Street generated over $2.3 billion in net revenue from equity derivatives in India last year.

The Wall Street firm may highlight that it’s being punished without a hearing, or that the impounding of a large sum of money may cause financial difficulties. It could argue that SEBI has allowed gamification of the derivatives market and having failed to keep amateurs out is now thwarting sophisticated players that provide liquidity and efficiency. It could play up the impact on India’s ambition to be a top economy and market in world. 

Whichever way this goes, I’m clearing my schedule for a courtside view of a case unprecedented for its complexity and for what’s at stake. 

Best of Bloomberg

Trump’s given the world a reprieve this week by pushing reciprocal tariffs to Aug. 1, though new rates apply to some countries — Brazil gets 50%.

A 50% duty on copper will also come in to effect then. And he’s threatened a 200% tariff on medicines.

Trump also warned of a 10% levy on BRICS countries, the leaders of which, including Modi, met in Brazil this week for a summit.

That may put India in a tough position as it races to finalize a favorable trade deal with the US. 

We are also watching this week for a preliminary report on the reasons for the Air India crash.

As for the second half of the year — get ready for $18 billion in IPOs.

By the Numbers: Frequent Flyers

Second Lead: To Build an Indian Consulting Giant

India has revived Modi’s eight-year-old dream of a homegrown, multidisciplinary consulting firm. A made-in-India Deloitte or McKinsey of sorts.

To be sure, the country already has some of the world’s best-known IT services firms in TCS, Infosys and others. It is also home to about a third of the global talent pool of the Big Four audit and consulting firms (Deloitte, EY, KPMG and PWC), many of whom work in global delivery centers and service international clients. 

Why is it that, although Indians dominate this field worldwide, there is no Indian multidisciplinary consulting firm in the world, Sanjeev Sanyal, member of the Prime Minister’s Economic Advisory Council, asked rhetorically over the phone from Delhi.

According to him, a key reason is stodgy rules across professional services bodies, like for accountants and lawyers, that disallow cross-functional partnerships. Some countries, like the UK, have long allowed such alternative business structures though the uptake has been slow. Earlier this year, KPMG gained approval to become the first Big Four accounting, tax and consulting company to operate a law firm in the US, specifically in Arizona.

Sanyal wants India to do the same while also urging professional bodies like the Bar Council of India and Institute of Chartered Accountants of India to relax restrictions around branding and advertising. And he wants a review of size thresholds in bidding norms for government consulting contracts that help perpetuate the dominance of large firms.

Contrary to media reports, Sanyal’s mission has little to do with reducing audit concentration in India or dislodging the Big Four in favor of Indian firms. “All we are doing is creating a level playing field so that Indian consulting firms can emerge,” he said.

That’s already happening, said Mumbai-based Jamil Khatri. He is the co-founder and Chief Executive Officer of Uniqus, a three-year-old firm offering accounting to tech services, with over 550 partners and employees across the US, the Middle East and India. The firm is already profitable, Khatri said to me over email, while listing three reasons for its early success:

• The two co-founders were senior leaders at EY and KPMG with a large network of talent and clients across the world. 
• They eschewed a low-cost, local model for a Delaware-based incorporation to support a global footprint and premium service. Currently over half their clients are international, contributing 80% of the $50 million in estimated revenue this year.
• Uniqus has raised $40 million from funds like Nexus Partners and Sorin Ventures that will support organic growth until 2030. 

Another large, successful Mumbai-based firm, Dhruva Advisors, offers tax regulatory services in India, the Middle East and Singapore. Its founder and CEO, Dinesh Kanabar, a former deputy CEO of KPMG India, said in a recent newspaper column that to build a global firm, India’s professional services ecosystem needs to break out of its fragmented, small-scale mindset with poor governance and reluctance to share leadership.

So, deregulation is welcome but the bigger challenge to solve will be mindset, ambition and capital. It will take time. Hopefully not the 180 years it’s taken Deloitte or even the 99 it took McKinsey. 

How long do you think it will take to produce a made-in-India consulting giant? Send me your views at indiaedition@bloomberg.net. Thanks for reading. — Menaka.

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