SEBI Takes Action Against Alleged Market Manipulation in New Closing Auction Mechanism
Overview of the Allegations
New Delhi: A recent initiative aimed at enhancing transparency in stock closing prices has come under scrutiny due to allegations of market manipulation. The Securities and Exchange Board of India (SEBI) claims that aggressive trading orders in Sensex stocks were utilized to sway the index's closing level, particularly on the expiry day for options.
SEBI has issued an ex-parte interim order against Copthall Mauritius Investment Ltd, linked to JP Morgan Chase, and Mansi Share and Stock Broking Ltd, concerning their trading activities during the Closing Auction Session (CAS) on August 13, which coincided with the weekly expiry for Sensex derivatives.
The regulator has identified a total of Rs 3.68 crore in alleged wrongful profits and has instructed banks and depositories to ensure that debits from accounts can be processed for amounts exceeding the impounded total.
Understanding the Closing Auction Session (CAS)
The CAS was introduced by SEBI on August 3, 2026, in a phased approach, initially covering stocks with available derivative contracts. Trading in these stocks ceases at 3:15 PM, followed by a reference price calculation from 3:15 PM to 3:20 PM. The auction commences at 3:20 PM and can randomly conclude between 3:28 PM and 3:30 PM.
During this period, prices of Sensex constituents can fluctuate by up to 3% from the reference price. By 3:35 PM, a single equilibrium price is determined, allowing for the maximum volume of shares to be executed. The closing price for the index is derived from the closing prices of its constituent stocks, which is crucial for the settlement price on expiry.
The alleged manipulation occurred just two weeks after the CAS was implemented.
Events of August 13
On August 13, the Sensex reference price was recorded at 77,829.60. The index ultimately closed at 78,080, experiencing three rapid spikes during the auction period. Notably, between 3:20:41 PM and 3:20:43 PM, the Sensex surged by 362.02 points in just two seconds.
Further spikes occurred between 3:24:08 PM and 3:24:20 PM, where it increased by 132.67 points, and again from 3:25:49 PM to 3:26:17 PM, with a jump of 405.08 points.
SEBI's surveillance indicated that Copthall was the primary buyer during these significant upward movements, placing 88 buy orders in a mere two seconds during the first spike.
Details of the Allegations
Copthall was responsible for approximately Rs 66.58 crore, or 99.91%, of the total value during the first spike, with all its limit-buy orders positioned at 3% above the reference price across all Sensex constituents. In the second spike, it accounted for Rs 126.59 crore, or 96.09%, and in the third spike, Rs 98.12 crore, or 85.21%.
Conversely, Mansi Share and Stock Broking's orders reportedly suppressed the Indicative Equilibrium Price (IEP) for about four to five minutes, with the downward pressure alleviated upon the cancellation of orders.
SEBI's order, issued by member Kamlesh Chandra Varshney, claims that both entities employed large, aggressive buy and sell orders in Sensex stocks to manipulate the IEP and, consequently, the final closing price to benefit their derivatives positions.
Consequences and Future Steps
SEBI has estimated wrongful gains of Rs 2.96 crore for Copthall and Rs 71.65 lakh for Mansi, totaling Rs 3.68 crore. The regulator has mandated the following actions:
- Impounding the wrongful gains, which will be placed in fixed deposits under SEBI's lien.
- Prohibiting both entities from participating in the CAS in the equity segment, including placing, modifying, or canceling orders during the auction window, until further notice.
- Restricting both entities from accessing the broader securities market.
SEBI emphasized the urgency of these measures, citing that both entities had already established positions in the upcoming weekly Sensex options contract set to expire on August 20. The regulator expressed concerns about the potential for similar conduct if the entities were allowed to continue participating in the CAS.
This interim order, issued without prior notice to the parties involved, is standard in urgent enforcement matters. A thorough investigation by SEBI is anticipated to assess the violations committed by these entities and any other involved parties.
Both Copthall and Mansi Share and Stock Broking have 21 days to respond to this order and may request a personal hearing.
This action marks SEBI's first enforcement under the CAS framework, coinciding with efforts to align India's closing-price discovery process with global standards. SEBI Chairperson Tuhin Kanta Pandey had previously warned against any attempts to undermine the CAS through manipulation, asserting that the regulator's ability to detect such activities is enhanced compared to the previous volume-weighted average price system.