The Securities and Exchange Board of India (Sebi) executed one of the fastest raids by restricting access to the stock market for two entities: Copthall Mauritius Investment and Mansi Share and Stock Broking. These companies are accused of conducting manipulative trades during the Closed Auction Session (CAS).
This incident is related to manipulations that occurred during CAS when the Sensex expired on the BSE on August 13. The regulator took action just six days after the alleged violation.
Sebi also ordered the confiscation of illegally obtained profits amounting to 3.67 crore rupees from these two entities: 2.96 crore rupees from Copthall Mauritius Investment and 71.64 lakh rupees from Mansi Share and Stock Broking. Furthermore, the regulator banned them from participating in CAS in the equity segment, directly or indirectly, including placing, modifying, or canceling orders during CAS until further notice. For Mansi Share and Stock Broking, the ban applies only to its proprietary trading account.
A few hours before issuing this order, Sebi Chairman Tuhin Kanta Pandey warned market participants about strict measures against any CAS manipulation. He stated at the FICCI Capital Markets Conference that immediate and stringent action would be taken in case of manipulation.
The Sebi Chairman added that the new mechanism allows for more effective detection of any manipulative actions compared to the previous Volume Weighted Average Price (VWAP) system. Pandey noted that the CAS system provides a greater opportunity to detect manipulations relatively easily compared to the old VWAP system.
In an ex-parte interim order against both entities, it was also directed to freeze bank accounts for withdrawals without Sebi's permission. The order states that 'immediate interim directions are necessary in the interest of maintaining the integrity of the stock market, fair price determination, and preventing further potential misuse of the CAS mechanism on stock markets by entities employing manipulative practices.'
Sebi reported that the entities created open positions in upcoming weekly Sensex options for August 20, which required immediate and urgent action from the regulator. The regulator will conduct a detailed investigation into this matter.
CAS, implemented on August 3, is a 20-minute trading window from 15:15 to 15:35, used to determine the closing price of stocks through an auction mechanism. Currently, it is applied only to stocks in the futures and options segment. The order emphasizes that with the introduction of CAS, volatility and manipulation are expected to decrease due to increased efficiency and transparency of the system, giving Sebi a greater ability to detect manipulations compared to the previous system.
Sebi Permanent Member Kamlesh Chandra Varshney noted in the order that such manipulative practices have huge consequences for participants trading in the F&O segments, including retail investors. He added that any manipulation or unfair methods used to violate fair price determination in CAS must be strictly curbed by the regulator.
In the 46-page order, Sebi detailed the method used by the two entities, which involved using large and aggressive buy and sell orders in the base components of the Sensex during CAS to influence the Indicative Equilibrium Price (IEP) or the Sensex closing price for personal enrichment.
In the case of Copthall, large buy orders were placed among Sensex components at prices significantly exceeding the reference price, and over short periods, leading to a sharp rise in the IEP. Simultaneously, Copthall held open long call positions and short put positions, which benefited from the artificial rise in the prices of Sensex components, presumably triggered by Copthall.
The order indicates that on August 13, three sharp movements of the Sensex were recorded during CAS in periods ranging from two to 28 seconds. The order book showed a significant concentration of corresponding orders by the two participants, with Copthall accounting for 99.91% and 96.09% of the buy order volume during the first two-second spike.
Regarding Mansi, Sebi's findings show that she had open positions in put options for the expiration day before the start of CAS. The order notes: 'The profit from these put options was gained through the artificial suppression of the IEP over five minutes, which, according to preliminary data, was provoked by Mansi by placing aggressive sell orders in 8 Sensex components at significantly lower prices than the reference price. After closing existing put option positions to her advantage, Mansi canceled the sell orders.'
