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In one of the swiftest crackdowns on market malfeasance, the Securities and Exchange Board of India (Sebi) on Wednesday barred Copthall Mauritius Investment and Mansi Share & Stock Broking from accessing the securities market for alleged manipulative trades during the closing auction session (CAS). The matter pertains to such trades during CAS on Sensex expiry at BSE on August 13.
The regulator has also directed the impounding of wrongful gains of ₹3.67 crore by the two entities — ₹2.96 crore from Copthall Mauritius Investment and ₹71.64 lakh from Mansi Share & Stock Broking. It has also prohibited them from participating in the CAS in the equity segment, directly or indirectly, or from placing, modifying or cancelling orders during the CAS until further orders. For Mansi Share & Stock Broking, the ban applies only to its proprietary trading account.
Hours earlier, Sebi Chairman Tuhin Kanta Pandey had warned market participants of strict action against any manipulation in CAS.
“If people do manipulation in CAS, then we will take strict action and (will) do it immediately…If someone thinks that they will manipulate the CAS to defame it, then they are mistaken,” he said on the sidelines of Ficci Capital Markets Conference.
Pandey further said the new mechanism is more effective at identifying manipulative activity than the previous volume weighted average price (VWAP) system. “In the CAS system, we have more capability to catch manipulation. Compared to the old VWAP system, in the CAS system, we can catch manipulation relatively easily,” he stressed.
In the ex-parte interim order against the two entities, Sebi also directed that their bank accounts be frozen for debits without the regulator’s permission. “Immediate interim directions are necessitated in the interest of maintaining the integrity of the securities market, fair price discovery and preventing further possible misuse of the CAS mechanism in the securities markets by entities adopting manipulative practices,” the order states.
Sebi added that the entities had created outstanding positions in the coming weekly Sensex options on August 20, necessitating immediate and urgent action by the regulator. The regulator will carry out a detailed investigation into the matter.
CAS, made effective from August 3, is a 20-minute trading window from 3.15 pm to 3.35 pm used to determine the closing price of stocks through an auction mechanism. At present, it is applicable only to stocks in the futures and options segment.
The order adds that with the introduction of CAS, volatility and manipulation are expected to decline as the system becomes more efficient and transparent, giving Sebi greater ability to identify manipulation than under the earlier system. “It is imperative to note that such manipulative practices have huge ramifications on participants who trade in F&O segments including retail investors,” Kamlesh Chandra Varshney, Sebi’s whole-time member, said in the order.
“Any manipulation or unfair practices employed to disturb the fair discovery of prices in CAS has to be dealt with sternly by the regulator,” he added.
In the 46-page order, Sebi outlined the modus operandi of the two entities, involving the use of large and aggressive buy and sell orders in the underlying constituents of Sensex during CAS to influence the indicative equilibrium price (IEP), or the closing price of the Sensex, to enrich themselves.
In the case of Copthall, large buy orders were placed across Sensex constituents at prices materially above the reference price and within short intervals, resulting in sharp upward movements in the IEP. At the same time, Copthall had outstanding long call and short put positions that stood to benefit from the artificial upward movement in Sensex constituents, allegedly engineered by the firm.
The order adds that three sharp movements in the Sensex during CAS on August 13 were recorded within periods ranging from two seconds to 28 seconds. The order log showed substantial concentration of the relevant orders by two participants, with Copthall accounting for 99.91 per cent and 96.09 per cent of the buy-order value during the first two-second spike.
“The payoff from these put options benefitted from the artificial suppression of IEP for five minutes which was prima facie engineered by Mansi by placing aggressive sell orders in 8 constituent scrips of Sensex at significantly lower prices than the reference price. Once the existing positions in put options were squared off to its advantage, Mansi cancelled sell orders,” the order notes.
The regulator noted that had Mansi’s sell orders at prices below the reference price in Sensex constituents not been placed to artificially suppress the IEP, Mansi would not have been able to sell the put options at prices that helped it earn the alleged wrongful gains.
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