Sebi bars two entities, impounds ₹3.67 crore over manipulative CAS trades

Bars them from the securities market, impounds ₹3.67 crore

In one of the fastest crackdowns, the Securities and Exchange Board of India (Sebi) on Wednesday restrained Copthall Mauritius Investment and Mansi Share and Stock Broking from accessing the securities market for allegedly manipulative trades during the closing auction session (CAS).

 

The matter pertains to manipulative trades during CAS on Sensex expiry at BSE on August 13—taking action within six days of the alleged manipulation.

 

Sebi has also directed impounding wrongful gains of ₹3.67 crore by the two entities— ₹2.96 crore by Copthall Mauritius Investment and ₹71.64 lakh by Mansi Share and Stock Broking.

 

The regulator has also prohibited them from participating in the CAS in the equity segment, directly or indirectly, from placing, modifying or cancelling orders during the CAS until further orders. For Mansi Share and Stock Broking, the ban is only on its proprietary trading account.

 

 

Hours before the order, Sebi chairman Tuhin Kanta Pandey had warned market players 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,” the chairman stated, at the sidelines of FICCI Capital Markets Conference. 

 

The Sebi chairman further added that the new mechanism is more effective in identifying any manipulative activity compared to 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,” Pandey added.

 

In the ex-parte interim order on the two entities, the bank accounts are also directed to be frozen for debits without permission from Sebi.

 

“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,” states the order.

 

Sebi added that the entities have created outstanding positions in the coming weekly Sensex options on August 20, necessitating the immediate and urgent action by the regulator.

 

The regulator will be carrying out detailed investigations in 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 the stocks through an auction mechanism. At present, it is applicable only on the stocks in futures and options segment.

 

The order adds that with the introduction of CAS, volatility and manipulation is expected to reduce as the system becomes more efficient and transparent—providing Sebi with greater ability to identify manipulation compared to 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,” noted Sebi whole-time member Kamlesh Chandra Varshney 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 has outlined the modus operandi by the two entities, involving 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 Sensex to enrich themselves.

 

In 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 IEP. At the same time Copthall had outstanding long call and short put positions which derived benefits from the artificial upward price movement in Sensex constituents, allegedly engineered by Copthall.

 

The order adds that three sharp movements in Sensex during the 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.

 

In case of Mansi, Sebi’s findings show that it had open positions in expiry day put options at the start of CAS.

 

“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,” notes the order.

 

The regulator noted that had the sell orders of Mansi at lower than reference price in Sensex constituents not been there to artificially suppress the IEP, Mansi would not have been able to sell the put options at prices which helped them gain the alleged wrongful gains.