Sebi bars JPMorgan unit over suspected Sensex manipulation

The Securities and Exchange Board of India has barred a JPMorgan-owned investment firm and a Mumbai brokerage from the securities market after finding preliminary evidence that they allegedly tried to manipulate the Sensex during its new closing auction.

The order is Sebi’s first enforcement action involving the Closing Auction Session, or CAS, which was introduced on 3 August to improve price discovery at the end of the trading day.

Sebi said Copthall Mauritius Investment Ltd and Mansi Share and Stock Broking Pvt. Ltd placed large orders in Sensex stocks during the 13 August auction, when weekly derivatives linked to the index were expiring.

The orders appeared designed to move the Sensex closing level in directions that benefited their respective derivatives positions, rather than to complete genuine purchases or sales of the underlying shares, the regulator said.

Copthall is a Mauritius-based foreign portfolio investor owned by JPMorgan Chase, according to public records reviewed by Reuters.

Sebi estimated that Copthall made wrongful gains of ₹2.96 crore, or about $309,000, while Mansi made ₹71.65 lakh, or about $75,000. It ordered the impounding of a combined ₹3.68 crore, or approximately $384,000.

The findings are contained in an ex-parte interim order, meaning Sebi acted before hearing full responses from the firms because it believed immediate restrictions were needed.

Under the new closing system, continuous trading in eligible shares ends at 3.15 p.m. A reference price is established over the next five minutes, after which investors enter, modify or cancel orders in an auction.

The exchange then identifies the price at which the greatest number of shares can be matched. That equilibrium price becomes the official closing price and is used in index calculations and the settlement of expiring derivatives.

Sebi said Copthall placed aggressive buy orders across all 30 Sensex stocks at prices about 3% above their reference levels.

During one sharp increase in the Sensex’s indicative equilibrium level, Copthall accounted for 99.91% of the value of aggressive buy orders, according to the order. Its share was 96.09% and 85.21% during two subsequent movements.

Copthall later canceled buy orders worth about ₹98.12 crore, or $10.3 million, before the auction closed. Sebi said the size, pricing and cancellation pattern indicated that the orders were intended to lift the index rather than acquire the shares.

Mansi allegedly attempted to push the Sensex in the opposite direction. It placed sell orders worth about ₹143.44 crore, or $15 million, across eight index stocks and then canceled the entire block within four seconds.

The cancellation caused the indicative Sensex level to jump by almost 233 points, illustrating how large orders could alter the auction result even if they were withdrawn before execution.

Sebi said there was no preliminary evidence that Copthall and Mansi acted together. Its case is that the two firms independently tried to move the closing level to favor their separate derivatives books.

The regulator restrained Copthall from accessing the securities market until further orders. The restriction on Mansi applies to its proprietary account rather than trades executed for clients.

Both firms were also prohibited from entering, changing or canceling equity closing-auction orders. They must place the amounts identified as wrongful gains in fixed deposits under a lien in Sebi’s favor.

The firms may respond to the order, request a hearing and appeal to the Securities Appellate Tribunal.

The case exposes an early weakness in a mechanism intended to make closing prices harder to manipulate.

Sebi introduced the auction because closing prices were previously based on the volume-weighted average price during the final 30 minutes of trading. Auctions are widely used in international markets because they pool liquidity and set one closing price.

But they work best when participation is broad. When the order book is thin, a single institution can account for most buy or sell interest, giving large orders an outsized effect on the indicative price.

That risk is especially important on derivatives-expiry days. A relatively small order in the cash market can potentially generate a much larger gain in options or futures tied to the closing index level.

Sebi chairman Tuhin Kanta Pandey said this week that the closing auction would remain in place but that the regulator would study concerns raised by market participants.