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Introduction.

Market manipulation has always been a part of securities markets, but the way in which it can be carried out has changed considerably. Earlier, practices such as circular trading, price rigging and creating artificial volumes were comparatively easier to identify. Today, similar objectives can be pursued through complex order strategies, algorithmic trading, derivatives positions and transactions spread across different trading venues. For a regulator, the problem is therefore not simply to identify an unusual trade. The more difficult question is whether apparently legitimate trading was arranged in a manner that created a false or misleading picture of market activity or was intended to influence prices for some ulterior benefit.

India's securities-law framework deals with this through statutory prohibitions, market surveillance, investigation powers and enforcement action. Section 12A of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”) prohibits manipulative and deceptive devices and fraudulent schemes in connection with securities. The SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (“PFUTP Regulations”) also prohibit fraudulent dealings, manipulative or deceptive devices and practices which create a false or misleading appearance of trading or manipulate securities prices.
The real issue, however, is whether a broad legal framework is enough when the methods of manipulation are themselves becoming more technology-driven. The recent introduction of the Closing Auction Session (“CAS”), followed shortly by SEBI's interim action against two market participants, gives a useful example of this problem.

SEBI’s Regulatory and Surveillance Framework.

SEBI's regulatory framework can broadly be understood at three levels. First, surveillance is used to identify unusual patterns in the market. Second, investigation looks at the actual transactions and the circumstances surrounding them. Finally, enforcement determines whether the conduct violates the applicable regulations and, if so, what action should follow.

This distinction matters because an unusual trading pattern does not automatically mean that manipulation has taken place. A sudden price movement, a high order-to-trade ratio, frequent cancellation of orders or concentrated trading may trigger a surveillance alert, but each of these can also arise from genuine trading activity. The legal assessment has to consider the intention behind the conduct, the surrounding circumstances, its economic substance and its effect under the relevant legal provisions. This issue becomes even more important in algorithmic trading. Algorithms by themselves are not manipulative. They are legitimate tools which allow trades to be executed much faster and in much larger numbers than would be possible manually. SEBI's 2025 framework for safer retail participation in algorithmic trading therefore requires safeguards against misuse or unauthorised access, real-time monitoring and proper audit trails of algorithmic orders, trades and control parameters.

The main difficulty, therefore, is attribution and reconstruction. SEBI has to be able to move from an unusual data pattern to the person, entity or strategy behind it. It may also have to examine the connection between cash-market trades and derivative positions and then establish why the overall conduct went beyond aggressive but legitimate trading and amounted to manipulation.

The Closing Auction Session and Emerging Manipulation

SEBI introduced the CAS in the equity cash segment from August 3, 2026, initially for securities having listed derivatives. The session lasts for 20 minutes, from 3:15 p.m. to 3:35 p.m., during which orders are aggregated to arrive at the closing price. SEBI introduced the mechanism with the objective of making price discovery at the close fairer and more transparent. The closing price is important not only for the cash market but also for purposes such as derivatives settlement, index calculation and valuation.

The importance of CAS became clear quite soon after its introduction. On August 13, 2026, during the expiry of weekly Sensex derivatives, SEBI noticed unusual trading involving Copthall Mauritius Investment and Mansi Share and Stock Broking. In its ex-parte interim order dated August 19, 2026, SEBI alleged that aggressive buy orders placed by Copthall and large sell orders placed by Mansi affected the prices of Sensex constituent stocks during the CAS. SEBI estimated prima facie wrongful gains of around ₹2.96 crore and ₹71.65 lakh respectively and restrained both entities from accessing the securities market while further proceedings continued.
The episode is also notable because Copthall Mauritius Investment Limited is a Mauritius-based entity of JPMorgan Chase & Co., bringing the conduct of a sophisticated institutional market participant into focus. The trading pattern described by SEBI is particularly relevant for understanding the issue. During the auction, SEBI observed three sharp upward movements in the Sensex. Copthall allegedly placed aggressive buy orders in several constituent stocks at prices substantially above the reference price, after which a significant part of those orders was cancelled. Mansi, on the other hand, allegedly placed large sell orders in eight Sensex constituents and later cancelled almost all of them. SEBI also considered the entities' positions in the derivatives market, which allegedly stood to gain from movements in the closing value.
It is important to keep in mind that the SEBI order is an interim, prima facie order and is not a final finding of liability. Even so, the episode shows why an auction-based closing mechanism can be particularly sensitive. When a relatively small number of concentrated orders can influence an official closing price, that price can in turn affect derivative positions and other market-linked values.

There have also been wider market effects following the introduction of CAS. September 3, 2026, report on the impact of the new closing-auction mechanism noted that options traders had reduced their position sizes and increased hedging, with average daily options turnover falling during August. This by itself does not show that manipulation occurred. It does, however, show why SEBI's surveillance systems need to distinguish between genuine changes in trading behaviour and conduct that is actually abusive.

Judicial Approach to Market Manipulation

Indian courts have generally been careful not to treat every regulatory violation or unusual trading pattern as proof of market manipulation. The Supreme Court's decision in Reliance Industries Ltd. v. Securities and Exchange Board of India is important in this context. The Court considered allegations relating to Reliance Petroleum Ltd.'s futures and cash-market transactions and distinguished a breach or circumvention of position limits from the separate question of whether fraud or manipulation under the PFUTP Regulations had been committed. In substance, the Court held that exceeding or circumventing a position limit, by itself, does not establish fraudulent conduct. The surrounding facts and the legal elements required to prove fraud still have to be established.

This decision is especially relevant when dealing with sophisticated trading strategies because large positions, concentration and hedging can have genuine commercial reasons. The Court also recognised the relevance of anticipatory hedging and did not accept that a hedge must always be a perfect one-to-one match. The Court’s reasoning is particularly relevant to modern securities markets, where large and complex positions may simultaneously serve legitimate commercial and strategic purposes. The judgment makes clear that the existence of a regulatory irregularity cannot, without more, establish the separate allegation of fraud under the PFUTP Regulations. The regulator must still establish the legally relevant connection between the conduct and the alleged manipulation. This distinction is important in an environment where algorithmic trading, derivatives and hedging strategies can produce substantial concentrations and rapid market movements without necessarily involving a manipulative purpose. At the same time, Reliance Industries does not create a safe harbour for sophisticated market participants. Its significance lies in requiring the regulator to establish manipulation through legally relevant evidence rather than inference based solely on the scale or unusual nature of trading. An alert may justify investigation, but enforcement action must still be supported by evidence capable of demonstrating the prohibited conduct. At the same time, the Supreme Court has recognised that direct evidence of manipulation may not always be available. In SEBI v. Kishore R. Ajmera, the Court held that where direct proof of a meeting of minds is not available, an inference can be drawn from the overall circumstances, including trading volume, persistence, order details and the closeness in timing. For civil liability under securities laws, the relevant standard is the preponderance of probabilities.

The judicial approach therefore tries to maintain a balance. Sophisticated trading does not become manipulation simply because it is complex or carried out at high speed. At the same time, a manipulative strategy cannot escape liability merely because there is no direct evidence showing an agreement between the parties.

New-Age Trading Practices and Regulatory Gaps

The newer regulatory challenge is not limited to algorithms. Market participants now operate across cash and derivatives markets, use APIs and automated execution systems, and react very quickly to information shared on social-media platforms. As a result, manipulation may involve several systems working together rather than one clearly identifiable transaction. SEBI's recent initiatives also reflect this change. Its Annual Report 2025–26 refers to technology-based surveillance tools such as Project SUDARSAN, which focuses on detecting unauthorised digital activity, and R(AI)DAR, which is used to review potentially problematic advertisements. SEBI reported that it had identified more than 20,000 instances of potentially fraudulent content and posts across social media since November 2025.

This broader information environment is important because investors are no longer influenced only by formal disclosures made through stock exchanges and listed companies. SEBI's Investor Survey 2025 found that nearly 62% of investors make some of their investment decisions based on recommendations from financial influencers, while 93% considered financial influencers to be moderately or highly credible.

The regulatory problem is therefore not limited to watching orders. SEBI has to understand how orders interact with the market, but it also increasingly has to consider how information reaches and influences investors. In some situations, manipulation may involve both trading activity and the information surrounding it.

Assessing SEBI’s Regulatory Arsenal

The bigger concern is now SEBI's technological capacity, its ability to conduct surveillance across different markets and the quality of evidence available to establish a violation. A modern manipulator could spread activity across several securities, combine cash and derivative positions, use automated orders and cancel those orders within a very short period. Identifying such conduct requires surveillance systems that can reconstruct the overall strategy rather than simply flag individual unusual trades.

The CAS episode brings out this issue quite clearly. The mechanism was introduced to improve price discovery, but because the closing price can have significant consequences, it can also create incentives for strategic trading around the close. The answer should not necessarily be to restrict sophisticated trading. Instead, SEBI should continue strengthening real-time surveillance, audit trails, cross-market analysis and post-trade reconstruction. The existing requirements relating to algorithmic trading, including real-time monitoring and preservation of detailed trading logs, provide a useful base for this. The next step should be to connect these capabilities more effectively across the cash market, derivatives market and digital-information space.

Conclusion

India therefore does not lack laws dealing with market manipulation. The SEBI Act 1992, and the PFUTP Regulations 2003, provide a broad legal foundation, while judicial decisions make it clear that manipulation can, where appropriate, be established through circumstantial evidence based on the overall facts. At the same time, the decision in Reliance Industries shows that a regulatory irregularity, concentrated position or sophisticated trading strategy cannot by itself be treated as fraud.

The main challenge is increasingly technological rather than simply legislative. Trading is becoming faster, more automated and more connected across different markets. SEBI's surveillance and enforcement systems must therefore keep developing so that they can identify, reconstruct and attribute complex trading strategies, while still maintaining proper evidentiary standards and legal certainty.

The CAS episode is an early example of this changing regulatory environment. Its importance is not limited to whether the particular participants involved are ultimately held liable. It also shows something broader about market integrity: as technology changes the way markets operate, effective securities regulation will depend increasingly on whether the regulator can understand and respond to those technological developments at a comparable pace.

-Authored by Dipanshuk Ambastha (Intern) under the guidance of Mallika Agrawal (Associate).

Disclaimer

This publication has been prepared by RMA Legal for general informational purposes only and does not constitute legal, tax, financial or any other professional advice. The information has been compiled from sources believed to be credible; however, it is provided on an “as is” basis without any representation or warranty, express or implied, as to its accuracy or completeness, and RMA Legal shall not be liable for any loss arising from reliance on this publication. Readers are advised to seek appropriate professional advice before taking any action.