SEBI warns against rigging closing auction as markets deepen rapidly

MANIPULATORS RISK CRACKDOWN | AI safeguards put accountability upfront

Palazhi Ashok Kumar

mumbai

SEBI Chairman Tuhin Kanta Pandey on Wednesday put market manipulators on notice, warning that attempts to rig the newly introduced Closing Auction Session (CAS) to discredit the mechanism would invite stern regulatory action, as the watchdog strengthens surveillance across an increasingly large and technology-driven securities market. Pandey said the regulator is better placed to detect manipulation under CAS than under the older volume weighted average price (VWAP) mechanism it replaced.

“We can catch hold of manipulation in CAS relatively easily. CAS is for transparency. And if anybody feels that they will manipulate CAS for defaming the new system, they are in danger,” Pandey underlined.

The warning marks a firm defence of the closing-price framework introduced on August 3, even as Sebi acknowledges initial concerns and participation constraints around the transition. Pandey has maintained that CAS is a major market reform that is here to stay. 

Why Sebi is backing CAS

CAS pools buy and sell orders without immediate execution during a designated window towards the end of trading. The orders are then matched through an auction-style process to determine the closing price.

The framework is intended to improve transparency and reduce the scope for closing-price manipulation compared with the previous VWAP mechanism. CAS-type systems are already used in major global markets.

Pandey said participation is improving, particularly among mutual funds and proprietary traders, while Sebi is examining constraints that may be preventing broader adoption.

`4.5 tn raised via equities

The tougher regulatory message comes as India’s capital markets reach unprecedented scale. Equity issuances crossed ₹4.5 trillion in FY2025-26, of which around ₹1.9 trillion was raised through 366 IPOs. By end-July 2026, another ₹260 billion had been mobilised through 79 IPOs, while potentially around ₹2 trillion could be raised going ahead, Pandey said.

AI brings new regulatory challenge

As the market expands, Sebi is also preparing for risks arising from greater use of artificial intelligence and machine learning. 

Pandey said AI could strengthen surveillance, risk assessment, fraud detection and investor servicing, but warned that it could also introduce risks involving opacity, bias, cybersecurity, data protection and accountability.

‘Kill Switch’ and human oversight

Sebi will shortly issue guidelines for the responsible use of AI and machine learning in capital markets, Pandey announced.

The guidelines will adopt a tiered approach, with emphasis on clear accountability and governance. They will require “Kill Switch”, “Humans in the Loop” and data controls, providing for human intervention where automated systems create risks.

“The aim is to balance innovation with investor protection,” Pandey said.

“At SEBI, our approach is one of optimum regulation — regulation that is proportionate, forward-looking and supportive of market growth, without compromising investor protection or market integrity,” he said.

Wider market rulebook under review

Sebi is also examining an IT Resilience Index for Market Infrastructure Institutions (MIIs) to create an objective measure of the resilience of critical systems. It is working with MIIs to expand API-based connectivity and interoperability.

The regulator is reviewing the Securities Lending and Borrowing Mechanism and short-selling frameworks to deepen cash markets. In debt markets, proposals include greater ISIN flexibility, support for ESG debt and exploration of corporate bond tokenisation.