Spoofing in Indian Markets: Dissecting SEBI'S Crackdown on PWAPL

Yarabham Akshit Reddy* and Vaibhav Mishra+

INTRODUCTION

On 28 April 2025, the Securities and Exchange Board of India ("SEBI") passed an Interim Order against M/S Patel Wealth Advisors Private Limited (“PWAPL”) for order spoofing on stock exchanges. Spoofing is a deceptive practice that manipulates “Order Books” – a real-time list of buy and sell orders for a particular security – by placing large, non-bonafide orders to create artificial liquidity or momentum, inducing other market participants to react.

For instance, a spoofer places large fictitious buy orders above the prevailing market price to simulate demand, prompting other investors to increase their bids accordingly. Once the market responds, the spoofer swiftly cancels the non-bona fide orders and executes genuine trades on the opposite side at the distorted price, benefitting from the artificially induced price rally.  

By exploiting market psychology and price dynamics, manipulators secure profitable trades at the expense of genuine investor losses, undermining market integrity and fair price discovery. The Indian regulatory framework on spoofing remains scattered, coupled with inadequate surveillance systems to detect such trades, thereby demanding regulatory intervention to deter such manipulative practices. 

In light of the above, this piece dissects SEBI's order while delving into critical issues such as the need for statutory recognition of spoofing in India and clarity on the standard of proof in such offences, by making references to the enforcement regimes in the United Kingdom and the United States of America.  

DISSECTING SEBI'S ORDER AGAINST PWAPL

SEBI has held PWAPL liable for the alleged spoofing activities in its ex parte interim order against the company and its directors. In its order, SEBI relied upon the scattered legal framework governing spoofing activities. Section 12A of the SEBI Act, 1992, read with Regulations 3 and 4 of the Prevention of Fraudulent and Unfair Trade Practices, 2003 ("PFUTP Regulations"), indirectly prohibits fraudulent and unfair trade practices.

The stockbroker engaged in two-way manipulation by placing large buy-side orders at prices significantly below the last traded price, creating artificial demand while executing orders in small quantities on the opposite side of the book. Thus, it systematically cancelled initial buy-side orders after inducing artificial price movements favourable to its sell-side order.

For example, SEBI, in its order (Table 3), observes that PWAPL placed 548 buy orders for 538.09 lakh shares at prices lower than the last traded price by 20–26%. At the same time, it also placed buy-side spoof orders at 9–10% above the last traded price. It was found that stock prices surged by 5.3% due to the demand created by these artificial orders, 99.1% of which were eventually cancelled. PWAPL thereby benefited from these distorted market conditions. SEBI's order marks a significant enforcement action in India, implicating PWAPL for 292 manipulative trades across 173 stocks.

In this case, SEBI placed reliance on its order in Nimi Enterprises, which held that "a deliberative chain of acts amounts to 'spoofing'." The approach in Nimi Enterprises was to analyse the sequence of acts to determine spoofing, but given the evolving complexity of spoofing, detecting and proving the trader's intent remains challenging.

Further reference was made to the US judgment in Navinder Singh Sarao v. The Government of the United States of America, which adopted the "genuineness of a cancellation" approach for determining spoofing. This is used to assess whether the cancellation of trade orders was due to legitimate concerns such as market conditions, or formed part of manipulative practices. The US court determined this ‘genuineness’ by identifying the “prior intent” of cancellation, which would indicate a non-genuine cancellation.

Thus, jurisprudence evolved in the US and India, along with a combination of regulatory provisions, led to the implication of PWAPL for its manipulative practices.

REGULATORY GAPS: SPOOFING UNDER THE CURRENT LEGAL FRAMEWORK

Spoofing is not explicitly defined under the PFUTP Regulations. Instead, its treatment is inferred from the broad provisions of Section 12A of the SEBI Act, 1992, read with Regulations 3 and 4 of the PFUTP Regulations. Section 12A(b) of the SEBI Act prohibits the employment of any device or scheme to defraud in dealings involving listed or proposed-to-be-listed securities on stock exchanges. Viewed in light of Regulation 4(2)(a), which prohibits the unfair trade practice of "creating a false or misleading appearance of trading" in the securities market, such provisions effectively bar spoofing or similar activities.

This scattered framework creates a lack of legal certainty and presents enforcement challenges, as each instance of spoofing must be assessed independently to determine whether it falls within the ambit of these broad provisions. Such determinations often rely on the subjective discretion of SEBI authorities, potentially leading to inconsistent regulatory and judicial interpretations, where similar factual scenarios may be treated differently.

Moreover, in the absence of an express regulatory definition, SEBI’s reliance on its order in Nimi Enterprises to classify certain behavioural patterns as ‘spoofing’ is problematic. The Securities Appellate Tribunal has stayed that order, which remains under judicial scrutiny.

Further, SEBI has referred to certain US judicial precedents in spoofing cases. However, such precedents provide only persuasive value, and their direct applicability in the Indian context remains uncertain due to the underdeveloped nature of India’s spoofing enforcement framework, particularly in comparison to that of the United States.

Therefore, only the explicit inclusion of ‘spoofing’ under the PFUTP Regulations can provide the legal certainty necessary for consistent enforcement.

OBJECTIVE VS SUBJECTIVE INFERENCE OF INTENT: CHALLENGES IN PROSECUTING SPOOFING

The classification of spoofing under the broad anti-fraud provisions of the PFUTP Regulations reignites the debate on whether SEBI authorities must prove the trader’s subjective intent before initiating prosecution. The presence of the phrase “in order to induce” in Section 2(1)(c) of the PFUTP Regulations introduces ambiguity: does it mandate proof of the accused’s intent, or is the act itself sufficient, irrespective of intent? This phrase has attracted divergent judicial interpretations from the Securities Appellate Tribunal ("SAT") and the Supreme Court.

In SEBI v. Rakhi Trading (P) Ltd., the Supreme Court held that market manipulation involves a deliberate attempt to interfere with the free and fair functioning of the market. Accordingly, adjudicating authorities must demonstrate a conscious intent to manipulate the market for a violation to be established. Conversely, in SEBI v. Kanaiyalal Baldevbhai Patel, the Court downplayed the necessity of proving intent to establish inducement and focused instead on the conduct’s market impact and the losses suffered by investors. This divergence in judicial reasoning over the standard of proof complicates the prosecution of spoofing activities.

SEBI typically relies on circumstantial evidence—such as high cancellation rates, abnormal trading patterns, and resultant price distortions—to establish violations under Sections 3 and 4 of the PFUTP Regulations, especially in the absence of direct or substantial evidence. Proving a trader’s subjective intent in spoofing cases remains a formidable challenge due to the resource-intensive nature of such investigations and the inherent difficulty in distinguishing manipulative conduct from legitimate order cancellations.

This challenge was evident in S. Gopalkrishnan v. SEBI, where the SAT set aside SEBI’s order, holding that mens reamust be established—namely, that the trader’s intent to manipulate the market must be proven.

The authors are of the view that requiring the establishment of mens rea would hinder SEBI’s ability to effectively prosecute spoofing, as it would impose a significantly higher burden of proof on enforcement authorities. This underscores the pressing need for settled jurisprudence on the requirement of intent in cases involving market manipulation and spoofing.

A MIDDLE PATH FOR INDIA: ASSESSING US AND UK REGULATORY FRAMEWORKS

In the United States, spoofing is explicitly prohibited under the Commodity Exchange Act, as amended by the Dodd-Frank Act, 2010. The Act defines spoofing as: “bidding or offering with the intent to cancel the bid or offer before execution.” This definition imposes a higher evidentiary burden on regulators such as the Commodity Futures Trading Commission ("CFTC") and the Securities and Exchange Commission ("SEC"), as they are required to prove both the act and the intent behind the spoofing. The objective is to distinguish between legitimate and illegitimate order cancellations.

However, regulatory authorities often face significant challenges in establishing intent, as traders may cite reasons such as risk management or market volatility to justify cancellations. Experts generally consider that the limited number of spoofing prosecutions in the US is primarily due to the difficulty in proving intent, given that traders frequently rely on legitimate defences for cancelling orders.

By contrast, the United Kingdom does not explicitly define spoofing. Instead, it is subsumed under the broader category of a ‘market manipulation device’ as described in Article 12(2)(c) of the Market Abuse Regulation ("MAR"). Notably, this provision also acknowledges spoofing in the context of high-frequency and algorithmic trading, which remains overlooked in the Indian regulatory framework.

An analysis of the two jurisdictions reveals a key divergence in evidentiary approaches. The UK enforcement regime focuses more on proving market conduct than on establishing the trader’s intent. Since the offence carries civil consequences, the Financial Conduct Authority ("FCA") is required only to demonstrate—on a balance of probabilities—that a trader’s behaviour created, or was likely to create, a relevant market effect, namely a false or misleading impression. The FCA has clarified that “ignorance of the requirements of MAR, or the absence of intent to commit market abuse, is not a defence to breaches of MAR.”

Given these regulatory contrasts, India could benefit from adopting a more balanced and flexible definition similar to that of the UK. Such an approach would better equip SEBI to address evolving manipulative practices and uphold market fairness and investor protection.

Furthermore, SEBI could consider adopting a hybrid model. Under this model, where penalties are imposed under Section 15HA of the SEBI Act and exceed the profits made (i.e. up to three times the profits), enforcement could be based on clear and cogent evidence indicating a deliberate intent to mislead the market or induce participants. Conversely, where penalties are limited to the actual losses suffered by investors, violations could be assessed on the balance of probabilities, akin to the UK's enforcement standard.

THE WAY FORWARD

The advent of artificial intelligence and algorithmic trading has elevated spoofing into a more sophisticated and elusive threat to market integrity. SEBI’s recent order underscores the urgent need to invest in advanced surveillance systems equipped with artificial intelligence and machine learning capabilities—tools already successfully implemented by the UK’s FCA. Traditional surveillance mechanisms are ill-suited to detect such manipulative practices, especially given the vast volume of daily orders on stock exchanges.

The European Union’s two-pronged approach to surveillance offers valuable guidance. By dividing monitoring into pre-order surveillance and post-order analysis, the EU adopts a proactive rather than reactive enforcement model. Additionally, the International Organisation of Securities Commissions, a global body for securities regulation, could play a critical role in enhancing SEBI’s surveillance infrastructure through its technical assistance programmes.

Beyond surveillance upgrades, SEBI’s order also highlights the pressing need for explicit recognition of spoofing under the PFUTP Regulations. This should be done by incorporating key lessons from both the US and UK regulatory frameworks. Given the inherent difficulties in proving intent in spoofing cases, enforcement efforts should place greater emphasis on circumstantial evidence and the resulting effects of the trades on market behaviour.

In sum, a robust legal framework—explicitly defining spoofing—combined with advanced surveillance infrastructure, would empower SEBI to effectively counter increasingly complex and evolving market manipulation tactics, thereby reinforcing investor confidence and market integrity.

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* Yarabham Akshit Reddy and Vaibhav Mishra are fourth-year BA.LLB (Hons.) Students at Hidayatullah National Law University, Raipur.

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