[Astuti is a student at Hidayatullah National Law University.]
On 17 May 2024, the Securities Exchange Board of India (SEBI) notified the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2024 (2024 Amendment). This amendment has a specific focus on the mandatory market rumour verification (MRV) by a listed company when the market rumour is specific and results in a material price movement (MPM). When SEBI’s moves in the last year are observed, it brings us to a safe presumption that the 2024 Amendment was made to fill in the loopholes left behind by the amendment to the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (LODR Regulations) in June 2023 (2023 Amendment), which introduced mandatory MRV by top listed entities with deferred implementation. MRV is applicable to the top 100 listed entities starting from 1 June 2024, and for the top 250 listed entities from 1 December 2024.
The aim of this article is to address the background of the 2024 Amendment and explain its components to lay down the current picture. It attempts to comment upon the move and analyzes the practical challenges which might arise as a consequence.
Background
Under the 2023 Amendment, the trigger for an MRV was the occurrence of a ‘material event’. However, the same was left undefined. Concerns were raised that the requirements were stringent and lacked the practical bridge that could ease compliance with these regulations.
In July 2023, SEBI in line with its commitment to facilitate capital formation in the economy and ease of doing business proposed the formation of an Industry Standards Forum (ISF) by the Industry Associations. In August 2023, the ISF came into being as a result of the collaboration of three industry associations Associated Chambers of Commerce, the Confederation of Indian Industry and the Federation of Indian Chambers of Commerce and Industry. ISF was set to formulate standards for the implementation of some specific circulars and regulations in consultation with SEBI and based on feedback from the industry and other concerned stakeholders.
These developments together resulted in the release of a Consultation Paper on Amendments to SEBI Regulations with Respect to Verification of Market Rumour in December 2023 (Consultation Paper). The Consultation Paper and the following discussion on it now form the skeleton of the 2024 Amendment.
Understanding MRV as it Stands Post 2024 Amendment
The MRV requirement as mandated by SEBI is a result of the combined effect of the below-mentioned circulars and notes, in addition to the 2024 Amendment (Combined Effect).
The 2024 Amendment to Regulation 30 (11) which reads in contrast with the 2023 version as follows:
The omission of explanation shall come into force with effect from 31 December 2024;
SEBI’s circular on the framework for considering the unaffected price for transactions upon confirmation of market rumour dated 21 May 2024 (Unaffected Price Framework);
Framework for material price movement with respect to rumour verification by Stock Exchanges dated 21 May 2024 (MPM Framework);
The Industry Standards Note on verification of market rumours under Regulation 30 (11) of LODR Regulations dated 21 May 2024 (ISF Note); and
SEBI’s circular on Industry Standards on verification of market rumours dated 21 May 2024 (Circular on ISF).
Breakdown of the Combined Effect
MPM Framework
The 2024 Amendment mandates a top-listed entity to confirm or deny the rumour, resulting in an MPM. In order to assess the MPM, stock exchanges are required to release their standards. Accordingly, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) released the MPM Framework. As per the MPM Framework, MPM is an identified percentage increase/decrease in share price: (a) between the closing price of the previous trading day and the next trading day’s opening price and (b) intraday.
For (a), the percentage increase / decrease is to be considered without the impact of the benchmark index (i.e., NSE’s NIFTY 50 and BSE’s SENSEX). For (b), MPM is not a function of opening price versus closing price of the same trading day, but price movement throughout the day. Therefore, while there may be no or limited difference between the opening price and the closing price of the same trading day, if the stock price was volatile during the trading hours causing the relevant percentage increase / decrease, there is MPM. Given the scheme of MPM, it is imperative to adopt technology to track the stock price for intraday movement.
ISF Note
The ISF Note has been published through the joint efforts of the ISF and SEBI. This note has gained SEBI's authentication through the Circular on ISF dated 21 May 2024. The ISF Note plays the role of adding the flesh to the skeleton laid down by SEBI.
First, it thoroughly explores the classification of mainstream media. It lists newspapers, digital sources, international outlets, and news channels that fall under the category of mainstream media. Notably, it excludes news aggregators and social media platforms from this list. This is a significant step towards clarifying the broad scope created by the proviso to Regulation 30(11) of the LODR Regulations following the 2023 Amendment.
Second, the ISF Note clarifies what constitutes a specific rumour as opposed to a general one. A specific rumour should contain identifiable details about an event or cite a source expected to have credible knowledge of the event concerning the company.
Third, the ISF Note further stresses the occurrence of an MPM as a trigger for the obligation of verification. The MPM is a welcomed factor as it aligns the 2024 Amendment with the legislative aim of SEBI which led to the inception of the MRV. This intent prioritized the interests of the shareholders and other market players in the aftermath of an MPM due to MRV.
Lastly, this note goes beyond by making a distinction between stages of mergers and acquisitions (preparatory and advanced) and provides an exemplar of the kind of disclosure a company may have to give. It also clarifies that if a rumour is circulated between the issuance of prior intimation of the board meeting under Regulation 29(1) of the LODR Regulations and the conclusion of the board meeting, the event would be exempted from MRV.
Unaffected Price Framework
One of the pertinent questions posed in the Consultation Paper was the aftermath of the verification of a rumour which might affect the price of a company’s securities in the market. In the 2024 scenario, this has been addressed and resolved by way of the Unaffected Price Framework.
To specify, the ISF Note illustrates that when a disclosure is required under Regulation 30(11) of an M&A transaction that is a delisting offer, a buyback, a preferential issue of securities, including as part of a scheme of arrangement, and other events as listed in the ISF Note, the unaffected price of the shares shall be taken into account.
SEBI has also notified corresponding amendments to the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011, the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 and the SEBI (Buy-Back of Securities) Regulations 2018 to provide such price protection upon rumour verification for open offers, preferential issue of securities, qualified institutions placement and buyback, so that there is no ambiguity in statutory interpretation.
Takeaways and Conclusion
Since 2023, SEBI has made significant strides in addressing market concerns and easing business operations in India. The regulator's efforts to enhance investor protection and consider business needs are commendable. While the 2023 initiative overlooked the complexities of complying with the MRV, the 2024 amendments have effectively addressed these issues through SEBI’s industry engagement and the ISF Note.
For the top 100 listed entities, the compliance deadline was set for 1 June 2024, which was challenging given the immediate effect of the 2024 Amendment from 17 May 2024. Despite the tight timeline, the new and more implementation-friendly requirements have proved beneficial. This is evident as the top 100 listed entities have kept up and market has seen prompt MRVs by the likes of Bajaj Finance, Tata Steel and LIC.
At first glance, the 2024 Amendment along with the ISF Note and the Unaffected Price Framework appear robust. However, there are concerns about the practicality of calculating MPM, correlating MPM with a market rumour and ensuring price protection.
The 2024 Amendment offers price protection only when MPM is due to market rumours. This is largely based on the presumption that at a given time, either one-factor results in price variation or every factor’s effect is severable.
In reality, multiple factors often influence stock prices simultaneously. For example, the recent stock market turbulence during the 2024 Lok Sabha exit polls, which were controversially labelled an exit poll scam, caused widespread price variations. If a market rumour had emerged on the same day, isolating its impact on stock prices from the exit poll's effects would have been challenging.
How does SEBI propose to assess the extent of the effect on the price of a share in order to grant price protection is something that might require clarification or just yield an answer over time as the companies and stock exchanges adapt to it.
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