[Divyanshi is a student at Institute of Law, Nirma University.]
Starting 1 June 2024, the top 100 listed companies by market capitalization are required to verify, confirm, deny or clarify the market rumours concerning them. According to the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations 2015 (LODR Regulations), every rumour need not be verified and the mandate is only for rumours that have brought about material price movement and have been reported in mainstream media. Detailed clarifications on various aspects of the rule to facilitate its implementation have been provided in the Industry Standard Note made by the Industry Standards Forum in consultation with SEBI. The market rumour regulations are coming into force after multiple delays and attempts to incorporate industry suggestions and providing ample time to the affected companies.
What Comes under Mainstream Media?
The mainstream media consists of Indian newspapers that cross certain thresholds of circulation and readership, digital versions of these newspapers, online news sources listed in the Industry Standards, specified international newspapers and news channels. Online news that is behind paywall, news aggregators and social media have been excluded from the purview of mainstream media. Although, the social media handles of identified news sources have been included.
Monitoring of mainstream media across the various sources and jurisdictions requires the allocation of considerable resources especially with the 24 hours timeline. Companies will need a specialised department and team for the same. The comprehensive directions are an attempt to curb the industry concerns about the potential number of mainstream media entities being too large for effective monitoring and do succeed in it.
Rumour Must Not be ‘General in Nature'
Regulation 30(11) of LODR Regulations mandates that a market rumour must be confirmed, denied, or clarified if it includes specifically identifiable details about the event or is attributed to sources presumed knowledgeable on the subject. Conversely, this regulation does not apply to rumours that are vague or lack specifications. Additionally, if a specific rumour is proven to be false, the company is required to publicly deny it to maintain transparency and accuracy in market communications. If a listed entity confirms a reported event or information, it must also disclose the current stage of the event or information.
Unaffected Price
The LODR Regulations have also gone a step ahead and provided that the change in price shall not be considered for transactions where SEBI and stock exchange pricing norms are applicable. The unaffected price will be considered in such transactions. This is conditional on the rumour related to that transaction being confirmed by the company within 24 hours from the trigger of material price movement. Here, not only are the highly speculative or distorted prices kept in check, the companies not mandated for verification (i.e. not amongst the top 250 companies by market capitalization) are also incentivized to clarify rumours facilitating an informed market.
The Securities and Exchange Board of India (SEBI) on 21 May 2024 released the framework for consideration of unaffected price. The unaffected price is determined by adjusting the volume-weighted average price. This adjustment includes calculating the daily weighted average price (WAP) from the day of the significant price movement until the end of the next trading day after rumour confirmation, attributing any variation during this period to the impact of the rumour and its confirmation. The adjusted daily WAP is set to match the daily WAP from the day before the significant price movement, ensuring that the price reflects conditions unaffected by the rumour.
This adjustment is particularly relevant in scenarios like preferential issues to qualified institutional buyers and mergers and acquisitions, where transaction pricing must reflect unaffected market conditions. It ensures that the listed securities are priced fairly, based on conditions that do not consider the speculative impact of rumours.
Notably, this unaffected price is relevant for a period of either 60 or 180 days, depending on the transaction's stage, from the date the rumour is confirmed. If price variations due to rumour confirmation hit price band limits, adjustments are extended until the price stabilizes and no longer hits these limits on subsequent trading days. Additionally, if multiple rumours pertain to the same transaction and each is confirmed, the unaffected price is recalculated and applied from each confirmation date for a specified period, depending on the transaction stage. This comprehensive approach ensures that the pricing of transactions remains grounded in market conditions that are unaffected by rumours, thus maintaining fairness and transparency in the financial markets.
UPSI Related Proposal
The consultation paper released by the SEBI in December was criticized for the impact they will have on the insider trading regime in India. It was proposed that the unpublished price sensitive information (UPSI) published in the mainstream media and not verified by the company will still be considered UPSI. The non verification can be because it did not any trigger any price movement or a movement lower than the threshold of materiality. Considering such publicly available information as UPSI combined with the exception to certain trades provided in the SEBI (Prohibition of Insider Trading) Regulations 2015 encourages off-market sale of securities. The arbitrary discrimination between trades based on the platform which would have been encouraged here promotes off the market dealings. The recent SEBI circulars however have paid heed to the concerns and have chosen to exclude it from the published framework preventing the addition of a major contradiction to the regime.
Price Movement Attributable to Other Factors
Ever since SEBI released a consultation paper on the same in December last year concerns have been raised on the attribution of price change to the rumours. It is contested that the price movement can be due to wider industry or sectoral changes, policy changes or other public announcements. Such price movements shall be discounted for pricing guidelines for preferential issues of shares, qualified institutions placement, open offers etc. A mechanism for consideration of alternative explanations is missing from the current regulations. The regime may facilitate premature and hence potentially harmful disclosures. For example, some of these premature disclosures may lead to distorted market conditions.
A system must be in place to differentiate price movements in transactions involving listed securities from those brought on by speculative rumours. A practice that US exchanges have adopted, encouraging firms to seek secrecy when necessary and giving exchanges the opportunity to comply with these requests, encourages good information management by realizing that not all market rumours require prompt publication.
Loss to Retail Investors
Although the framework was brought out for the benefit of wider industry, it is primarily protecting the corporations and institutions which are party to rumored transactions. The unaffected price regime is of no benefit to the ordinary investor affected by market rumours as they remain exposed to price volatility caused by market rumours. An interesting situation to look at from this perspective (although not entirely context appropriate) would be the spike in the market after exit polls on the (Indian) General Elections in 2024. The market reached an all-time high on June 3rd upon the release of exit polls and on the official verification (results) within 24 hours on 4 June 2024, INR 29.9 lakh crore was wiped off in terms of market capitalization with huge losses across the board.
When prices are materially affected by rumours, retail traders might incur losses once the price stabilizes to the unaffected level and the clarification of rumours is not of much help in such cases. On the other hand, the principle of caveat emptor warns that an investor enters the market at its own peril with the knowledge that market forces are inherently unpredictable and out of his control. The volatile nature of markets, influenced by rumours or speculative information, is the risk that the investors willingly undertake and regulations cannot be expected to mitigate all inherent risks in the market.
Conclusion
Keeping in mind the feedback on the implementation from 1 June 2024 and other notable potential issues, it is on SEBI to balance regulation and uncertainty to avoid a decline in investor confidence. The goals of these regulations may be substantially undermined, and market efficiency may suffer, if they unintentionally result in burdensome disclosure requirements, intrusive micromanagement, or unstable market circumstances. Preserving the delicate equilibrium is crucial for a dynamic and resilient market along with investor protection.
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