[Onika Arora & Rishi Pareek are 4th Year students at National Law University, Jodhpur]
Brief Introduction
Rumours can create undue volatility and mislead investors, affecting market stability and confidence. Clearing up rumours helps protect investors from making decisions based on false or misleading information, which could lead to financial losses. In light of the same, the stock market regulator, the Securities and Exchange Board of India (SEBI) in June 2023 introduced a proviso to Regulation 30(11) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations) which required top 100 listed entities (based on market capitalization) to verify market rumours reported in the mainstream media within 24 hours, that are ‘material’, ‘impending’ and ‘specific’. This was done to mitigate the impact of such rumours on stock prices and transactions and to mandate timely disclosures by listed entities upon material events. In May 2024, SEBI released a circular introducing a new framework focused on managing unaffected prices amidst market rumours.
The framework intends to enhance transparency through timely disclosure of information. SEBI replaced the traditional objective parameter with a non-objective one to improve ease of doing business. Previously, ‘materiality’ was tested based on general criteria under Regulation 30, but now verification is required whenever there is a material price movement. This change intends to protect investors and companies by addressing rumours in mainstream media. The framework relies on material price movements and timely verification and disclosure. However, many implementation modalities remained undefined, leaving it to stock exchanges and stakeholders.
Subsequently, the stock exchanges, along with the three industry associations (FICCI, CII, and ASSOCHAM), issued an Industry Standards Note (ISN), which provides standards, guidance, and illustrations for implementing the Rumour Verification Amendments. The ISN clarified the meaning of two crucial terms left undefined by the SEBI. Firstly, for information to be specific, it must include identifiable details such as names, dates, locations, and a reliable source. Secondly, mainstream media covers major Indian newspapers, digital platforms, international media, and news channels, excluding social media except for official handles of reliable sources. However, the term ‘impending’ remains undefined, leaving ambiguity about when a deal qualifies as an ‘impending material event’ requiring disclosure, as negotiations can be affected by various factors.
This regulatory initiative mandates immediate verification of market rumours and the calculation of unaffected prices to protect transactions from speculative spikes. The unaffected price is calculated by excluding the impact of a market rumour on the share price. For example, if a rumour raises a stock price from Rs. 100 to Rs. 110 and is confirmed within 24 hours, the unaffected price of Rs. 100 would be used to set the floor price for preferential issues. This unaffected price remains applicable for either 60 or 180 days, depending on the transaction stage, starting from the confirmation date of the rumour until the ‘relevant date’ under existing regulations.
The amendments have been effective from 1 June 2024, for the top 100 listed companies based on market capitalization, and subsequently would be effective from 1 December 2024, for the top 250 listed companies.
Addressing Unresolved Challenges: Evaluating SEBI’s Amendments
Despite efforts by SEBI to smoothen its implementation, the framework faces several loopholes that could hinder its effectiveness.
The Broadened Scope of Disclosure under Regulation 30
Previously, Regulation 30 of the LODR Regulations required companies to disclose events under specific categories in Schedule III. However, the amendment broadens the scope, requiring disclosure of any event or information that causes a material price movement, even if it does not fit the predefined categories. This increases the responsibility of companies to monitor and promptly disclose relevant information. While Regulation 30(4) provides criteria for materiality, including financial impact and qualitative factors, ambiguity remains in assessing unlisted events. Companies must identify and disclose potentially material information and the burden of proof falls on them to specify why certain events were not deemed significant to trigger market reactions. Although on the face of it, this sounds like a transparency-enhancing directive because you are focusing on credible information, in terms of operating for companies is putting them in quite some operational stress.
Impact of Price Protection Mechanisms
Price protection mechanisms primarily benefit negotiated parties, such as promoters and private equity buyers, by shielding them from market fluctuations. These parties generally have access to non-public information which allows them to take strategic positions if rumours circulate. This creates a disparity between them and retail traders and other investors who rely on public data and market sentiment. Rumours can cause drastic price movements which may impact perceptions of market fairness and transparency, even before a trader reacts to it. Also, the larger brokerages, which rely on market float, may need to re-evaluate their business models due to increased regulatory emphasis on limiting misconduct and fraud.
Subjectivity in Rumour Analysis
The dependence of the method on a causal mechanism where the cause i.e. rumours in mainstream media is inherently subjective but on the other hand, the effect i.e. material price movement is evaluated by pre-determined thresholds and numerical benchmarks that are objective, gives rise to various problems. The interpretation of rumours may vary widely across stakeholders and give rise to subjectivity in analysis. This subjectivity may cause inconsistencies in enforcing legal frameworks and the outcome may be far different from what it is expected to be. For instance, positive news about a company might trigger negative effects on the price of shares.
Ambiguity in Assessing Price Movements
The switch to an ambiguous method focusing on general price movements rather than specific material impacts linked to rumours dissatisfies the regulation’s intent. Materiality is crucial not only for eliminating baseless rumours but also for addressing real impacts on companies. However, this approach introduces significant subjectivity into the analysis. Price changes in securities can happen due to various factors like industry news or market trends, making it challenging for companies to pinpoint a specific price movement to a single rumour under the objective test.
Lack of Preventive Measures
Without an active monitoring system, reactive market interventions may be ineffective in preventing chaos and unfair trading. If the framework focuses only on post-event corrections rather than preventing rumours, it may fail to deter rumour-mongering and market disruptions. Companies must respond to market-related speculation, but current criminal law lacks direct provisions against rumour-mongers. Post facto reactions would only be able to address the aftermath, not the underlying issue.
Potential for Exploitation of the 24 Hour Requirement
The requirement for companies to respond within 24 hours to rumours may be exploited by parties seeking confidential information. This can lead to premature disclosure of sensitive information, impacting trade secrets and fair trade principles. Early rumours during pre-M&A talks and renegotiations can result in public disclosure, affecting deal certainty and stock prices, and causing potential deals to fall through or become more costly. This is a matter of concern, as the valuation on which some of these deals rest comes into question even before an open offer price has been decided upon.
Reliance on Outdated Provisions
Finally, the provision makes an absolute statement. The regulator seems to have drawn inspiration from the existing frameworks in other countries. For instance, the New York Stock Exchange Manual mandates immediate public disclosure once news spreads beyond senior management or a leak is imminent even if it then causes business inconvenience. However, it should be kept in mind that these amendments were brought decades ago and they require an update. Most are in agreement that these guidelines need to be fixed and modernized considering evolving market dynamics and technology advancements.
Proactive Strategies and Recommendations for Effective Implementation
Although the amendments pose a complex set of issues, some steps can be taken to help ensure their effective implementation.
By bringing a standard operating framework for identifying and interpreting rumours, SEBI can make sure that all the companies receive more or less similar treatment on this count across different stakeholders. In addition, it is important to develop more explicit guidelines for the treatment of confidential information. These guidelines would prevent unintentional leaks and at the same time address market speculation and ensure a balance between transparency and confidentiality. SEBI can also take steps for the adoption of measures that prevent the circulation of rumours from, say competitors or market manipulators who might have personal or financial interests and prevent them from overburdening the company.
Appropriate amendments will also have to be made to the Bharatiya Nyaya Sanhita 2023 (“BNS”). Provisions must be enacted that quash rumours and in some way take a suitable course of action against those spreading them. A corresponding remedy in the BNS would aid in the creation of a deterrent effect against the spreading of such rumours, which would be beneficial in nipping the issue at its core.
Reliance can be placed on some more relevant and relatively newer amendments such as Rule 703(4)(a) of the Singapore Exchange which also mandates prompt disclosure of material information by way of a Corporate Disclosure Policy but specifies some exceptions. These regulations exempt issuers from disclosing material information that could affect the ongoing negotiations or when the information is speculative or insufficiently specific for publication. The inclusion of these provisions in the disclosure framework would align it more closely with unpredictable market trades involving commercial transactions.
Non-disclosure agreements may not act as a shield against any market rumours if and when the company neither confirms nor denies them, nonetheless sensitive information still has to be protected. To ensure the same, companies will need to have strong restrictions on who within the company has access to confidential deal details. Also, companies can make use of a proactive monitoring model so that they may catch and quell the rumours before they affect stock prices significantly. Taking a proactive approach such as this can help counteract the damaging effects of market volatility due to rumours. Moreover, enterprises can use AI and machine learning tools to track media outlets and detect any indications of potential rumours in a systematic manner which limits human bias as well as subjectivity in detecting rumour behaviours objectively.
Further, appropriate protective measures also need to be devised to shield retail investors from being misled by market rumours. Steps can be taken around increased disclosure and investor education programs to make certain that the retail investors have all of the information they need, while guarded from market fluctuations.
Conclusion: Ensuring Success Through Adaptation and Compliance
In conclusion, SEBI’s move is indeed a welcome step to curb market rumours and encourage a level playing field with more disclosures. The initiative while challenging to implement, and enforce operationally, may be successfully brought to serve its meaningful purpose if certain steps are taken by both the companies as well as the regulator. In a nutshell, the fate of this regulatory exercise hinges largely upon how market players embrace this new regulation and take proactive measures to ensure its effective implementation. Continuous engagement and collaboration between SEBI, listed entities, and other stakeholders will be crucial in refining the framework and addressing any potential challenges. With the right strategies and a commitment to transparency, this regulatory reform can significantly enhance market integrity and investor confidence.
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