INTRODUCTION
In a noteworthy development, the Securities and Exchange Board of India ("SEBI") has put forth proposed amendments aimed at addressing concerns associated with market rumours. Unveiled through a consultation paper dated December 28, 2023 ("Consultation Paper")., these changes signal a shift from emphasizing disclosure of material events, to concentrating on material price movements for the verification of market rumours. This article explores the implications and potential impact of these proposed amendments on the regulatory landscape, shedding light on the evolving approach to rumour management in India's securities market.
OVERVIEW OF THE REGULATORY FRAMEWORK
SEBI, in April 2023, proposed an amendment to Regulation 30 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 20151 ("LODR Regulations") read with Schedule III introduced a mandatory requirement for India's top 100 and subsequently, the top 250 listed entities based on market capitalisation to confirm, deny or clarify market rumours to the stock exchanges.2 As per the SEBI board note dated April 17, 2023, out of the 71 comments received regarding this amendment, 52 voiced dissent and specifically opposed this proposal.3 However, SEBI adopted the proposal with some deviation from the proposal.
Regulation 30(11) of the LODR Regulations that came into effect post the board note (discussed above) currently mandates listed entities, top 100 from June 1, 2024 and top 250 from December 1, 2024, to proactively confirm, deny, or clarify any reported event or information in the mainstream media which (i) is not general in nature and (ii) indicates that rumours of an impending specific material event or information in terms of Regulation 30 of LODR Regulations are circulating amongst the investing public. This confirmation or clarification must be provided within 24 hours of the event or information being reported, and in case of confirmation, the current stage of the event or information is also required to be disclosed. The market widely criticized these changes, citing practical challenges such as the vast volume of publications and navigating diverse linguistic landscapes, not to mention concerns about being required to confirm or deny a strategic business transaction for which rumours might be circulating and, for example, its implications on the pricing of the transaction. The listed entities face concerns about increased compliance costs and operational challenges in implementing stringent monitoring measures, which might have to include implementing AI tools or creating a new department to monitor news and rumours in relation to the entity. One of the primary issues causing widespread criticism in the market stemmed from the possibility of premature and potentially detrimental disclosures, a consequence of the mandatory obligations imposed on listed companies under the amendment. The prevailing concern is that not every market rumour necessitates immediate public disclosure and contributes to practical difficulties and potentially distorting the market.
Subsequently, on December 28, 2023, SEBI released a consultation paper on amendments to SEBI regulations and sought public views on certain aspects relating to verification of market rumours.
This article delves into the key recommendations laid down by SEBI in its Consultation Paper on (i) material price movement as criteria to verify market rumours; (ii) mechanism to ensure that the unaffected price is considered for transactions relating to the securities of listed companies upon confirmation of marker rumours, (iii) obligation on promoters, directors, key managerial personnel ("KMP") and senior management to respond to queries to ensure compliance with regulation 30(11) of LODR, and (iv) dealing with rumours which could relate to some unpublished price sensitive information ("UPSI") and is therefore not confirmed by the listed entity.
KEY TAKEAWAYS OF THE CONSULTATION PAPER
Material price movement
Under the existing framework for rumour verification, the listed entity is obligated to verify rumours specifically pertaining to material events or information, as delineated in Part A of Schedule III of LODR Regulations ("Material Event"). Currently, if the rumour pertains to a Material Event, the listed entity needs to deny or clarify, whether or not there is any share price movement because of that rumour. Conversely, if the rumour does not relate to a Material Event, then the listed entity does not need to deny or clarify.
The Consultation Paper highlights a proposal from the Industry Standard Forum ("ISF"), advocating the need to apply some threshold which is linked to material movement in the share price of the listed entity. The rumour verification requirement is, therefore, proposed to be applicable if there is material price movement in the securities of the listed entity. As per this proposal, the need to verify rumours would only arise if there is a significant and measurable impact on the prices of the listed entity's securities.
While the ISF model will come as a breath of fresh air for companies struggling to comply with the current regime which relied on the occurrence of a Material Event, with a more practical approach that assesses the actual effect on market prices. The same is proposed to be determined by the following: first, the percentage variation in the securities of the listed entity and second, movement in the benchmark index (Nifty50/Sensex).
While this proposal gives some sort of an objective test for a listed entity to figure out whether it needs to verify or deny a rumour, SEBI should consider to continue to link this with Material Events and require only those share price movements which pertain to a rumour relating to a Material Event to trigger this requirement. In other words, if the information or rumour is not material, there should be no presumption of price movement attributable to a rumour, as it pertains to a distinctly non-material event, and consequently, there should be no obligation for clarification.
Alternatively, SEBI could also consider a carve-out similar to what is provided under the Singapore regulations, namely "a) the information concerns an incomplete proposal or negotiation; or (b) the information comprises matters of supposition or is insufficiently definite to warrant disclosure; [or] (c) the information is generated for the internal management purposes of the entity; or (d) the information is a trade secret."4
In developing a framework for material price movement, the Consultation Paper acknowledges that high-priced securities may exhibit a more significant absolute price variation with a smaller percentage change. Therefore, it proposes distinct percentage variations tailored to securities with varying price levels. For instance, if a security is priced between Rs. 0-99.95, a percentage variation of 5 or more is considered significant, while for securities priced between Rs. 100-199.95 and Rs. 200 and above, the corresponding thresholds are 4 and 3, respectively. We note that clarity is required on note 3 under Annexure B of the Consultation Paper for negative news in the event the price range of the scrip moves in an upward trend. Here, the note does not envisage a situation wherein negative news coincides with an upward movement in the scrip's price, or vice versa, thereby raising questions about the calculation methodology.
SEBI, in its Consultation Paper, has proposed that the timeline for rumour verification related to such material price movement be within 24 hours of the material price movement, instead of within 24 hours of reporting of the rumour in the mainstream media as per the existing framework.
While pegging the rumour verification requirement to material price movement, is a step in the right direction, the definition of mainstream media as it currently stands, is too wide. It includes all newspapers registered with registrar of newspapers in India, all news channels permitted by the ministry of information and broadcasting, content published under the IT rules, and similar newspapers, content publishers and news channels from outside India. Further, since it is assumed that the material price movement would be due to a rumour in the market, the companies would have to run the process on an extensive sweep of all these sources, which could run into thousands if not more, to locate the rumour. Considering a truncated definition of "mainstream media" that is restricted to a certain well-known financial newspapers and news channels, as monitoring of innumerable regional/vernacular news (including in foreign jurisdictions) would reduce the compliance burden for companies and make compliance with this requirement practical for listed entities.
A well-defined scope for 'mainstream media' would streamline the verification process and aligns with the practical challenges companies face in promptly addressing market rumours. Without such clarity, the onus on companies to incessantly monitor price fluctuations throughout the trading day could prove cumbersome, potentially triggering the proposed 24- hour verification period.
Unaffected price
In order to combat the issue regarding the market price of securities of the listed entity getting affected upon the confirmation of the market rumours, the Consultation Paper proposes an "unaffected price" for determining the price of transactions relating to the securities of a listed entity, once the entity confirms the market rumour. It also suggests a 60-day validity period for the unaffected price from the confirmation of market rumours to the relevant date under the existing disclosure regime. In the case of a competitive bidding process for potential mergers and acquisitions without an identified sole/ exclusive bidder, the period extends to 180 days.
To arrive at the said unaffected price, the Consultation Paper suggests two frameworks: First, Framework A where the date immediately preceding the listed entity's confirmation of the rumour shall serve as the relevant date for determining the transaction price, and the look back period for the calculation of the volume weighted average price ("VWAP") will accordingly be considered from the date preceding the relevant date. Second, Framework B offers an alternative approach by allowing the exclusion of price variations from the day of material price movement till the end of the next trading day after confirmation of the rumour which is deemed to be attributable to the market rumour and its confirmation ("WAP Variation") from the calculation of the VWAP. In this scenario, the VWAP undergoes adjustment based on the WAP Variation.
The proposal does not provide a rationale behind the duration of applicability of unaffected price, and the timelines provided may prove to be too strict considering the deal related exigencies. The progression of the transactional stage varies based on individual deals. In the circumstance where a rumour has surfaced during the initial phases of a transaction, requiring the listed entity to validate such information, might establish a stringent timeline for the involved parties to reach a consensus and finalize the offer, and in many cases might put the listed entity at a strategic disadvantage when negotiating the deal with the counter party. The proposal, if implemented in the way it is proposed, would hamper the 'ease to do business' in India.
Obligation of promoters, directors, KMP and senior management
As per the current regulatory framework, the obligation to disclose material events is cast upon the listed entity. However, there may be instances where the rumour may pertain to the key personnel (as stated above) and the listed entity may need to seek information from such persons to provide adequate disclosure and compliance with regulation 30(11) of LODR regulations.
The Consultation Paper in this regard suggests that there should be an obligation on promoters, directors, key managerial personnel, and senior management to respond to queries raised by the entity to comply with the rumour verification requirement under LODR. Such persons are required to respond in an 'adequate', 'accurate' and 'timely' manner. Further, we note that none of these terms have been defined, raising practical challenges with respect to implementation of these suggestions, which could also raise privacy concerns for such persons, for instance, any information which would require disclosure of health-related details of such persons.
Unverified information classified as UPSI
There may be instances where rumours about a listed entity circulate in the market, but do not result in any material price movement in the scrips of the listed entity. In such cases, the Consultation Paper proposes that in case the listed entity has classified certain information as UPSI and the listed entity neither confirms, denies, or clarifies market rumours about such UPSI, then such media reports should not be treated as 'generally available' information, and used for defence as per the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 ("PIT Regulations"). What this means is that, if a listed entity is designating plans for a strategic partnership as UPSI and market rumours circulate about this information (causing no material price movement) and the concerned listed entity refrains from addressing the rumours, these media reports should not be deemed to make the UPSI "generally available". This seems more to address a situation where a third party who is aware of some UPSI deliberately has that published and then plans to use that publication to argue that this information was not UPSI because it was generally available. This seems like an overkill more since the PIT Regulations anyway prohibit communication of UPSI and any enforcement remedy that SEBI needs to seek should be under the relevant PIT Regulations or its FUTP regulations.
We note that PIT Regulations provide, in the current regulatory landscape, a sufficient framework to deal with UPSI and the resultant consequences on noncompliance. The defences that are available under the PIT Regulations should continue to operate effectively in the event of market rumours. Further, equivocating UPSI with market rumours is not ideal as it would give rise to duplicity and redundancies in the current framework dealing with insider trading.
CONCLUSION
While SEBI's proposals may be geared towards providing a more efficient way of rumour verification, unfortunately the way the current proposals stand, they create more problems than they solve. The practical challenges and substantial increase in compliance cost are concerns that the market regulator should try and solve before these proposals are put in place.
Footnotes
1. SEBI Board Note, Amendments to requirements for disclosure of material events or information by listed entities under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. (April 17, 2023)
2. SEBI Board Note, Extension of Timeline for Verification of Market Rumours by Listed Entities – Amendment to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. (December 7, 2023)
3. Para 8.3.1, SEBI Board Note, Amendments to requirements for disclosure of material events or information by listed entities under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. (April 17, 2023)
4. Appendix 7A Corporate Disclosure Policy, SGX Rulebook.
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