[By Priya Sharma & Archisman Chaterjee]
The authors are students of National Law University Odisha
Introduction
To facilitate a uniform approach for verifying market rumours by listed entities, the Securities and Exchange Board of India (SEBI) recently notified the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2024 (the Amendments). These amendments were accompanied by a Circular on ‘Industry Standards on verification of market rumours’ (the Circular).
Effective from 17 May 2024, the Amendments provide criteria for verification of market rumours in terms of material price movement instead of materiality of event or information and the mechanism to consider unaffected price with respect to transactions related to securities. The Circular requires the Industry Standards Forum (comprising representatives from ASSOCHAM, CII and FICCI) to formulate industry standards applicable to the implementation of the requirement to verify market rumours under Regulation 30(11) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”). Accordingly, the requirement to verify market rumours shall apply to the top 100 listed companies, effective June 1, and to the next 150 listed companies, effective 1 December 2024.
While the amendments are a welcome step in promoting uniformity and revamping the regulatory framework for market rumours, SEBI may have missed the opportunity to close regulatory gaps. Specifically, there is inadequate oversight on social media platforms and potential for false denial or confirmation of rumours.
The latest Amendments and accompanying developments
In pursuance of the Amendments, the Industry Standards Forum has published ‘Industry Standards Note on verification of market rumours under Regulation 30(11) of LODR Regulations’ (“Guidance Note”). The Guidance Note defines ‘Mainstream Media’ and the news sources that will be included within its ambit. It shall be the responsibility of the listed entity to put in place proper technology solutions and engage social media agencies to track the news reported in Mainstream Media. The requirement under Regulation 30(11) will only be applicable to the market rumours reported in this Mainstream Media.
Criteria for Verification
In order to activate the applicability of Regulation 30(11), the market rumour in question must not be vague or general in nature. Instead, it must provide specifically identifiable details of a matter/event or provide quotes or be attributed to those who are reasonably expected to be knowledgeable about the matter. Another prerequisite is that there must be ‘material price movement’ in the scrip of the listed entity, as opposed to the previous ‘materiality of event or information’ criteria. The listed entities usually avail services from agents or develop in-house teams to track such movement in their scrip. The obligation is placed on the promoters, directors, KMP and senior management of the entity to provide adequate and accurate responses to the queries raised to them. However, there are significant gaps in regulation that warrant attention.
Exclusion of Social Media: a missed opportunity
The rumour verification requirement was originally introduced to avoid false narratives that may impact the price of the securities of a listed entity. Notably, the definition of Mainstream Media excludes social media, which means that social media channels/accounts, such as those run by finfluencers having lakhs of followers, fall outside its scope.
Finfluencers are known to influence their audience by providing financial education and offering investment recommendations. In many cases, these finfluencers are unregistered, and may not adhere to any disclosure requirements. Apart from advice, finfluencer channels may also contribute or give rise to market rumours, which may in turn affect the scrip of a listed entity. Such market investment scams are on the rise. SEBI, in the recent past, has been cracking down on such activities, but these actions will largely remain ineffective in dealing with the menace of finfluencers in the long run. Currently, there is no specific legal framework dealing with finfluencers who are not registered as either Investment Advisors or Research Analysts. Therefore, considering the current regulatory gap, it is crucial for SEBI to tighten its regulatory grip on social media channels as well. The regulatory mechanism could incorporate an oversight mechanism to verify compliance by social media intermediaries and finfluencers.
In the present case, Mainstream Media must also include social media within its ambit, considering the fact that investment channels run by finfluencers have become one of the most important sources of investment information and financial literacy in recent times. Such inclusion may increase compliance costs, but will ultimately further SEBI’s overarching objective of protecting interests of investors.
While broadening the scope to include social media will be a step forward, there are other notable issues that need addressing.
Regulatory Gaps
As per the Guidance Note, the listed entity is required to either confirm or deny the rumour in case of material price movement. According to the price framework post confirmation of the rumour (price framework), the price would be frozen only if the said rumour is accepted to be true. In case the entity opts to deny the rumour, the price would be left to pan out in the usual course of business. Upon verification of the rumour, the price framework comes into effect. It envisages the mechanism for calculating the volume weighted average price (‘VWAP’), which dictates the price of a transaction. It is computed by deducting the variation in weighted average price (‘WAP’) from the daily WAP during the period between the date of material price movement and the trading day after rumour verification. However, there is uncertainty as to what would happen if an entity opts to deny the rumour, but later proceeds with the said rumoured transaction which specifically identifies the said entity. The present regulations which encompass both the LODR regulations as well as SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations”) do not explicitly dictate the recourse in such a scenario.
To understand how such a situation may be dealt with, it is necessary to look at the ‘Put up or Shut up’ rule (outlined in the UK’s Takeover Code) implemented in the UK. The rule states that if there is any announcement pertaining to an offer which is made, then any potential bidder is obligated to either “announce their intention to make an offer” or make an announcement that they do not have any intention to make an offer. If the offeror chooses to opt for the latter, they would be subjected to a halt period of six months during which they would, inter alia, not be able to make a fresh offer or produce any statement which indicates that they would make an offer. Such a framework ensures that parties are restrained from having an undue advantage all the while making a false announcement.
In the Indian context, the LODR Regulations do not specifically lay down any penalty for making a wrong/false disclosure while dealing with rumours, and only the general penalty for making false disclosures might be attracted. Herein, we highlight the lack of clarity with respect to whether such an act or omission could be construed as an unfair trade practice under the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (“PFUTP Regulations”). Section 4 of PFUTP Regulations punishes practices which involve the publishing or reporting of false information pertaining to securities when dealing in them. Thus, the denial of any rumour which is later on discovered to be true could have severe penal consequences for the entity.
However, it is essential to highlight how the lack of a clearly outlined penalty for divulging a false denial of the rumour might lead to unnecessary burdens for a listed entity. For instance, if a listed entity denies making any bid or offer in a certain acquisition which ultimately fails, then it would amount to a correct disclosure. However, if negotiations pertaining to the same are restarted after a short period of time, say four months, and the deal comes to a closure within five months, the earlier denial made by the entity might require it to refute charges of fraudulent conduct in court. Therefore, a clear delineation of the penal framework may go a long way in clearing ambiguities.
Conclusion and Way Forward
The exclusion of social media represents a critical oversight, given the influential role of finfluencers and digital platforms in shaping market perceptions. Addressing these regulatory gaps, particularly by extending monitoring and compliance to social media channels (both by SEBI and listed entities), is imperative to create a comprehensive approach. Additionally, clarifying penalties for false disclosures in the course of rumour verification would enhance transparency and accountability. It is suggested that a penal provision be incorporated in the LODR Regulations for punishing untrue confirmation or denial of any rumour, along with a suitable cooldown period during which all negotiations about the said transaction be held in abeyance.
As the financial and investment landscape evolves, regulations introduced by SEBI ought to adhere to its commitment towards establishing a fair trading market free from all types of manipulation, which is essential to protect the interest of investors.