[By Anirudh Das]
The author is a student of National Law University, Vishakapatanam.
Introduction
The Securities Exchange Board of India, via the amendments to the LODR Regulations on June 14th, 2023, has introduced a rather peculiar sort of Obligation on a Listed Entity, specifically on India’s top 100 & 250 listed entities (based on market capitalization), who would have to with effect from October 1st, 2023 and April 1st, 2024 respectively mandatorily confirm, deny, or clarify market rumours to the stock exchanges.
Now let’s try and analyze this move by SEBI and speculate on the potential impact of this regulatory step on the Indian securities market. We will try to provide a comprehensive analysis of the move, including its benefits, challenges, and potential implications for market participants and investors. By evaluating the regulatory framework and the underlying reasons for such a requirement, this study seeks to shed light on the effectiveness of this measure in enhancing market transparency and investor confidence.
History of the Provision and Need for the Amendment
SEBI’s existing regulations include guidelines on disclosure and transparency requirements for listed companies, mandate companies to promptly disclose any material information or events that could have a significant impact on their financial position or stock prices. However, the recent move goes a step further by specifically focusing on addressing rumors, rumors that often circulate in the market and have the potential to create confusion and market volatility.
Prior to the recent move, SEBI had already instituted regulations to address issues related to market rumors and misinformation. Regulation 30(11) of the Listing Obligations and Disclosure requirements gave an option to Listed Entities to “..confirm or deny any reported event or information to stock exchange(s)”. Now it has become mandatory for the Top 250 Companies.
Dissecting the Words
In order to fully appreciate the Obligation that this proviso confers let us break down the requirements for the Proviso to be triggered:
- Information must be in Mainstream Media
- Must not be General in Nature & Indicates Rumors of Impending Specific Event
- In terms of the Provision of this regulation
- Circulating amongst the Investing Public
And in response to which the company must perform the following:
- Deny or Confirm any reported Material event or Information.
- Within a reasonable time or 24 hours from the time when the Event has been reported
In trying to examine each and every element, we must pay close attention to the words used. Several of these words do not have any defined legal meaning and hence we would try and subject them to interpretation and define the Set of Conditions to be met in order for them to be fully met.
Firstly, The expression ‘Mainstream media’ has been, in the prefaces of the amendment, said to include both print and electronic by stating that it would not just be “print media but television and Digital Media”. It is interesting to note that Social Media has not been mentioned as a source of news, implying quite literally that Rumors or news that is circulated on Social Media, which constitutes a significant avenue for news consumption, would fall outside the purview of this Regulation. The Jury’s out on whether it is a willful omission or a negligent one.
Secondly, rumors that would qualify to be subject to clarification would require specific averments in reference to the Material Event or information. The Current Amendment quantifies by Para 3.1.6 , Material Events on specific Criteria.
The criteria are based on a combination of turnover, net worth and profit/ loss after tax (PAT) where such event/ information is considered “material”, whose value or the expected impact in terms of value, exceeds the lower of the following;
- two per cent of turnover, as per the last audited consolidated financial statements of the listed entity;
- two per cent of net worth, as per the last audited consolidated financial statements of the listed entity, except in case the arithmetic value of the net worth is negative;
- five per cent of the average of absolute value of profit or loss after tax, as per the last three audited consolidated financial statements of the listed entity.
Hence only such events that are probable to trigger the aforementioned thresholds would qualify for disclosure under this bracket.
Additionally, the term used here is ‘impending’ Specific Event or information, and hence thereby must be an even that is set to happen in the near future. Meaning that speculations about events that said to occur in distant future or a general policy decision not relating to an event or information other than an event would not trigger the said Regulation.
And lastly, it must be a piece of information that is circulated within the Investing Public, therefore any piece of information by merely becoming widely speculated would not attract the provision, since prosecution would have to prove that it is circulated within the Iinvesting public. All the same quantifying whether a certain information has been circulated to the Investing Public would be difficult.
It wouldn’t be surprising to think that the amendment stems from the recent speculative train ride that was faced in Jio-Facebook deal,[1] but it could also be seen as a provision providing for greater transparency and robust regulatory environment.
The Clarification Conundrum
The most evident pitfall of the Regulation would definitely be the volume of such rumors. Consider, India has over 392 news channels and over 20, 278 newspapers. And hence the question that arises is that does any rumor or speculation that has been brought forth by these news outlet mandate a clarification by the company? Because if that is the case one could only imagine the volume of clarifications that would arise.
It could also be argued and has been in fact contented in the feedback to the consultation brief that some listed entities subject to these conditions would lose their competitive Edge while vying for various contracts and Concession. The author feels that this argument has no merit since the Companies that would have to comply with these regulations are the top 250 Companies-in terms of Market Capitalization, meaning they are some of the biggest players in the game. Hence their sheer size would more than compensate for the disadvantage that they have due disclosure requirements.
Way Forward
The new amendment could also engage in creating stronger Non-Disclosures Agreements which could have steep consequences since such the new regulations would empower strategic information leakage, while blatant misinformation is punishable, little can be said about strategic Speculation (Ref Regulations 4(2),& 4(f) of PFUTP Regulations) and Rumors[2] and hence companies would have to tighten their administrative system to ensure that information especially in sensitive matters is shared only on need-to-know basis.
In reference to arguments that were raised in the Board Note about the reluctance of foreign companies to engage with disclosure compliant companies, it is poignant to note that international Stock Exchanges also have such a rumor clarification regiment, which in fact is not limited merely to the top 250 Companies. For instance, the New York Stock Exchange under Section 202.03 of its NYSE Manual Requires that:
“If rumors or unusual market activity indicate that information on impending developments has leaked out, a frank and explicit announcement is clearly required. If rumors are in fact false or inaccurate, they should be promptly denied or clarified”
In the UK, the “Put Up or Shut Up” Rule (“UK PUSU Rule”) under the Takeover Code is triggered in situations where there is a leak announcement, and requires a bidder to announce a fully financed binding offer within 28 days or announce it will not be making an offer – in which case the bidder would be subject to a six-month standstill.[3] Which in context make the new amendment seem far less draconian.
The recent amendment introduced by SEBI requiring market participants to clarify rumors has brought forth several intriguing questions and created a framework that has the potential to drive positive change in the Indian securities market. Overall, the amendment has sparked interesting questions and introduced a framework that holds the potential for positive change. Through proactive engagement, the adoption of advanced technological solutions, and the cultivation of trust and transparency, this regulatory measure can contribute to a more resilient, trustworthy, and investor-friendly securities market in India.
As market participants adapt to the new requirements and SEBI monitors its impact, it will be crucial to remain vigilant, and be considerate of difficulties as they arise. By doing so, the Indian securities market can foster an environment that encourages investor participation and contributes to the overall growth and stability of the economy.
[1] Reliance Industries Limited and Ors v. Securities and Exchange Board of India, SAT Order dated September 27, 2022, in Misc. Application No. 751 of 2022 and Appeal No. 603 of 2022.
[2] V Natrajan vs SEBI, SAT Order dated June 29, 2011, in Appeal No. 104 of 2011.
[3] Rule 2.7 of the London City Code on Takeovers and Mergers.