SEBI’s Take on Rumour Verification: Micromanagement or a Welcome Move?

[By Dharani Maddula & Anoushka Das]

The authors are students of Symbiosis Law School, Pune.

 

Introduction

On 28 December 2023, the Securities and Exchange Board of India (“SEBI”) published a new Consultation Paper on Amendments to SEBI Regulations with respect to Verification of Market Rumours (“Consultation Paper”). The paper seeks to use material price movement instead of material event as defined under Regulation 30 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations 2015 (“(LODR) Regulations”) attributable to a rumour to determine when a rumour verification is necessary. The paper also aims to give more clarity on the determination of price change to be considered on stocks, bonds and valuation in buybacks while allowing for relaxation on the 24 hour timeline on the rumour verification. This consultation paper was published after taking into consideration various observations and suggestions put forth by the Industry Standard Forum (“ISF”) composed of representatives from industry bodies such as FICCI, ASSOCHAM, and CII. The need for such a framework can be traced back to the recent case of Reliance Industries Limited v. SEBI dealing with the JIO-Facebook deal where market rumours fuelled price variation. 

Proposed Changes  

Through this paper, SEBI seeks to suggest the criteria of material price movement based on the price range of securities for determining the need for rumour verification. In order to ascertain a material price change, the price range of such a share needs to be taken into consideration. While accounting for shares falling within the higher price change, any small change in the price will be considered material in terms of absolute price, while a higher price change will be considered material for cheaper shares. The changes in benchmark indices will be a determining factor while accounting for market dynamics influencing such a price change. 

It notes that for shares falling under the high price range, a low percentage move would be considered as a material price change, and for shares falling in the lower price range, a higher percentage move in price would be considered as a material price change in order to determine the difference of prices in absolute terms in both price ranges. This shall also be determined by taking into account movement in the benchmark indices such as NIFTY50 and Sensex to factor in market dynamics.  

The consultation paper suggests two frameworks for the determination of material price movement. “Framework A” entails considering the price from the day before the company confirmed the rumour while ignoring subsequent market changes to determine the transaction price. On the other hand “Framework B” entails  excluding the price variation in price due to the rumour and its subsequent confirmation from the Volume Weighted Average Price calculation and adjusting the same according to the daily prices. Irrespective of the Framework chosen, SEBI clearly intends to allow for fairness in price determination while acknowledging potential drawbacks in both the frameworks in its consultation paper.   

The consultation paper also suggests a minor amendment to the proviso to Regulation 30(11) of the (LODR) Regulations which requires listed entities to verify, deny or clarify any rumours within 24 hours of its report in any mainstream media. This timeline is now suggested to be changed to within 24 hours from the material price movement. This is said to be implemented from 1st February 2024 for the top 100 listed companies and from 1st August 2024 for the top 250 listed companies.  

The unaffected price as proposed by the ISF will be applicable from 60 days admeasuring from the date of confirmation of the rumour till the date of public announcement by the company or any other relevant disclosure such as a board approval by the company. In cases of competitive bidding for a potential M&A deal without an unidentified buyer, the applicable time period for unaffected price shall be 180 days from the date of confirmation of the rumour to the relevant date under the applicable regulations.  

The rationale behind these implementations on the basis of material price movement is to provide an effective mechanism to combat false market sentiment and nullify any impact of the securities of such listed entities. The metric of material price movement helps in narrowing the pool of rumours of potential rumours that can cause an upheaval in the market. The consultation paper in order to reinforce this sentiment by casting an obligation upon the Key Managerial Personnel (“KMP”) to provide accurate and timely response as required under Regulation 30(11) of the (LODR) Regulations. The consultation paper also imposes a restriction upon the listed companies to not hide under the garb of UPSI when the same news report may be used by an insider as a defence. This initiative aims to establish and uphold industry standards for a more efficient business environment. 

Hurdles in practical implication and impact on the market  

Regulation 30(11) of the (LODR) Regulations acts as a  general provision for listed entities to verify any market rumour. The consultation paper strengthens this obligation by imposing the same on all top 250 listed companies by 1st August 20024 which ensures that such listed entities give heed to rumours being spread through mainstream media. This is an interesting move as most companies choose not to comment on any such rumours due to internal policies. 

SEBI substantiated its resolution for combating misinformation by relying on similar mechanisms under Section-202.03 of the New York Stock Exchange (NYSE) Company Manual on “Dealing with Rumours or Unusual Market Activity” where companies are supposed to confirm, clarify or deny such rumours with appropriate public statements. After comparing the two statutes, it should be noted that there are a few deviations in SEBI’s methodology pertaining to such rumours. SEBI in the paper relies on Regulation 30(11) for the definition of a rumour which mentions that a rumour triggering this provision should not be general but specific in nature and deal with an impending material event. The yardstick on what will be considered “specific” is not spelt in the paper or any statute which might lead to inconsistent decisions. On the other hand under  the NYSE manual no such differentiation has been made making it mandatory compliance in all situations. 

Another problem that companies face is the practical application of tracking rumours due to the expanded scope of mainstream media which now includes global news outlets. The sheer volume of mainstream media that the companies will have to verify on a daily basis will be an onerous task. Coupled with the fact that not every newspaper has an online channel and some of them being in vernacular languages, will make the task more arduous and difficult to implement for a company. 

Furthermore, though the paper mentions the time period for unaffected price determination in case of potential M&A deals, the paper fails to take into account situations of nascent deal talks and impact of rumour confirmation on the deal valuation. This also brings to attention the main contention raised in the Board note on the consultation paper (Clause 8.3.1) wherein 52/71 participants expressed that most transactions are bound by Non-Disclosure Agreements (“NDA”) which extends to rumours as well which doesn’t give such companies the liberty to confirm or deny such rumours. Though SEBI defended the same by saying that if a rumour has been circulated then an NDA may have been breached. This explanation seems to be a vague justification for  the subsequent outright violation of the NDAs in place. 

Way forward  

The Consultation Paper is a commendable attempt towards allowing for transparency and protecting current and prospective investors in securities plagued by misinformation in mainstream media while obligating such listed companies to be accountable for confirming such rumours. The consultation paper excludes social media or any other small-scale websites from its purview of rumour publication. Though the exclusion is a sensible one in the meantime, it is something that needs to be considered due to its growing relevance for investors alike. It will be a herculean task for listed entities to ensure efficient market rumour verification in the age of increasing social media use and various outlets in vernacular languages.

In fact, given the scattered and completely unfathomable reach of electronic media and social media currently, rumours may be spreading anywhere, and it is practically impossible for a listed entity to respond. This particular loophole might be exploited to cause a frenzy and trigger a pump-and-dump response in the market. The SEC has already started to regulate it as can be seen in SEC v. McKeown and Ryanand SEC v. Craig and SEBI should follow suit and account for the same. 

The paper also aims to make the compliance more rigid which may hamper the companies from swiftly responding to all queries/rumours. However, with guidelines for tracing rumours, an established standard for due diligence for companies to respond and a few tweaks in the existing framework, a better dissemination of significant information can be achieved. With critics raising valid concerns, it will be interesting to see SEBI’s approach to dealing with these concerns while incorporating public comments plaguing the current market. 

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