[Harsh N Dudhe is a IV year student at NALSAR University of Law, Hyderabad]
Much has already been said (here and here) about the pitfalls of the mandate proposed by the Securities and Exchange Board of India (SEBI) on top 250 listed companies to confirm or deny market rumors, as part of the continuous disclosure mechanism. The major criticism is that such disclosures would premature and may adversely affect deal price and deal certainty, and will likely militate against the interests of investors. However, in my view, there is still a practical need for the said disclosure, as several investors would still rely on them to make their investment decisions in companies. In that light, I argue that SEBI would need to alter its proposed framework and take into account certain nuances to make the proposal more workable.
Background & Analysis
Before delving into the suggested model, it would be imperative to understand the background of the proposal and its flaws. On March 4, 2020, Jio Platforms Limited (a subsidiary of Reliance Industries Limited (RIL)) entered into a non-binding term sheet with Facebook in relation to the latter’s proposed investment in Jio Platforms Limited. At the stage of the negotiations and due diligence of the deal, the Financial Times on March 24, 2020, published an article titled “Facebook eyes multi-billion dollar stake in Reliance Jio”. The price of RIL’s scrip rose by 14.72% on March 25, 2020, which indicated that this particular deal was price sensitive. In its order dated June 20, 2022, SEBI held that once RIL came to know about the rumor, it was duty bound to make the said disclosure under regulation 30(11) of the SEBI (Listing Obligations and Disclosure Requirements), 2015, as this information was price sensitive in nature. A similar situation arose during the Zomato’s acquisition of Blinkit, in which news reports in circulation hinted that such an acquisition was about to take place. In relation to this, several investors wrote to SEBI complaining that such a rumor should have been clarified by Zomato.
The sentiments of these investors seem to have been reflected in the discussion paper released by SEBI on November 12, 2022, which lays down the following framework:
“Provided that top 250 listed entities shall necessarily confirm or deny any event or information reported in the mainstream media, whether in print or digital mode, which may have material effect on the listed entity under this regulation.
Explanation –The top 250 listed entities shall be determined on the basis of market capitalization, as at the end of the immediate previous financial year”
The intent of SEBI is rather clear – that since investors rely on such information, it is preferable to mandate the denial or confirmation of rumors from the companies itself. However, such a framework is arguably insufficient, as it leaves many gaps which may be misused in a matter would operate against SEBI’s objective of promoting the securities market, and protecting the rights of the investors.
Firstly, the discussion paper is silent on when precisely such a disclosure needs to be made. This leaves a significant degree of discretion to the companies as to the timing of the disclosure. It may also lead to a situation where the disclosures come at a time that may turn out to be too late for the investors to make an informed decision.
Secondly, such disclosures would certainly affect deal price as well as deal certainty. As witnessed in the Jio-Facebook deal, the share price of Reliance Industries Limited saw traction in just one day after the Financial Times article in relation to this deal was published. However, any confirmation or denial of the same can severely affect the deal price and can affect negotiations. In cases where the prices move upwards, the seller can demand a higher price making the deal too expensive for the buyer to invest. The opposite situation may make the deal unfeasible for the seller. In either case, such a proposal would severely affect the price, and result in the feasibility of the deal itself. On the other hand, even if such disclosures are made, they would always be premature before they actually fructify. This is because deals may fall through at any moment. For better or worse, if the transaction surrounding the rumor does not materialise, it may also lead to a charge from the investors as to the creation of a false market, which may again place an unnecessary burden on the company.
Thirdly, there is no guidance on what constitutes “mainstream media”. In the present age, sources of information and media extend to news on sub-reddits, Facebook groups and Instagram channels, all of which have significant following. Even assuming for a moment that news in hard print de facto qualifies as mainstream, there are different levels of readership for different languages of newspapers. Therefore this begs the question of “how mainstream is mainstream enough?” Clarity on this aspect is imperative as this will affect the reach of such disclosures to investors.
Tweaking the Proposal
To make SEBI’s proposal work, one can take cue from listing rule 703(3) of the Singapore Exchange’s Mainboard Rules. It mentions that if “(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”, the issuer would not need to announce any information which is likely to affect the price or the value of the security and would not need to clarify anything in relation to a rumor. Drawing reference from such a rule would lead to a more optimal framework for disclosures of market rumors. This is because points (a) and (b) of the listing rule (specified above) would take into account of the uncertainty of deals.
Moreover, such a framework would provide for a disclosure mechanism the moment the deals become certain enough, and when the proposals or negotiations become complete. Such a mid-way solution would benefit investors and companies alike. Thereby, this seems to be a workable solution which has clearly delineated the stage of negotiation at which the disclosure would have to be made. Furthermore, on the timeline of disclosure, one may pay heed to Appendix 7.1 of the SGX Rules relating to “Corporate Disclosure Policy”. Part VI of the same stipulates that the clarification or confirmation of rumors would have to be promptly. Reading this with Part VIII, it would lead us to understand that such information would have to be disclosed as and when it arises, even if it is during trading hours. To ensure a thorough dissemination of such a disclosure, the Exchange would expect the issuer to request a trading halt of at least 30 minutes and such a request would have to be announced. A temporary suspension of trading in the shares of the company may also be requested to this end by the issuer. The Appendix has also provided for where such disclosures need to be made, and in Part IX has also specified a guideline in relation to the preparation of the public announcement.
One may also take reference from the United States in this regard. In Greenfield v. Heublein, Inc., a bright line test was laid down in terms of a duty of disclosure. The Court held that any kind of negotiations (in relation to a merger) would not have to be disclosed until an agreement in-principle has been reached. By an “agreement in-principle”, it was meant that an agreement vis-a-vis the price and structure of the new company. From the transplant of the abovementioned mechanisms, SEBI may be able to cater interests from both sides of the spectrum.
Conclusion
As observed in the Jio-Facebook deal, market rumors and the price of shares are co-related. However a pre-mature confirmation or denial of the existence of the deal itself would bite the investors in the back, as deals may fall through any time. The solution here is not to absolutely do away with such disclosures. Rather, taking cue from existing frameworks outside India, SEBI may create certain checkpoints at which the disclosures have to be made. This would ensure that disclosures of such events occur and that information parity is maintained, which is not at the cost of unnecessarily intervening in the deal-making process and imposing additional compliance burden on the companies.
– Harsh N Dudhe