[Raashi Sanjay Sarupria is a 3rd-Year B.B.A., LL.B. (Hons.) student at the Gujarat National Law University]
The Securities and Exchange Board of India (“SEBI”) has implemented significant amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”), effective from October 1, 2023. The SEBI (Listing Obligations and Disclosure Requirements) (Second Amendment) Regulations, 2023 introduce a new provision under regulation 30 of the LODR Regulations, focusing specifically on addressing market rumours. “Market rumours” are defined as unverified information or speculative content circulating in the financial market concerning a particular company or its securities.
Prior to the Amendment, regulation 30(11) of the LODR Regulations empowered listed entities to voluntarily confirm or deny any reported event or information to the stock exchange(s). However, the Amendment brings about a mandatory requirement for the top 100 listed companies, effective from October 1, 2023, and the top 250 listed companies, effective from April 1, 2024, to verify market rumours that are not of a general nature and are present in mainstream media.
The term “mainstream media” is explained in the Amendment, including print and electronic forms of communication. This definition includes newspapers that are officially registered with the Registrar of Newspapers for India, news channels that have received permission from the Ministry of Information and Broadcasting under the Government of India, and content published by entities recognised as publishers of news and current affairs content in accordance with the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021. Additionally, it encompasses newspapers, news channels, or news and current affairs content that are either registered, permitted, or subject to regulation in foreign jurisdictions outside India.
The primary objective of this amendment is to promptly and effectively address and debunk market rumours in order to instill stability within the financial market and mitigate any potential adverse consequences arising from unwarranted speculation. SEBI’s move underscores the regulator’s commitment to maintaining the integrity and transparency of India’s capital markets while safeguarding investor interests.
Regulatory Intent of the Amendment
Paragraph 8.1.2 of the Board Note underscores the evolving dynamics of market sentiments. It acknowledges the increasing influence of television and digital media in addition to print media, which at times contribute to abrupt price fluctuations of specific securities based on unverified information pertaining to the listed entity. It suggests that it is essential to promptly verify such rumours and respond to them before they impact the market price of their securities. A similar sentiment is reflected in paragraph 3.4.2 of the Consultation Paper.
Furthermore, in the case of Reliance Industries Limited, it was observed that Compliance Officers held an obligation to promptly confirm or deny the specifics of the proposed Jio-Facebook deal following its unauthorised disclosure in the Financial Times. This interpretation underscores the regulatory emphasis on prompt and accurate responses to market rumours and information leaks to maintain transparency and integrity in the financial markets.
Criteria for Applicability
A rumour must exhibit certain distinct characteristics to attract the proviso to regulation 30(11). Firstly, it must pertain to either (a) a material event or development that, at a certain juncture, would have necessitated disclosure but has not been disclosed by the company at present, or (b) the rumours must pertain to a non-existent material event or development. In both scenarios, the rumour is linked to specific information or an event that would have necessitated disclosure as per regulation 30.
Moreover, as stipulated in paragraph 8.4.1 of the Board Note, it is emphasised that the market rumours in question should not be of a general or vague nature. Instead, they should clearly indicate the presence of potential information about an impending material event or information currently circulating among the investing public.
It is worth noting that the term “impending developments”, referred to in the Board Note, is found in the NYSE Manual as well. The deliberate use of this term highlights its importance in defining the exact scope and relevance of the Amendment.
The Amendment carries significant implications for the functioning and dynamics of financial markets.
Firstly, the amendment’s emphasis on timely clarification of rumours may inadvertently disrupt the equilibrium between well-informed investors and speculative traders. The increased emphasis on prompt clarification might discourage speculative traders from engaging in the market, possibly diminishing market liquidity and hampering the effectiveness of short-term trading strategies.
Additionally, the amendment introduces the possibility of misuse by competitors and media agencies. Intentional dissemination of inaccurate or speculative news reports with the intent of compelling covered listed entities into making official confirmations or denials could become a strategy to create market disruptions. Additionally, the requirement for public statements may inadvertently put companies at a competitive disadvantage during sensitive negotiations or strategic discussions, as their strategies and intentions become public prematurely.
The Amendment’s definition of “mainstream media” extends its jurisdiction to international newspapers and news channels. This would require listed entities to monitor and verify information published globally. Identification of material information can be a complex process. Companies may need to seek legal advice to determine whether a particular piece of information falls within the ambit of materiality. Failing to correctly identify material information could lead to regulatory non-compliance.
The requirement for prompt verification and disclosure may impact mergers and acquisitions (M&A) negotiations. Parties involved in M&A discussions may need to carefully navigate the disclosure of sensitive information. Failure to manage this effectively could lead to regulatory scrutiny or the premature collapse of M&A deals.
Most importantly, the rejection of a market rumour by a prospective buyer, followed by the subsequent announcement of an acquisition within a short timeframe, may raise regulatory concerns. Under regulation 4(2)(f) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations), if information published or reported by a person dealing in securities is found to be untrue, or if the person making the statement does not believe it to be true, such dealings can be considered fraudulent or an unfair trade practice. This raises the possibility of regulatory scrutiny in cases where premature disclosures may be perceived as manipulating market sentiment or engaging in unfair trade practices.
In an adjudication order regarding the matter of Pyramid Saimira Theatre Ltd., SEBI explicitly stated that disseminating false or deceptive information with the aim of manipulating individuals to trade securities constitutes an unfair practice in the securities market. The ruling highlighted that prematurely revealing information could potentially violate the PFUTP Regulations.
The Amendment signifies a notable effort by the regulator to improve fairness and transparency within the securities market. Nevertheless, compliance with this new requirement will demand significant resource allocation and a substantial commitment of time and effort.
Companies should consider implementing stringent internal controls and risk management protocols to ensure compliance while minimizing legal exposure. A failure to respond adequately to market rumours could lead to regulatory investigations.
From a regulatory standpoint, it is crucial to recognise the dual perspective underlying this amendment. It seeks to strike a balance between the benefits of speculation, which is intrinsic to trading, and the need for control within the market. It also seeks to safeguard against intentionally circulated rumours that could lead investors into potentially detrimental situations.
In conclusion, the Amendment represents a regulatory shift and emphasizes the need for a comprehensive approach, including legal risk assessment, infrastructure improvement, and crisis management preparedness, to address its impact on the securities market effectively.
– Raashi Sanjay Sarupria