[Gyanesh Mishra is a third year B.B.A LL.B (Hons.) student at National Law University, Odisha]
The Securities and Exchange Board of India (“SEBI”), through a consultation paper released on 28 December 2023, proposed substantial reforms to enhance the regime surrounding the verification of market rumours. The reforms propose to change the existing material event criteria under the regulation 30 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”) relating to material price movements. Such a change aims at bypassing the objective event requirement entailed under Schedule III of the LODR Regulations. It further provides for a mechanism to ensure that the unaffected price is taken into consideration with respect to transactions following the confirmation. While SEBI’s proposal, aimed at providing a faster and an efficient way of verifying rumours, marks a positive development for both the listed companies and the overall securities market, certain structural and implementational aspects must be deliberated upon to bring about an appreciable and meaningful impact on the securities market.
The aim of this post is to explain the key proposals of the consultation paper, analyse the implications and potential challenges that may arise in implementation and suggest recommendations for the same.
Key Proposals in the SEBI Consultation Paper
Material Price Movement as a Criterion
Under the status quo, regulation 30(11) of the LODR Regulations requires listed entities to verify and confirm, deny or clarify the rumours which are reported in the mainstream media. Such a verification is to be applied in a phased-out manner in 2024. The verification has to follow a “materiality” principle whereby only those rumours which affect the entity materially will have to be disclosed. The criterion of materiality is such that the rumour has to correspond to a material event or information listed out under the Part A of Schedule III of the LODR Regulations. Through the consultation paper, SEBI proposes to change such a criterion to material price movement where, instead of the rumour being contingent on a material event, its confirmation will depend upon the price movement it brought in the scrips of the entity. In order to establish materiality of a movement, the paper has affixed certain percentages to price movements. A highly priced scrip will have a higher percentage attached and vice versa. Such a rumour will have to be verified within 24 hours of the material price movement.
SEBI has tried to overcome the objective parameter under the LODR Regulations and has provided for a non-objective parameter to promote ease of business. Such a change, however, undermines the very essence of the Regulations by allocating a vague metric of determining a general material movement instead of a specific material movement caused by the rumour. The concept of materiality is indeed very crucial to avoid frivolous rumours and to pinpoint only such rumours which practically affect the entity, but the element of subjectivity which comes with that is substantial enough to be bound in an objective parameter. A price movement can take place due to multiple reasons, such as public announcements, news pertaining to the industry, developments across the market, and the like, and attributing such a movement to a specific rumour without an objective set of instructions will prove to be cumbersome for the entities whose securities are regulated.
Unaffected Price as a Determinant
A share market is extremely dynamic and sensitive. The price of shares fluctuates based on multiple events, including rumours. A rumour could potentially cause an unfair imbalance of price in the market and lead to unwanted gains or losses for both the entity and the shareholders. Hence, in order to mitigate the damage caused by such rumours, SEBI has proposed unaffected price as the price to be considered for transactions relating to the securities of a listed entity upon confirmation of market rumour. Such an unaffected price will generally remain in force for 60 days from the date of confirmation until the relevant date under the current regulations. In the consultation paper, two frameworks are placed under consideration in order to decide the “relevant date” for determining the pricing for the transaction.
Under Framework A, the date which “immediately precedes” the date of confirmation by the entity shall be the relevant date. By opting for a day prior to such a confirmation, SEBI has sought to invalidate the effect of the rumour, which would have impacted the price of the shares. The framework, however, comes with a caveat of a person interested in the transaction misusing the regulation by floating a rumour. Moreover, it also neglects the price movement which occurs through legitimate means. Under Framework B, the price variation from the day of material price movement until the end of the next trading day after confirmation of the rumour shall be attributed to the rumour and confirmation of the rumour.
Potential Implications and Recommendations
The Twenty-Four-Hour Time Limit for Verification
Currently, rumours are required to be verified within 24 hours of being published in the mainstream media. Mainstream media has not been defined under the LODR Regulations; however, it could be defined as media houses which are registered and have a decent customer base. In India, there are potentially thousands of such media outlets and, hence, companies will have to keep a check on each of those to segregate rumours as material and immaterial. Therefore, the move to replace such a burdensome requirement with the material price movement is commendable but not without flaws. A material price movement could be attributable to many factors and pin-pointing such a change to a rumour is extremely difficult, especially within 24 hours. This could potentially lead to the stakeholders losing out on various market opportunities arising through a legitimate and fair price movement. A way out could be the imposition of a time limit which gives more opportunity to the entities for determining the cause of such a change.
The Problem with Frameworks of Unaffected Price
SEBI has proposed two frameworks for determining the relevant date, one which precedes the date of confirmation of a rumour and the one which takes into account the following day. Under Framework A, a movement which is directly attributable to the rumour along with the movement that occurs due to other factors is taken into account. The lack of segregation will lead shareholders to lose out on fair price changes which occurred independent of the rumour. For instance, Company X’s share price rests at Rs. 90 on 1 January 2024 and the company makes a legitimate public announcement which raises the share price to Rs. 95 on 2 January 2024. Subsequently, on 2 January, 2024 itself, the company confirms a rumour. Based on Framework A, the unaffected price of Rs. 90 will be taken into account and the effect of the public announcement will be discarded.
The problem of attributing the unaffected price solely with rumours is addressed under Framework B, whereby price variation due to other factors such as announcements by the listed entity, news pertaining to the industry, or developments in the market will be included in the price of the transaction. The paper emphasises on today’s new age technology and faster facilitation of data; however, the very emphasis is discounted by providing for an additional day of determination under this framework. There could be two possible occurrences: either the rumour will affect the price and adjust itself into the share price until the next day, or the price will prevail until the relevant date begins and an unfair advantage will be taken by the stakeholders on the unaffected price. In both the cases the objective of the regulation to mitigate rumour’s effect on the undetermined price falls short.
A mid-way could be to propose a framework which provides for an unaffected price attributable only to rumours and where the relevant date begins the preceding day. Through this, the shareholders will be placed in a more optimal and a fairer position. Moreover, a time limit of 60 days has been affixed to the unaffected price, which could heavily impact the entities position in the market. A sensitive share market where the price of certain shares is stagnant will lead to significant reduction in the market due to a negligible possibility of returns.
Effect on Mergers and Acquisitions
Mergers and acquisitions between companies require a significant amount of data sharing between the entities. Moreover, there already exists a high burden of confidentiality on the companies in order to supress rumours from spreading. In such a scenario, if the initial negotiations at a very pre-liminary stage leak as a rumour, the companies will be forced to verify it. This public knowledge of preliminary discussions could have severe impacts on the transaction such as the deal breaking off, share prices taking a sudden upward hit, and similar such exigencies.
Conclusion
SEBI has taken a bold way forward by proposing a change in shifting the standard of verifying rumours from material events to price movements. Such a change is accompanied with a restriction on the verification of movements to a time-limit of 24 hours from the price movement. It has even proposed to impose obligations on promoters, directors, key managerial personnel and senior management to provide adequate, accurate and timely response to the queries raised or explanation sought in respect of market rumours and classification of unverified information as unpublished price sensitive information. While the proposed changes are in line with SEBI’s vision of enhancing capital formation and ease of doing business, it must not come at the cost of unfairness to the entities. The replacement of an objective parameter with a cumbersome exercise of keeping track of rumours that affect the price movement seems ineffectual. SEBI must find a way to address these concerns and provide for a robust framework to go ahead with the necessary principle of verification of rumours.
Gyanesh Mishra