[Sahil Kripalani is a 4th year B.B.A., LL.B. (Hons.) student at Gujarat National Law University]
In an effort to enhance market integrity and ensure fair valuation, the Securities and Exchange Board of India (“SEBI”), by its recent circular, has introduced a new framework focused on managing unaffected prices amidst market rumours. According to the SEBI Listing Obligations and Disclosure Requirements (“LODR”) Regulations, 2015, this regulatory initiative mandates immediate verification of market rumours and precise calculation of unaffected prices to protect especially mergers & acquisitions (“M&A”) and other financial transactions from speculative spikes. This post delves into the relevant provisions of this circular, exploring its implementation, advantages, and challenges while highlighting its implications for various market participants.
Relevant Provisions of the Circular Pertaining to Unaffected Price
Immediate Verification of Market Rumours
Under regulation 30(11) of LODR, 2015, as amended, listed entities are required to verify market rumours that result in material price movements. The framework mandates that such confirmation must occur within 24 hours of the trigger of material price movement.
Calculation of Unaffected Price
The unaffected price is calculated by excluding the price variation attributed to the market rumour and its confirmation. The adjusted volume-weighted average price (“VWAP”) is used to ensure that the negotiated deal price remains unaffected by speculative spikes. This process involves:
- determining the variation in daily weighted average price (“WAP”) from the day of material price movement until the next trading day after the rumour confirmation;
- adjusting the daily WAP by excluding this variation for the look-back period; and
- calculating the adjusted VWAP based on the adjusted daily WAP.
Scope and Implementation
This framework will initially apply to the top 100 listed entities starting June 1, 2024, and will be extended to the next top 150 listed entities (ranked 101-250) from December 1, 2024. Additionally, it will be applicable only in cases where the listed entity has confirmed the rumour of the transaction within 24 hours from the trigger of material price movement.
Duration
The unaffected price will remain valid for either 60 days or 180 days, depending on the transaction stage, from the date the market rumour is confirmed until the ‘relevant date’ according to existing regulations, including public announcement, board approval, etc., as applicable.
Protection for Transacting Parties
The primary beneficiaries of this framework are the entities directly involved in the transactions, such as company promoters and private equity buyers. It ensures that the agreed-upon transaction prices are not influenced by temporary market speculations, thereby providing stability and predictability in deal-making
A Practical Example Portraying the Implementation of the Circular
To illustrate, consider a scenario where a listed company’s promoter negotiates a share sale to a private equity firm at ₹100 per share. If a market rumour causes the share price to spike to ₹120, the framework ensures the transaction price remains at ₹100 for the involved parties. However, retail traders buying at the inflated price of ₹120 would not benefit from this protection. The VWAP adjustment ensures that speculative spikes do not affect the negotiated deal price, thereby preserving the fairness and integrity of the transaction.
The Associated Chambers of Commerce & Industry of India’s (“ASSOCHAM”) Industry Note on Market Rumours
SEBI has also introduced a circular on Industry Standards on verification of market rumours. According to the circular above, ASSOCHAM and other industry bodies will have to develop an Industry Standard Note on market rumours. In furtherance of the same, ASSOCHAM published their Industry Standard Note, which prescribes the scenarios under which the unaffected price will be applicable for sixty days:
- Signing of a binding term sheet for an M&A transaction involving a listed target.
- Agreement on all material commercial terms, pending board approval.
- Rumour verification involving securities of a listed bidder or acquirer.
The note mandates clear disclosure standards for different transaction stages, ensuring timely communication of material information and reducing misinformation. By requiring responses only to rumours that cause material price movements, it maintains market efficiency and prevents unnecessary noise. The framework for considering unaffected prices ensures fair pricing in transactions linked to traded stock prices. Additionally, the emphasis on internal systems, board involvement, and technology solutions strengthens corporate governance, boosting investor confidence and fostering regulatory compliance. While operational challenges exist, the benefits of improved market integrity and investor trust outweigh these concerns.
Analysis of the Circular
Advantages
Protection for Dealmakers
By ensuring that transaction prices are insulated from speculative activities, SEBI’s framework helps maintain market integrity. This is particularly crucial for fair execution of M&A transactions and other significant deals like qualified institutional placements. It fosters a more stable and predictable market environment, benefiting the transacting parties and the overall market. The framework offers a crucial safeguard for dealmakers by protecting the negotiated prices from artificial inflation due to rumours. This ensures that the parties’ commercial terms remain intact, reducing the risk of deal renegotiation or failure.
Reduction of Speculative Volatility
SEBI’s initiative incentivises transparency by encouraging companies to disclose ongoing deals without the fear of market speculation driving up prices. This leads to a fairer market for all stakeholders, as the speculative impact is neutralised, and the true value of the transaction is preserved. The framework aims to curb speculative trading, often leading to volatile price movements based on unfounded rumours. By stabilising prices, SEBI seeks to create a more orderly market environment, which benefits both long-term investors and companies.
Delegation to Industry Bodies
SEBI’s initiative of delegating the task to determine which scenarios the time limit will apply to the industry bodies is a welcome move. This strengthens the faith amongst the investors because of their close involvement in drafting such provisions. Additionally, it ensures that the practical difficulties are considered because of the technicalities involved.
Challenges
Complex Procedure
The process of calculating adjusted daily WAP and VWAP involves multiple steps, such as identifying the variation due to market rumours, adjusting prices for a specific look-back period, and ensuring these adjustments are accurate. The framework introduces a complex methodology for calculating the unaffected price by adjusting the VWAP to exclude the impact of market rumours. This complexity can lead to initial confusion among market participants. Additionally, the Industrial Standards Forum did not favour this method, as evidenced by the SEBI’s Consultation Paper.
Retail Investors
The framework primarily benefits the transacting parties involved in significant deals, such as company promoters and institutional buyers, by protecting their negotiated transaction prices from speculative spikes. However, it does not extend the same protection to retail traders and daily market participants. Retail investors remain exposed to price volatility caused by market rumours. When rumours drive up prices, retail traders buying shares at inflated prices might incur losses once the price stabilises to the unaffected level.
This perceived inequity can create dissatisfaction among small investors, who may feel that the system favours larger institutional players over individual retail investors. The framework could lead to a perception of unequal treatment in the market. Retail traders might believe that their interests are secondary to those of institutional investors, which could impact their trust and participation in the market.
Potential for Market Manipulation
While the framework aims to reduce speculative volatility, it could inadvertently create opportunities for market manipulation. Sophisticated investors or traders might attempt to exploit the timing of disclosures and price adjustments to their advantage.
There is a risk that market participants might strategically disseminate rumours to influence prices before entering or exiting positions. If not properly monitored, such activities could undermine the framework’s objective of maintaining fair transaction values.
Investors might attempt to “game the system” by predicting the timing of unaffected price calculations and adjusting their trading strategies accordingly. This could lead to unintended price movements and distortions in the market.
Duration
The designated time periods for considering unaffected prices (60 days or 180 days) may not always align with market realities. These fixed periods may be too rigid, failing to accommodate the dynamic nature of financial markets where conditions can change rapidly.
Conclusion
SEBI’s new framework for considering unaffected prices amidst market rumours represents a significant step towards ensuring fair valuation and market integrity in India’s financial markets. While the framework offers substantial benefits in protecting dealmakers and enhancing market transparency, it also poses challenges in terms of complexity, operational implementation, and the limited scope of protection for retail investors.
The success of this initiative will depend on the ability of market participants to adapt to the new requirements and the robustness of their compliance mechanisms. By fostering a more stable and predictable market environment, SEBI’s framework is poised to bolster investor confidence and promote healthier market practices.
This circular underscores SEBI’s commitment to fostering a transparent and fair trading environment, which is crucial for sustaining investor confidence and promoting healthy market practices in India.
– Sahil Kripalani