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Sebi Rumour Verification Framework: Between Rumour and Reality – Sebi’s Verification Dilemma

Abstract

The author explores SEBI’s Rumour Verification Framework introduced under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, focusing on its impact on market transparency and investor protection in India’s securities market. The framework aims to mitigate the disruptive effects of unverified rumours on stock prices and commercial transactions by mandating timely disclosures from listed entities. It introduces the concept of ‘unaffected prices’ to safeguard transactional integrity from speculative influences, fostering a fair and efficient market environment. The author evaluates the framework & implications for stakeholders, including parties in commercial transactions and retail investors, while advocating for further refinements as its implementation expands. By addressing these aspects, the blog contributes insights into enhancing market integrity and supporting informed decision-making in India’s evolving securities market landscape and its impact on commercial transactions, particularly Merger and Acquisition deals.

Introduction

Rumours can spark significant reactions in the market, akin to a small spark spreading through a forest fire. They not only drive market activity but can also be exploited for unfair advantages, often disadvantaging investors. The adage “buy on rumours, sell on facts” encapsulates this phenomenon, where speculative buying precedes official confirmations that typically deflate stock prices. Companies themselves can contribute to these dynamics by either originating or amplifying rumours. Positive rumours may be tacitly encouraged to boost stock prices, while negative ones might be left unaddressed to avoid further decline. To mitigate the impact of such rumours on stock prices and commercial transactions, and to mandate timely disclosures by listed entities upon the occurrence of material events SEBI has introduced a rumour verification framework under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 which recently became effective for Top 100 listed entities from 1 June, 2024 and will be applicable for next Top 150 listed entities from December 1, 2024.

Historically, the absence of stringent requirements for timely disclosure allowed rumours to influence market sentiments and distort stock prices without accountability. The framework mandates timely disclosures and introduces the concept of ‘unaffected prices’ to safeguard transactional integrity from speculative influences. By enforcing these measures, SEBI aims to foster a fair and efficient market environment where stakeholders can make informed decisions based on reliable information.

Law Relating to Rumour Verification on Own Initiative by the Listed Entity

The framework derives its force from Regulation 30(11) of SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015. The framework is supplemented by the Industry Standard Note 2 (ISF Note) issued by FICCI, CII and ASSOCHAM. This note was adopted by SEBI, and it provides for a detailed procedure for a compliance with the requirements under the framework.

Regulation 30(11) mandates that a listed company must verify any market rumour pertaining to a specific upcoming event, which is not of a general nature, and is reported in mainstream media, if it causes a significant movement in the company’s stock price. This verification must be conducted within 24 hours of the material price movement.

  1. Not general in nature: A two-pronged test is established to determine if an information is ‘specific’ enough to trigger the Rumour Verification Requirement. This test ensures that companies only need to verify rumours that have a substantive basis. First, the information must include clearly identifiable details about the event in question. This means the rumour should provide concrete specifics, such as names, dates, locations, or other definitive elements that precisely describe the event. Second, the information must cite a reliable source that can be reasonably expected to have knowledge of the event.

 

  1. Mainstream media: Additionally, given the immense flow of information in the digital age, the ISF Note precisely identifies reliable sources of information relevant to market participants. These sources include prominent Indian newspapers, digital platforms, international media outlets, and news channels. The Note further explicitly excludes social media platforms, with the exception of the official social media handles of the identified reliable sources. By designating these specific sources, and excluding social media, the ISF Note ensures that the information used for rumour verification is both credible and pertinent.

 

  1. Material price movement: Further the triggering event is ‘material price movement’ in scrip prices of the entity to bring in the Rumour Verification Framework. Here, ‘materiality’ is defined in terms of price movement rather than the event itself, as per Regulation 30, to ensure swift verification of rumours that trigger sudden and significant fluctuations in the listed entity’s stock price. This approach focuses on real-time market impacts, allowing companies to promptly address and clarify market-moving rumours, thereby maintaining market integrity and investor confidence.

 

The term “price movement” denotes the percentage change in the stock prices of a listed entity in response to a rumour, which can manifest as either a positive or negative change. Under the revised mechanism, the materiality of such price movements is determined based on two main factors: the price range of the listed entity’s securities and the movement in the benchmark index (such as Nifty 50 or Sensex). This approach ensures that the determination of materiality considers both the specific characteristics of the listed entity’s securities and their performance relative to broader market trends.

Impact of the Amendment on Commercial Transaction

News reports about anticipated corporate actions, such as offers for sale or amalgamation schemes, often lead to significant stock price movements. While these movements may or may not directly affect investors, they can certainly alter the dynamics of the corporate transaction in question. SEBI has introduced new guidelines to preserve the integrity of stock prices, ensuring they remain unaffected by rumours or news reports. This will be achieved through introduction of the concept of “unaffected price.”

  1. Scope of Commercial Transactions : Transactions that involve pricing norms, where the calculation of the transaction price is based on the share prices listed on recognized stock exchanges, are encompassed within the scope of this framework to ensure the calculated prices reflect true market values, free from the impact by rumours or speculative news reports. The purpose of these guidelines is to eliminate price disruptions caused by rumours, ensuring that stock prices used in acquisitions or other corporate actions reflect their true value without any speculative influence. This is crucial for maintaining fairness and accuracy in transactions where stock price is a key factor.
  2. Unaffected Price :When a commercial transaction is at an advanced stage, the issue created due to effect on the transaction price caused because of material price movement in share prices of the company resulting from verification of the rumour by the listed entity, will be addressed by excluding the resultant increase or decrease in the price from the price calculation for the deal. The calculation of the adjusted volume-weighted average price (VWAP) is crucial in determining the unaffected price. If a market rumour emerges today, the change in the VWAP of that security will be considered until the end of the following trading day. Once this value is derived, it will be excluded from the VWAP to determine the unaffected price for a period of 60 days from the confirmation of market rumor. However, if the M&A transaction is at a competitive bidding stage without an exclusive bidder being identified, the period extends to 180 days.

What It Means for the Stakeholders

The framework has significant impact on various stakeholders, including parties to commercial transactions, retail investors, and listed entities.

  1. Implications for Parties to Commercial Transactions: Previously, the lack of disclosure and confusion caused by rumours did not benefit investors, regulators, companies, or the other parties involved in commercial transactions, as they were left uncertain about the situation. SEBI’s new framework addresses this issue by encouraging transparency among deal makers. By confirming that a deal is in progress, SEBI provides price protection, which is crucial for the parties involved in the transaction. This incentivizes companies to disclose ongoing deals while ensuring the transaction price remains unaffected by speculative market movements.
  2. Implications for Retail Investors: The price protection under the rumour verification framework primarily benefits the parties involved in the transaction, not retail investors engaged in speculative trading during periods of market uncertainty. Retail investors are given accurate information, allowing them to make informed decisions based on disclosed details, which can influence stock prices. However, the protection mechanism is designed to safeguard the negotiated deal price for the involved parties, rather than shielding retail investors from market volatility.
  3. Implications for the Listed Entity: The new regulations will require listed entities to maintain vigilant oversight of market movements and media reports. Companies must monitor mainstream media platforms for any information related to them and ensure rapid, accurate dissemination of this information to the stock exchanges. This necessitates reviewing and potentially updating internal policies and compliance frameworks to align with the regulatory changes. Companies may need to establish dedicated departments to handle rumour verification and implement technology solutions to alert them of material price movements. Additionally, they should have mechanisms in place to search and verify rumours in mainstream media. This proactive approach will help listed entities maintain regulatory compliance and ensure transparent communication with the market.
  4. Gaps in the Framework: While the SEBI rumor verification framework represents a laudable initiative with significant benefits for stakeholders, certain unresolved issues continue to pose considerable obligations on listed entities. Notably, prominent listed companies grapple with numerous rumors and news reports daily, rendering it challenging to establish a clear causal link between specific rumors and substantial share price fluctuations. The framework also does not provide any method or mechanism to establish such causal link between a particular rumour around a commercial transaction of the entity and the material price movement in the shares of the company. Further, the expansive definition of mainstream media, encompassing regional and international news platforms, imposes onerous monitoring duties on companies, resulting in practical hurdles and elevated compliance costs. Moreover, the framework fails to address the impact of rumor verification on retail investors, a substantial segment vulnerable to market rumors. Addressing these gaps is crucial to enhance the framework’s efficacy and ensure comprehensive protection for all market participants.

Conclusion And Way Forward

In conclusion, SEBI’s introduction of the rumour verification framework signifies a significant advancement in ensuring transparency and market integrity within commercial transactions. By instituting measures such as timely disclosures and the concept of ‘unaffected price,’ SEBI aims to shield transactional values from the distorting effects of unverified rumours, thereby fostering a fairer trading environment.

However, it is important to acknowledge that challenges and gaps exist within the framework. As implementation extends to encompass broader entities and diverse disclosure requirements in response to emerging rumours, clarifications will be essential. These clarifications will ensure consistent application and effectiveness across different market scenarios, enhancing the framework’s reliability and relevance

Looking forward, ongoing refinement and adaptation of the rumour verification framework will be crucial. By addressing these gaps and evolving regulatory needs, SEBI can strengthen investor confidence and uphold market integrity effectively. This proactive approach will be pivotal in navigating future market dynamics and sustaining a robust securities market ecosystem in India.

In summary, while SEBI’s framework represents a significant milestone in regulatory practice, continuous improvements and clarifications will be imperative to maximize its impact and effectiveness across the Indian financial markets.

The post is written by Rishita Sethi, 5th year student at NLIU Bhopal.

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