Sidharth S. Kumar
Key Highlights
Listed companies need to address a market rumour only if it creates significant movement in the price of its shares.
Amendments in Takeover Code and Buy-Back Regulations will reduce impact of rumour on pricing of shares in M&A activities and corporate actions.
Trading on the basis of any unverified rumour brought within the ambit of insider trading.
Ensuring investors have fair access to information about issuers is a cornerstone of a robust and competitive capital market. The Securities and Exchange Board of India (“SEBI”) mandates every listed entity to disclose any information it deems significant to the general investors, thereby safeguarding their interests.
According to Reg. 30 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”), inter alia, any information that is likely to stir up volatility in the trading price or quantity of a security should be considered material by the issuer. This stipulation ensures that investors have sufficient data about an issuer while making investment decisions.
SEBI, in its commitment to prevent investors from making decisions based on market rumours, amended the LODR Regulations last year. This amendment requires listed entities to promptly affirm, deny, or clarify any rumour published in the mainstream media about them or their subsidiary within 24 hours of publication.
The SEBI's amendment sparked concerns among market participants due to the lack of guidance on the type of rumours that would warrant clarification from the issuer. Fearing increased compliance burdens, listed corporations voiced their apprehensions. In response, SEBI decided to delay enforcing the new requirement until June 2024.
With a few days left before the moratorium lapses, the SEBI has again amended the LODR Regulations to reflect the nature of the rumours that need to be addressed by listed companies. After the latest amendments, the listed entities must intervene and clarify to the public investors when:
a. Any rumour about an impending specific event or information related to the entity or its subsidiary is disseminated through mainstream media (newspapers, news channels and news and current affairs published through digital media); and
b. Such rumour triggers material price movement in their securities.
The Industrial Standards Forum (comprising ASSOCHAM, CII, FICCI, and major stock exchanges) would formulate the industry standards to identify and analyse material price movement due to rumours. All listed entities must follow the standards to ensure compliance with Reg. 30 of the LODR Regulations, and the stock exchanges will monitor them.
Apart from clarifying the nature of rumours that listed entities need to address, SEBI has introduced several other amendments to diminish the impact and role of rumours in the capital market.
SEBI has amended the provisions of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Code”), and the SEBI (Buy-Back of Securities) Regulations, 2018 (“Buyback Regulations”), to curtail the impact of volatile price movement due to rumours, which are confirmed by the companies, during an open offer or buy-back of securities. In such circumstances, the impact of material price movement on account of the rumour can be excluded while determining the open-offer price or buy-back price for such security. SEBI has also issued a separate Circular No. SEBI/HO/CFD/CFD-PoD-2/P/CIR/2024/51 that lays down the framework for calculating the unaffected transaction price under the Takeover Code and the Buyback regulations.
Another amendment was brought into the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”) to discourage trading activities based on rumours. PIT Regulations prohibit any person from trading in a security while possessing any unpublished price-sensitive information (“UPSI”) with respect to the issuer of such security. UPSI is not generally available to public investors. Investors must only deal in the securities market based on generally available information.
Post amendment, any unverified event or information (basically rumour) about a listed company, reported in print or electronic media, has been excluded from the gamut of generally available information. If a person deals in securities based on a rumour that has not been verified by the issuer, he /she can be hauled up for insider trading. It is not essential for PIT Regulations that the rumour should create any material price movement for the securities.
The collective aim of all these changes introduced by SEBI to tackle rumours in the capital market is to ensure the integrity of information disseminated to investors. With the advent of technology, data and information are passed on in the blink of an eye. Therefore, listed companies are the most suitable sources to confirm or deny rumours in the capital market within a stipulated timeframe. These measures underline the regulator's efforts to facilitate the availability of qualitative and quantitative data of the highest standards, enabling sound investment decisions by public investors. The issuers must reciprocate the regulatory efforts by leveraging automation and data analysis technologies to streamline compliance processes.