Contributed by Ananya Sinha and Tirth Purani

Introduction

On May 21, 2024, the Securities Exchange Board of India (“SEBI”) issued a circular to set out industry standards for verification of market rumours. This circular sets out the standards for implementation of the Rumour Verification Amendments introduced under Regulation 30(11) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”). The amendments introduced under Regulation 30(11) of the LODR Regulations have been issued by the stock exchanges and the three industry associations, namely the Associated Chambers of Commerce and Industry of India, Confederation of Indian Industry, and Federation of Indian Chambers of Commerce and Industry, in association with SEBI to facilitate capital formation and ease of doing business.

The Industry Standards Note (“Guidance Note”), which was prepared in consultation with SEBI, sets out the standards for the implementation of the Rumour Verification Amendments. The absence of stringent requirements for timely disclosure has allowed rumours to influence the sentiments of the market and distort stock prices without imposed accountability. The measures undertaken by SEBI aim to foster a fair and efficient market environment where stakeholders can make informed decisions based on reliable information.

This article provides the need for amending the rumour verification to make compliances more practical. It further examines the impact by analysing the proposed calculation of prices and compliances. For better implementation of amendments the article recommends clarifying only those rumours which leads to price changes, providing specific interpretation of mainstream media, setting up an internal body for compliances and clarifying timelines for disclosure of information.

The Requirement of the Rumour Verification Amendment

The rumour verification requirement was imbibed to restrict false or misleading market sentiment affecting the listed entity’s securities and ensure market stability. Regulation 30(11) of LODR Regulations provides the rumour verification requirement. It requires listed entities to verify and confirm, deny or clarify market rumours reported in the mainstream media. Prior to the amendment, under Regulation 30, the verification requirement of the rumour was with respect to any specific material event or information. However, the industry body recommended defining the ‘materiality’ in terms of price movement in the scrips of the listed entity since the main purpose was to ensure quick verification of rumours that lead to sudden changes in the price of the scrips of the listed entity. Defining the materiality in terms of the price movement will make compliance with this requirement more practical. The determination of price movement shall be based on two parameters- 1) The price range of the scrip and 2) Movement in the benchmark index (Nifty 50/ Sensex). Based on these parameters, price movements have been proposed, which would be identified as material upon the publication of market rumours. The parameters will ensure the verification of securities of a specific entity and will also scrutinize the market widely through variations in the index. SEBI has also noted that changes in the price of the scrip may occur due to any policy, official announcements, and other factors. As a result, only those cases will be considered in which publishing a rumour has caused price movement.

The Aftermath of Verification of Market Rumour

Entities regularly undergo multiple commercial transactions. Under various SEBI regulations, the pricing of these securities transactions is based on the market price of the securities being traded in the stock exchanges. Considering this, the concept of ‘unaffected price’ was introduced to determine the pricing of these transactions after the market rumour had been confirmed. The unaffected price shall be considered by excluding the change in the price of the equity shares of the listed entity. For its determination, it is crucial to calculate the adjusted volume-weighted average price (“VWAP”). It is the average price of a stock adjusted by the total trading volume that helps determine whether a stock is undervalued or overvalued.  If a market rumour emerges on a particular day, the change in the VWAP of a particular security will be considered till the end of the following trading day. After the calculation, it will be excluded from the VWAP to determine the unaffected price. This price shall be applicable for a period of 60 or 180 days from the confirmation of market rumour. The mechanism of unaffected price will strike off the false stock price fluctuations. Since the entities constantly undertake transactions dependent on the share prices, it is pertinent that these prices reflect their true value in the market without any kind of false information and rumour, resulting in the transactions being completed with utmost accuracy and fairness. 

Under this framework, the parties undergoing commercial transactions benefit. The framework protects the prices of the transactions from unnecessary speculation and market rumours. It will further encourage the companies to make their ongoing transactions public, unaffected by the false information revolving in the market. However, this framework majorly favours the parties in the transaction as the prices are protected. Any individual or a retail investor trading in the market may invest when there is a sudden price change due to the market rumour and may end up in losses once the prices return to normal. Thus, the framework does not offer any shield to the retail investors. However, investors may benefit after an entity officially clarifies the transaction it is undergoing. Such clarification can help investors make informed decisions and avoid incurring losses if prices are inflated due to false rumour.

Additionally, the framework may increase the burden of monitoring the rumours in the market. Entities will have to keep a close watch on the information related to it circulating in the mainstream media. To cope with this, it may have to undertake several compliances and prepare an internal system to align with the regulatory changes. The Materiality Threshold increases the burden on listed entities, as it requires them to track daily price movements in their stocks to determine whether the “material price movement” criteria are met. It also expects the listed company to check for rumours in the mainstream media, compelling them to keep a close and constant watch on the media.

Recommendations

While ensuring market integrity, the rumour verification framework has narrowed the scope of the proviso to Regulation 30 (11), but it has significantly clarified the scope of “materiality” for market rumour verification. The framework, along with the benefits, poses certain obligations to the listed entities. As numerous news reports are reported daily, the prominent listed companies will find it challenging to establish a clear link between specific rumours and substantial share price fluctuations. In such a scenario, companies should be made obligatory in clarifying the rumour, resulting in price movement categorically.

In addition to the burden of monitoring the rumours, the benchmark index movement criteria and the scrip’s general price range require dual adherence to the requirements, which raises a significant burden that can be resolved by reducing compliances. No amendment has been made to the definition of “mainstream media”, giving the term a broader interpretation. This leads the listing company to continue to monitor content published across the publications that already exist under the ambit of its existing definition of LODR Regulations. A specific interpretation of the definition of “mainstream media” would reduce the ambiguity for the listed companies. 

Since the entities will have a burden of keeping a check on the rumours, there is a need to formulate guidelines directing composition of an internal body in the entity that will specifically monitor the rumours and adhere to all the compliances with respect to rumour verification. This will ensure that verification is efficiently undertaken and communicated well on time to the public.

The amendment is based on the general presumption that after public clarification, rumours will be known to the public within 24 hours. Further, the listed company verifies the rumour in a forum, which differs from the forum where it was published (i.e., mainstream media). The verification, which becomes available to the public within 24 hours, does not necessarily become “known” to the public simultaneously. The material price movements may occur even beyond the timeline (i.e. 24 hours). The SEBI (Prohibition of Insider Trading) Regulations, 2015, states that the disclosure, capable of market assimilation, takes place only 48 hours after its release. The mode of transmission being the same in both regulations raises questions about the regulator’s specification of a separate timeline. The clarification on the pertaining timeline and other amendments would bring a definitive change in the entire functioning of the present framework. 

Conclusion

The rumour verification framework highlights a significant advancement in ensuring transparency and accountability while focusing on feasible implementation. SEBI’s efficient measures to implement timely disclosures and the concept of the unaffected price will protect transactional values from the effect of rumours, which are not verified, and provide a fair trading environment. At the same time, challenges and gaps encircle the framework, which can be bridged by efficient implementation and clarifications. Adapting the rumour verification framework will be crucial to its way forward.

The proactive approach will be crucial in navigating the future market dynamics and building a robust securities market ecosystem in India. The framework is a significant achievement in regulatory practice and improving the effectiveness of Indian financial markets.