On 9 July 2024, the Securities and Exchange Board of India (“SEBI”) issued a Master Circular titled Surveillance of the Securities Market (“Circular”), marking a significant development in the regulatory framework governing unauthenticated news dissemination. This Circular builds upon and further refines SEBI’s existing framework under Regulation 30(11) of the SEBI (Listing Obligations and Disclosure) Regulations, 2015 (“LODR”).
Regulation 30(11) of LODR which also referred to as the Rumour Verification Regulation, mandates the top 250 listed entities to confirm, deny, or clarify any reported events or information in the mainstream media that is not general in nature and have resulted in material price movement. Such verification is to be done within twenty-four hours. In instances where the event is confirmed, the entity is further obligated to disclose the current stage of such event or information.
The authors, through this blog, attempt to delve into the existing framework of Rumour Verification under Regulation 30(11) of LODR while drawing a connection to the recent Circular as the further development in this rumour verification.
I. Background
Unlike the traditional open outcry system, the conventional trading floor rapidly transitioned and sprawled into the platforms wherein the market players transacted in high numbers with huge stakes. The advent of information technology and developments in artificial intelligence, however, has presented a double-edged sword, creating a paradoxical situation for the securities market.
In this vulnerable and dynamic environment, the voluminous transactions have increased the investors’ tendency to seek market information. This requirement is increasingly being exploited through market manipulations, the potential misuse of information, and the fast-track speed of market rumours, which significantly has distorted the market behaviour. Consequently, these practices caught the attention of regulators, who emphasized stringent Market Surveillance. Additionally, the watchdog closely monitored concerns regarding the information imbalance in the securities market, seeking to ensure that information access and symmetry is not undermined.
II. About The LODR Regulations
The LODR aims to regulate the disclosure requirements of publicly listed companies in India. In an attempt to alleviate the Rumour Verification concerns, the notification dated 14 June 2023 added a provision to Regulation 30(11). This was followed by the Consultation Paper dated 28 December 2023, wherein the regulator introduced a revised framework for verifying rumours. Further, the amended SEBI LODR was released on 10th July 2024.
The leading amendments are listed as follows:
A. Material Price Movement:
Rumour Verification has been defined as the obligation imposed on a listed company to verify the market rumours pertaining to a specific event that are not of a general nature, particularly when this event is reported in the mainstream media and results in a significant movement in the company’s stock price. Rumour Verification is triggered only in case of a Material Price Movement (“MPM”) in the company’s stock. It also provides a percentage-based threshold to assess abnormal stock price movements by comparing the company’s stock price performance against its NIFTY 50 or SENSEX performance on the same day. It is pertinent to note that this verification is triggered only when the stock price movement meets or exceeds this percentage-based threshold as provided.
Therefore, it may be validly pointed out that these amendments provide a more objective standard for initiating Rumour Verification as opposed to the earlier- where the 24-hour Rumour Verification period began after the rumour was reported.
B. Obligation on Promoters/Directors/KMP/Senior Management:
Promoters, Directors, and Senior Management of the listed companies are now mandated to respond to queries sought by the other entities for complying with the Rumour Verification Amendments. While the provision aims at ensuring timely addressal, it however may become challenging and burdensome where the issuer company is not directly involved in the rumours.
C. Unaffected Price Framework:
As per the LODR Regulations, the unaffected Volume Weighted Average Price (“VWAP”) is used in pricing only when the company confirms a rumour within twenty-four hours of significant movement in its stock price. However, the recent Notification provides that the data will be considered from the day of the significant stock price movement until the end of the next trading day; beyond this period, any subsequent rumour confirmation will not be taken into account for the calculation of the unaffected price. This is aimed and designed to ensure that stock price of the company remains unaffected during significant transactions like- Preferential Issues, Mergers and Acquisitions thereby ensuring and reinforcing the fair pricing idea. The unaffected price remains valid for sixty (60) to one hundred and eighty (180) days, depending on the transaction stage. These adjustments continue until the price stabilizes in cases where price variations exceed limits.
- Mainstream Media:
The Industry Standards Note on verification of market rumours includes Indian newspapers with specific circulation thresholds, their digital versions, listed online news sources, and selected international newspapers. However, Paywall news, news aggregators, and social media are excluded from the umbrella except for the social media accounts of approved news sources.
III. ANALYSIS
A. Privity Of Contract And Non-Disclosure Agreement
While the recent circular lays down the importance of the establishment of internal robust controls, it also mandates that the employees should refrain from disclosing unverified information. Further, any market-related news needs to receive an approval from the compliance officer before disclosure.
Although the circular, broadly aligns with the principal regulations which require the confirmation of rumours, that can significantly impact the party and the transaction interests, it however raises concerns regarding the potential overreach in the disclosure process. It may potentially also lead to the situations wherein the intermediaries may be compelled to disseminate the sensitive transaction information, making the confidentiality of the client more vulnerable.
This undermines the spirit of ‘Privity of Contract’ since the listed companies will now have to respond to external influences like speculative information, irrespective of the fact whether the company is directly engaged with the party spreading the rumour. In essence, SEBI’s regulations extend the responsibility of the listed entity beyond its immediate contractual relationships to include a duty towards the broader market participants, including shareholders, potential investors, and regulators.
B. Principles Of Unpublished Price-Sensitive Information
Unpublished Price Sensitive Information (“UPSI”) refers to any unpublished information related directly or indirectly to a company, which if disclosed, could materially affect the price of the securities. There have been certain cases wherein unauthenticated news has been disseminated through the usage of social media, instant messaging, and other platforms by employees. The element of price discovery here can be better understood through the Reliance Facebook case, wherein it was published that Facebook is going to acquire a multibillion-dollar stake. However, this was based merely on a term sheet outlining a timeline for the executing the investment agreement. When analyzed in terms of price sensitivity, this rumour led to a rise of fifteen percent (15%) from its initial price. This raised concerns regarding the potential violation of principles of fair disclosure under UPSI despite there being no direct fault of the entity in the disclosure. As principles of fair disclosure places an emphasizes on prompt and uniform disclosure required to be made in a timely manner so as to avoid the selective disclosure by communicating the same to the stock exchanges. the Such disclosures can be made on the Company’s website as well. Consequently, the companies are obliged to verify the selective information dispersed in the securities market to prevent the unlikely/unintended damage.
- Misuse Of Regulations
Although the circular tightens the regime of disseminating unauthenticated news, the obligation of the listed companies being held accountable for rumours spread by the issuer remains intact. Since the regulations shift the onus onto the listed companies to establish the credibility of the information rather than the issuer. Competitors may take undue advantage to extract confidential insights. Consequently, listed companies are compelled to respond within twenty-four hours, often leading them to disclose sensitive business strategies and other critical information that they otherwise did not intent to disclose, posing a serious threat to their business and business strategy.
- Market Fragility
In the financial markets, regulatory disclosures play a significant role in ensuring transparency and protecting investor confidence. It is pertinent to pay our attention to some prominent International Frameworks for example as provided by the New York Stock Exchange and National Association of Securities Dealers Automatic Quotation. They mandate the companies to disclose information to maintain market integrity and build investor confidence. Upon taking a look at such international frameworks, it is surprising to the fact that the Indian market is a niche market and is not as developed as its foreign counterparts where investors are confident to invest. Taking into consideration the fragile dynamics of the Indian market, such regulations may do more harm than good.
E. Contravening Effect on Retail Investors
Instead of protecting retail investors, the Rumour Verification regulations might, in some cases, disproportionately serve institutional or foreign interests, creating more risk in the market. To understand this better, we may refer to the January 2023 Hindenburg Research report that accused the Adani group of stock manipulation and financial fraud resulting in the sharp decline of Adani Group stocks causing loss to investors.SEBI’s Circular also aims to closely monitor or restrict access to social media platforms and other communication platforms to mitigate such risks. The Circular has notably filled in a crucial regulatory gap by including social media within the ambit of Mainstream Media for rumour verification. Previously, social media platforms, including investment channels run by finfluencers, were outside this scope. Hence, the unregistered individuals would influence market sentiment without regulatory oversight. This loophole nonetheless has now been addressed, ensuring that SEBI’s efforts to curb unauthenticated information and market manipulation extend to social media as well. While this inclusion may increase compliance costs, it is a significant move towards protecting investor interests and improving market integrity.
IV. Conclusion
SEBI’s Circular when read in alignment with the regulations on Rumour Verification, it seeks to address market rumours and protect investors by requiring companies to either confirm, deny, or clarify rumours. However, these regulations place a heavy burden on listed companies, often compelling them to disclose sensitive information, which can be exploited by potential competitors. The twenty-four-hour response window and rigid disclosure requirements could unintentionally impede market participants, especially in the relatively less developed Indian market.
V. Way Forward
While it is clear that the companies have to remain updated in terms of developments in the market, however it is also to be ensured that the regulatory regime should not overburden the targeted entities. Even if these regulations are intended to improve transparency, such initiatives might not always benefit the necessary stakeholders. They may instead exacerbate market volatility, leaving small investors vulnerable to swings caused by speculative reports. Though the SEBI has come up with innovative technologies like data analytics, however, there remains a need for clarification concerning how these methods are to be implemented. Monitoring these media sources across jurisdictions requires significant resources, especially with regards to the twenty-four-hour response window. Companies may now need specialised teams to handle these increasing workloads and costs. The point of concern is that the authenticity and credibility of reports (such as the Hindenburg research report on Adani Group) by opaque foreign entities demand careful consideration and investigation.