Recently, Security and Exchange Board of India (SEBI) issued a circular which provides timeline extension for verification of rumours by the listed companies. This circular is in context of the previous one which was issued by SEBI a couple of months ago in June 2023, which had made notable amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (LODR Regulations). One of the particular amendments in this is the second amendment regulations to the LODR Regulations or the market rumours amendment. Regulation 30(11) introduced a new binding compliance on the listed companies that with effect from 1 October 2023, the top-100 listed companies, and similarly with effect from 1 April 2024, the top 250 listed companies shall confirm, deny or clarify any reported event or information in the mainstream media which is not general in nature and which indicates rumours of an impending specific material event. The listed company must do so not later than 24 hours from reporting of such rumour. The new SEBI circular has extended the timelines that the listed companies needed to conform to.
The main intent behind introducing these amendments was to bring major reforms in the disclosure regime coupled with bringing transparency in the securities market by exposing veracity of market rumours. Before the introduction of this amendment, it was voluntary for a listed company to either accept, deny or clarify any rumour relating to that company, but the current amendment has made this binding. After the roll out of these amendments, the listed companies will face many challenges while adapting to these new changes, but before delving into the problems and challenges which the companies may face, it is imperative to discuss the basis for these amendments.
SEBI's Intent Under Scrutiny: Assessing the Logic Behind Amendment
Behind any legislation/amendment, there is often a strong need for that change and a clear intent to introduce the same. In the present scenario, the second amendment is broadly based on the SEBI’s consultation paper, board note and on a SEBI order.
Analyzing the board note of SEBI, it was proposed that the top 250 listed entities should mandatorily confirm or deny any rumour which may have material effect and which is also reported in mainstream media. The board note talks about the suggestions received on this proposal and in point 8.3.1 of the board note, it is expressly mentioned that 52 out of 71 members were not in conformity with the proposal and raised several contentions. One of the contentions which was raised was that there are non-disclosure agreements (NDAs) between companies that restrict them from disclosing any material information in the market even if it pertains to a rumour, but SEBI defended it by claiming that parties cannot override the regulatory obligation and NDA has already been breached by someone if rumours are circulating in the market. On a closer examination, its veracity can be questioned as it cannot be certain that NDA has already been breached if rumours are circulating. It can be concluded that very vague logic has been used by SEBI to counter the NDA’s contentions.
Another point which SEBI pointed out in its board note was that similar regulatory practices are present in different countries like the USA where Section-202.03 of the New York Stock Exchange (NYSE) Company Manual on “Dealing with Rumours or Unusual Market Activity” states that a listed entity must respond to rumours; if they are false, the entity must deny or clarify them, and in case where rumours are correct, an immediate candid statement must be made directly and openly to the public.
Now, there is a huge difference between Indian rumours amendment framework and NYSE process of dealing with rumours as NYSE listed company manual is clear as to how to deal with rumours in both cases - when they are correct and incorrect. In the current amendment, there are many vague terms that have been included, and there is less clarity on how it will be dealing with the rumours. For instance, Regulation 30(11) mentions that rumour should not be general in nature and should be a specific material event. Now, the main dilemma here is the ground on which SEBI will decide whether a rumour is of general nature or specific material nature as there is no device employed by SEBI in the amendment to distinguish between rumours. On the other hand, NYSE company manual just uses simple terminology and mentions that a “rumour” of any nature has to accepted, denied or clarified as stated in the section. So, from this, it can be inferred that the SEBI using NYSE company manual to justify the amendment does not look very promising.
The rumour amendment has its roots of origin also in the recent adjudication order of SEBI in the case of Reliance Industries Limited v. SEBI wherein there were a lot of rumours in the market surrounding Jio-Facebook deal and it was alleged that Facebook was going to invest in Jio, and as a result, it was alleged that Reliance did not clarify about the deal and so Reliance should be penalized. However, this order later was set aside by the Securities Appellate Tribunal (SAT) and it ruled that there was no impending obligation on reliance to clarify the rumour surrounding deal. So, the SEBI’s genesis of rumour amendment has been itself struck off by SAT.
It can be inferred that the logic and need behind bringing these amendments is left far behind.
Issues and Gaps in SEBI’s Amendment
Challenge of mainstream media monitoring
Now, the foremost issue in the amendment is that in the regulation the term mainstream media is used in the sense that the entity shall confirm, deny or clarify “any reported event or information in mainstream media” (emphasis supplied), but in Regulation 2(1) of this amendment, a new clause is inserted which states that mainstream media will include newspapers or news channels that are registered in India as well as worldwide. Globally, there are more than 35 crore newspapers, and in India, there are more than 390 news channels, so the main concern is that this will make it very difficult for a company to comply with the requirement as it is nearly impossible for a entity to check all the rumours which are published or broadcasted on a daily basis on a large number of platforms. A company will need to establish a separate vigilance centre with a proper AI-integrated model that can track the rumours being published in e-newspapers and news channels, but it must be noted that many newspapers do not have an online version and also many newspapers are published in different languages, so tracking of rumours seems a very onerous task for a listed entity.
Extent of company’s liability?
Another issue is to what extent can company be made liable for the things on which it does not have any control. Now, the rumours spread in a market in large numbers, rumour may be a speculation or a hunch on which the listed company does not have any control, and asking the companies to clarify a rumour seems a little far-fetched.
Other issue is that competitors of a listed company can misuse this amendment and publish false allegations or speculative reports with the intent of making the listed entity accept or reject it.
A regulatory lacunae
It must be noted that there is no regulatory mechanism or no penal sanctions compiled by SEBI if a company does not adhere to the new requirements, and the amendment itself does not prescribe any penalty in case of non-compliance by the listed entity. However, in the past, there are some precedents in which SEBI punished several companies under Section-15H of the SEBI Act 1992 which provides for penalty in case of non-disclosure.
However, the SEBI’s amendment falls short as it does not provide any penalty for non-compliance by the listed entity, which makes the amendment somewhat weaker.
After this amendment comes into force, it will be clear as to what challenges companies are facing and how many of the top 250 companies will comply with the amendment, and it will also be interesting to see that what action SEBI takes on non-compliance. Compliance will demand a great effort from the company’s side as it will entail a shift from conventional regulatory system to a new regulatory system. Companies should in advance set-up comprehensive tech infrastructure before the amendment comes into force.
Regulation is important in a securities market, otherwise it would put parties involved at peril, but regulation on the other should be based on practicality and not whims of someone, otherwise it would act as a double-edged sword. Now, only time will tell whether this regulatory framework would act as a boon or a bane for the market.