Unmasking Market Whispers: The Market Rumours Amendment 2023
[Esha is a student at Jindal Global Law School.]
The Securities and Exchange Board of India (SEBI) has introduced a series of amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (LODR Regulations), aimed at fortifying the corporate governance and disclosure framework. One notable amendment is the market rumours amendment, incorporated within Regulation 30 in conjunction with Schedule III of the LODR Regulations.
Commencing from 1 October 2023, this amendment mandates India's leading 100 listed entities, as determined by their market capitalization at the end of the immediately preceding financial year, to provide explicit confirmation, denial, or clarification regarding market rumours to the relevant stock exchanges. This obligation will expand to encompass the top 250 listed entities, taking effect from 1 April 2024 (covered listed entities).
SEBI's Consultation Paper and Board Note underscore the objective of this amendment, which is to prevent the propagation of erroneous market sentiments and safeguarding investors from the emergence of a misleading market perception.
Guardians of the Investors
Before the LODR Amendment, Regulation 30(11) included a general provision that allowed listed entities to, on their own initiative, confirm or deny any reported event or information to the relevant stock exchange(s). However, the amendment introduces a departure from the said provision, specifically for the top 100 and 250 listed entities. Commencing from their respective prescribed timelines, these entities are now mandated to promptly confirm, deny, or clarify any reported event or information across domestic and international mainstream media, including print and electronic platforms. This requirement applies to information that is not general or rumours of an impending specific material event, circulating amongst the investing public. Compliance with this mandate is expected within 24 hours from the initial reporting of such information or event. If the covered listed entity verifies the reported information or event, it is additionally obliged to provide the current stage of such ongoing.
The fundamental objective of the amendment is to instate a fair playing ground for all investors, guaranteeing the uniform dissemination of accurate information. This, in turn, can lead to more informed investment decisions rather than speculative or panic-induced trading driven by investors who might act on incomplete or erroneous data.
This amendment also functions as a deterrent against intentional propagation of false rumours aimed at manipulating stock prices. Clearing up market rumours allows companies to focus on their core operations and long-term value creation strategies, rather than being side-tracked or functioning superficially through inducement of positive speculation. While our current regime involves enforcement against unfair trading practices, encompassing the dissemination of false or deceptive information that could influence the public's decision to buy or sell securities, this amendment introduces ex-ante regulations related to disclosure, which will help address the issue early on and significantly alleviate the enforcement burden.
Unaligned with Market Reality?
Efficient markets necessitate a delicate equilibrium between well-informed investors and speculators. Speculation and rumours have the capacity to trigger short-term price fluctuations and heightened market volatility. Although an excess of volatility can have adverse consequences, a certain degree of volatility is imperative to allow traders and speculators to capitalize on fleeting market shifts. However, the pronounced focus of the amendment on timely clarification could undermine the feasibility of short-term trading strategies, thereby deterring speculative traders from engaging in the market. The exclusion of a significant segment of the market may consequently curtail liquidity and compromise the overall efficiency of the market. Furthermore, the necessity for companies to promptly address rumours could potentially result in hasty responses and information overload that may be misconstrued by investors or media outlets. Such a scenario has the potential to deepen confusion and give rise to unintended consequences within the market.
Beyond the investor and market concerns, the company is also likely to face several challenges, as has also been discussed in the SEBI Board Note. While the amendment aims to prevent market manipulation, it could inadvertently provide an opportunity for competitors and media agencies to misuse the amendment by deliberately publishing inaccurate or speculative news reports with the objective of forcing the covered listed entity to make a statement confirming or denying the reported event. Moreover, requiring companies to publicly address possibly premature matters could cause competitive disadvantage during sensitive negotiations or strategic discussions.
Further, one of the key criteria for rumours necessitating addressal is their circulation within ‘mainstream media’, which encompasses newspapers registered with the Registrar of Newspapers for India, news channels approved by the Ministry of Information and Broadcasting, and content from news publishers as defined by the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules 2021. This obligation also extends to the news content of foreign jurisdictions, whether or not an entity has operational presence in such jurisdiction. With the unfathomable number of newspapers and news channels that fall under this criteria, companies may find themselves compelled to allocate substantial time and resources towards dispelling and elucidating such rumours, which could potentially detract from their core business activities.
Lastly, if a covered listed entity denies a market rumour and then announces the transaction shortly afterward, such action might be interpreted by SEBI as a fraudulent and unfair trade practice under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices (FUTP) relating to Securities Market) Regulations 2003 (FUTP Regulations). Regulation 4(2)(f) of the FUTP Regulations deems dealing in securities as manipulative, fraudulent, or unfair if it involves knowingly disseminating false information about securities, such as financial results, financial statements, mergers and acquisitions, and regulatory approvals, prior to or during securities trading. Although the SEBI Board Note acknowledges concerns about FUTP implications resulting from this amendment, no specific defence or carve-outs have been outlined to address the potential FUTP aspect, which must be introduced at the earliest. For instance, in the United Kingdom, the Put Up or Shut Up Rule (PUSU Rule) within Rule 2.6 of the Takeover Code is invoked when a leak announcement occurs. This rule mandates that a bidder must either declare a fully financed binding offer within 28 days or publicly state that they will not be pursuing an offer, in which case the bidder would be subject to a 6-month standstill. Unlike the PUSU Rule, the LODR Amendments do not impose a standstill period if the covered listed entity denies a market rumour related to a deal, leaving considerable room for ambiguity concerning the timeframe for assessing their dealings in light of the said denial.
Arming Up for the Future
Compliance with this new requirement will require a paradigm shift in approach as well as in mindset. It would be essential for the covered listed entities to promptly initiate steps for ensuring that their infrastructure is set in order well-in advance.
Acknowledging that the potential for leaks can never be completely eliminated, it is now more crucial than ever to establish strong provisions within non-disclosure agreements (NDA) to safeguard the confidentiality of deal details within a carefully selected group within the company, as has also been emphasized upon in the SEBI Board Note. While the stipulations within the NDA may not serve as a defence when a company neither confirms nor denies an existing market rumour, an NDA can effectively mitigate the likelihood of such rumours originating in the future, thus shielding the company from the need to confirm, deny, or clarify information they are not ready to release into the market.
Finally, effectively monitoring daily content pertaining to the entity necessitates a robust technology-driven infrastructure and comprehensive training for employees, or alternatively, outsourcing to specialized agencies for the daily aggregation of circulating news and the prompt flagging of any market rumours.
Speculation often carries negative connotations, and there is a prevailing preference for a sense of purity in intent, purpose, and action. The belief is that prices should be primarily driven by fundamentals, and those engaging in stock transactions should be well-informed investors who have meticulously studied the companies they invest in.
However, the risk to economic activity from unknown future prices is largely mitigated by speculative activity, whereby prices undergo consistent fluctuations. Small yet pivotal pieces of information that might have eluded the attention of larger institutional investors are seized upon by speculators, thereby influencing market prices. This proactive role played by speculators ensures that buying and selling can occur readily, swiftly, and cost-effectively, ultimately benefiting the broader economy.
In a scenario where buyers exclusively comprise such informed investors, the market would become prohibitively expensive and restrictive. The processes of becoming a buyer would demand excessive time, resources, capital, and effort, leading to a scarcity of market participants. The dynamics between buyers and sellers would become mismatched, hampering the liquidity needed for smooth market operations.
Regulation in this regard has a dual perspective, which recognizes the benefits of speculation but within a controlled environment. Without wanting to hamper the exercise of individual speculation as basis of trading, the market rumours amendment appears to attempt to offer protection to these very speculative shareholders who may lack extensive knowledge of a company’s financial performance and thus might easily fall into traps set by intentional and publicly circulated rumours.
The months to come will reveal whether this amendment, which has yet to take effect, creates a well-structured and sustainable market framework with well-informed investments or if it in fact leads to the loss of a significant segment of investors who can no longer exercise their ability to take potentially high-return risks based on their speculations.