Sebi’s rumour roulette: The proposed norms must be scrutinised for their likely impact on market dynamics

 

I have a piece with Manas Dhagat in today's Financial Express on the new norm for listed companies to come out with a clarification for certain market rumours. The full piece is reproduced below:

Introduction 

The Securities and Exchange Board of India (“SEBI”), through a consultation paper dated December 28, 2023, proposed amendments to address concerns related to market rumours. The consultation paper seeks a notable change from prioritizing material events to focusing on significant price movements for verification of rumours. Under the proposed amendments, any significant price movement triggered by a market rumour reported in the mainstream media would necessitate clarification from the concerned listed entity within 24 hours. At the outset, the extensive range of participants falling under the umbrella of 'mainstream media' poses a considerable challenge in meeting this time constraint. For instance, over 1.4 lakh newspapers and magazines registered with the Registrar of Newspapers for India (RNI), meet the criteria. Effectively monitoring all these mainstream media outlets becomes a daunting task for entities, demanding substantial resources merely for tracking these rumours.

Verifying Market rumours through price movements and the pricing of transactions

The proposed amendment places a distinct emphasis on price variation rather than the specific events outlined in Regulation 30 of LODR Regulations. The material price movement would be attributable only to the rumour, and shall require verification of the rumour by the listed entity. The consultation paper recognizes that a smaller percentage change in high-priced securities may result in a more substantial absolute price variation, necessitating distinct percentage variations for securities with different price levels. SEBI further proposes that the price fluctuations in listed entity securities be compared with the movements of Nifty50/Sensex to provide a comprehensive reflection of market dynamics. Another noteworthy change is the suggestion to verify market rumours within 24 hours of a material price movement, as opposed to the existing requirement of doing so within 24 hours from mainstream media reporting. This adjustment aims to enhance the timeliness and efficiency of addressing market speculations.

One of the major concerns is the potential for premature and potentially harmful disclosures due to the obligation imposed upon listed companies through the proposed changes. Not all market rumours merit immediate public disclosure, and such a requirement could inadvertently lead to market distortions.  For instance, in the case of preliminary merger talks, even minor leaks causing any price change could force companies to disclose sensitive information, potentially causing market disruptions and influencing negotiations adversely as the target market price would move up if the acquisition negotiations have been confirmed by the company.

SEBI proposes a mechanism to ensure that unaffected price is considered with respect to transactions relating to the securities of listed entities. There are difficulties that accompany the exclusion of price variation during the pricing of transactions. In a scenario where price movement occurs due to, inter alia, public announcements, sectoral trends, policy changes etc, in the same timeline wherein a rumour was clarified by a listing entity, such price movements shall be discounted for pricing guidelines for preferential issues of shares, Qualified Institutions Placement (QIPs), open offers etc. To protect the best interests of the investor, an approach is needed such that price variation due to genuine considerations is not discounted in transactions of listed securities.

Obligations on Directors, KMPs, senior management and designated persons

The consultation paper further raises practical challenges by imposing obligation upon the listed entity to clarify rumours pertaining to promoters, directors, and key managerial personnels (KMPs). In complex corporate scenarios, obtaining timely responses from these individuals may not always be feasible. This could result in delays in providing clarifications, impacting the credibility of the listed entity, which could potentially lead to market speculation. To ensure strict compliance, listed companies may need to cope up with an additional burden to set up separate departments solely for tracking and clarifying rumours to avoid delays. SEBI further proposes that a person may not use an information published in mainstream media as a defence for ‘generally available’, which is not confirmed, denied or clarified as it does not lead to a significant price movement, for allegations of insider trading, treating it as UPSI. The proposal tries to impose an high threshold for defence of insider trading allegations. It imposes an additional requirement upon a person who may be deemed to have knowledge of price-sensitive information to track the clarifications of listed entities even when such information is already available publicly.

The proposed amendments pose a challenge in achieving a delicate balance between regulatory oversight and allowing companies the flexibility to manage their affairs effectively. Encouraging collaboration between SEBI and exchanges for efficient rumour tracking and communication can help in establishing a seamless and responsive system by leveraging the strengths of both regulatory bodies and market intermediaries. This partnership would facilitate a more proactive approach to identifying and addressing market rumors. Providing companies with the option to request confidentiality and allowing exchanges to respect such requests would empower entities to manage information dissemination responsibly. This approach recognizes that not all market rumours require immediate public disclosure. American exchanges adopt this approach of selectively allowing confidentiality. Excessive regulation or a lack of clarity in the verification process may create an environment of uncertainty. SEBI must carefully weigh the potential consequences on investor sentiment and take measures to ensure that the regulatory framework inspires trust and confidence. 

Conclusion

The proposed amendments must be scrutinized for their potential impact on market dynamics. While these proposed amendments aim for increased transparency, they also raise concerns about potential unintended consequences such as market disruptions, micromanagement, and burdensome disclosures. In navigating the complexities of market regulation, SEBI’s commitment to an inclusive and thoughtful decision-making process will be pivotal. The financial markets require a regulatory framework that adapts to evolving challenges without compromising efficiency and innovation. As the consultation period ends, market participants, regulatory bodies, and investors alike await a framework that strikes the delicate balance needed for the sustained growth and integrity of India’s financial markets. The need for a balanced regulatory framework cannot be overstated. As SEBI reviews the feedback received during the consultation period, it should carefully consider the concerns raised and explore alternative approaches that maintain the delicate equilibrium between investor protection and market dynamism. In particular, an out for confidential treatment should seriously be considered.