back to top
OpinionsSEBI introduces changes to curb market rumours and ensure fairness

SEBI introduces changes to curb market rumours and ensure fairness

Date:

Shivanand Pandit

Amidst the dynamic realm of the stock market, whispers of speculation spread rapidly, triggering waves of volatility and significant shifts in stock prices. These fluctuations frequently prompt irrational investment choices, fostering an unjust and uncertain market climate. Acknowledging the detrimental impact of such market rumours, 's regulatory authority for capital markets, the Securities and Exchange Board of India (SEBI), has taken decisive action. Recently, SEBI introduced a fresh framework aimed at quelling market rumours and fostering fairness, thus striving to establish a more balanced playing field for all investors.

The SEBI has introduced amendments to various regulations aimed at preventing material price movements (MPM) caused by market rumours from influencing transaction prices in situations like takeovers under open offers, buy-backs, and preferential allotments. To support capital raising and simplify processes, the SEBI has established criteria for verifying market rumours based on significant price movements in the equity shares of listed companies.

Following numerous delays, a new framework requiring listed companies to verify market rumours will take effect on June 1, 2024. Initially, it will apply to the top 100 listed companies and will expand to include the top 250 by December 1, 2024. This innovative framework targets to assess a security's price as if the rumour did not exist, offering a more accurate reflection of the stock's true value. It provides investors with a valuable tool for making informed decisions and enhances the SEBI's regulatory oversight, further solidifying its role as a vigilant market regulator.

The SEBI regulations have undergone several key changes. They are: (1) The applicability of LODR Regulations to listed entities based on market capitalization has been modified. (2) Enhanced regulations have been introduced for verifying rumours, particularly in response to significant price movements. (3) The timeline for filling vacancies of key managerial personnel (KMP) when authority approval is required has been extended. (4) Timelines for providing prior intimation to stock exchanges for certain specified proposals at board meetings have been established. (5) The interval between two risk management committee meetings has been revised. (6) The compliance timeline for high-value debt-listed entities (HVDLE) has been extended. (7) The impact of material price movement (MPM) and rumour confirmation has been excluded when computing the open offer price. (8) The impact of MPM and rumour confirmation has been excluded when determining the volume-weighted average market price of a company's equity shares and for the lower-end price range calculation for buy-backs. (9)The definition of generally available information has been tweaked to exclude unverified events or information.

Rumour verification plays a crucial role in the capital market ecosystem worldwide, including in some of the most developed and sophisticated markets. In the United States, for example, there is a mechanism that allows companies to confirm rumours while maintaining confidentiality. This is achieved by having companies confirm the rumours solely to the exchanges, rather than to the general public. In other jurisdictions, such as the United Kingdom and Hong Kong, there is no specific timeline mandated for rumour confirmation. These jurisdictions do permit “delayed disclosure” if it is necessary to protect a company's legitimate interests, provided that the delay does not mislead the public.

Will it stop manipulation?

The implementation of this unaffected price framework holds several implications for market participants. Firstly, investors benefit from heightened transparency and fairness, as market rumours no longer exert undue influence on their investment decisions. Secondly, companies witness reduced volatility in their share prices, fostering greater stability and bolstering investor confidence, thus attracting increased market participation.

Moreover, SEBI gains enhanced capabilities for monitoring and regulating market activity, curbing manipulative practices, and upholding market integrity. By diminishing the impact of market rumours, the framework contributes to reduced overall market volatility, cultivating a more stable investment climate.

Furthermore, it fosters investor trust by fostering fairness and transparency, thereby encouraging broader engagement in the stock market. Lastly, by ensuring that prices align more closely with the true underlying value of securities, the framework enhances market efficiency, aligning with the primary objectives of market regulators. This framework strengthens SEBI's regulatory arsenal, empowering it to safeguard market integrity and thwart manipulative behaviours effectively.

The significance of the new rules becomes evident when considering corporate restructuring, such as buybacks, takeovers, or capital raising. These rules tie the execution price of such actions to recent share price movements. In some cases, abrupt and significant spikes in price could jeopardize deals. Therefore, the capital market regulator has implemented a mechanism to confirm rumours and ensure deals are not unduly influenced by stock price fluctuations. While there's always potential for refinement through experience, these new rules appear to offer advantages to all involved parties.

 

Some tricky rules

The new regulations mandate companies to monitor mainstream media for news regarding impending corporate actions. If such news or rumours coincide with significant stock price movements, companies must issue confirmations or denials to the stock exchange within 24 hours. Stock price fluctuations caused by confirmed events will not be factored into benchmark price calculations for events like mergers, takeovers, de-listings, and preferential offers.

However, SEBI's attempt to implement these rules in 2023 faced challenges due to the lack of specific definitions for terms such as rumour, mainstream media, material stock price movement, and impending events. The SEBI collaborated with the Industry Standards Forum, comprising industry chambers, to clarify these aspects, but the resulting definitions have made the rules overly complex.

The SEBI initiated this overhaul for two main reasons. Firstly, to eliminate subjectivity in determining material events. Under the earlier version of the Listing Obligations and Disclosure Requirements (LODR) Regulations, companies were required to disclose events or information deemed material by their boards, based on the expected impact on turnover, profits, and net worth. However, the subjective nature of this estimation led to inconsistent reporting of material events. By obligating companies to respond to events reported in mainstream media, the SEBI aims to broaden the coverage of material events reporting. Secondly, to prevent price manipulation through unfounded rumours.

Despite the merits of these objectives, concerns remain about how rumour verification will be implemented in practice. For example, ‘mainstream media' is defined by listing the top 20 English dailies, six business channels, five business newspapers, etc., thereby excluding many other publications, including social media, where rumours often originate. Moreover, determining what constitutes a ‘material price movement' involves categorizing stocks by their absolute prices and setting specific thresholds of 5, 4, or 3 per cent for each category, after accounting for index changes. Since stock prices may not always adhere to such rigid definitions, important events might go unnoticed. Additionally, applying these regulations only to the top 250 listed companies exempts smaller firms, which are more susceptible to rumour-mongering and price manipulation, from scrutiny. A broader, principle-based approach to regulation might have been more effective than delving into such minutiae.

 

Way Forward

While the unaffected price framework presents considerable potential, it also comes with its share of challenges and limitations. One such obstacle is the difficulty in accurately pinpointing market rumours and gauging their influence on prices, particularly when dealing with nuanced or intricate rumours. The suggested methodology might require ongoing refinement and adaptation to maintain its efficacy and precision. Moreover, the successful execution and enforcement of the framework will be paramount for its effectiveness. Despite these hurdles, the prospective advantages of this framework are significant, positioning it to be a pivotal force in moulding the trajectory of the Indian stock market in the future.

 

The writer is a tax specialist, financial adviser, guest faculty and public speaker based in Goa. He can be reached at panditgoa@gmail.com

or 9822983420

 

 

Northlines
Northlines
The Northlines is an independent source on the Web for news, facts and figures relating to Jammu, Kashmir and Ladakh and its neighbourhood.

Share post:

Popular

More like this
Related

US to supply weapons directly to Ukraine’s fascist Azov battalion

Nato rehabilitates Neo-Nazi militia that drove 2014 Euromaidan coup By...

When One Dares a PM for Public Debate

by Dr. Jaipal Singh This author has been watching this opposition...

Elections 2024 and Viksit Bharat

by Gollamudi Radha Krishna Murty Now that the national six-week boisterous...

Nepali PM Dahal’s daughter at Modi’s swearing-in event: Heir in line!

Family nepotism causing discontent among party ranks, resignations By Arun...