After many postponements, a new Securities and Exchange Board of India (SEBI) framework requiring listed companies to verify market rumours is set to take effect from June 1. It will first apply to the top 100 listed companies and then extend to the top 250 by December 1. Under the new rules, companies will be required to track news about impending corporate actions in the mainstream media.
If the news/rumour is accompanied by material stock price movements, then the company will need to issue a confirmation or denial to the stock exchange within 24 hours. Stock price moves caused by confirmed events will be excluded for the purpose of calculating benchmark prices in situations such as mergers, takeovers, delisting and preferential offers. However, SEBI’s attempt to implement this in 2023 led to a demand for specific definitions of terms such as rumour, mainstream media, material stock price movement and impending event. SEBI roped in the Industry Standards Forum consisting of the industry chambers to flesh out these aspects, but the definitions have ended up overly complicating the rules.
SEBI seems to have initiated this overhaul for two key reasons. The first is to remove subjectivity in the determination of material events. Under the earlier version of Listing Obligations and Disclosure Requirements (LODR) Regulations, every listed company was required to disclose any event or information which, in the opinion of its Board, was material. Materiality was determined based on the likely impact of the event on the company’s turnover, profits and net worth. But as such estimation involved subjectivity, material events reporting by companies was patchy at best. By casting an obligation on companies to respond to events reported in mainstream media, SEBI is hoping to widen the coverage of material events reporting. The second objective is to prevent price rigging through unsubstantiated rumours.
While the above objectives are sound, there are doubts on how the rumour verification will take shape in practice. For instance, ‘mainstream media’ has been defined by listing out the top 20 English national dailies, six business channels, five business newspapers and so on. This leaves out many other publications apart from the social media — which is a fertile ground for rumours. To decide what constitutes a ‘material price movement’, stocks will be classified by their absolute prices (below ₹100, ₹100-200 and above ₹200) and price movements will be deemed material only if they exceed specific thresholds of 5, 4 or 3 per cent for each category, after factoring in index changes. As stock prices may not behave in such a clearly defined fashion, important events may slip through the cracks. Applying these regulations only to the top 250 listed companies also allows smaller firms, which are most prone to rumour-mongering and price rigging, off the hook. Broader, principle-based regulations may have served the purpose better than getting into such details.