Sebi's rumour verification rule and its implications
Jun 3, 2024
Synopsis
A new Sebi rule requires top listed companies to confirm, deny, or clarify market rumours reported in mainstream media, focusing on material impacts on share prices.
A new rule by the capital market regulator Securities and Exchange Board of India (Sebi) requires top listed companies to confirm, deny or clarify market rumours reported in mainstream media from June 1. Reena Zachariah looks at what it means for these companies:
What's the new Sebi rule on market rumour verification?
The top 100 listed companies are required to confirm, deny or clarify market rumours reported in the mainstream media. However, they needn't respond to all kinds of rumours, except those that have a material impact on their share price movements. These include matters such as mergers and acquisitions, health issues of managing directors, leadership changes, and corporate frauds, among other things. They are required to clarify these rumours before the next trading day or within 24 hours of material price movements, whichever is earlier.
Do companies need to CLARIFY every rumour floating around?
They have to only clarify those market rumours that have a material impact on their stock price movements. The purpose of this new rule by Sebi is to avoid false narratives that would impact share prices positively or negatively.
"Rumours appearing on social media platforms need not be clarified," said Sunil Sanghai, founder of NovaaOne Capital, an investment banking firm.
Why is this rule significant for companies and investors?
An important aspect of this new rule on market rumour verification is that price calculations for corporate actions like share buybacks and open offers will exclude material share price movements caused by confirmed rumours.
How will it work in deals and share sales?
Price calculations for corporate actions like the preferential issue of shares, qualified institutional placements (QIPs), delisting offers and share buybacks are based on stock market prices. When a company's stock price gets affected following a rumour confirmation, it can consider the 'unaffected share price' for calculating the price of such transactions. An unaffected share price is the price before the confirmation of the rumour.
"The rumour verification framework has attempted to account for stock price volatility for purposes of calculation of share price for various transactions such as buybacks, QIPs and preferential allotments. The framework permits the calculation of share price for such transactions by excluding the price movement in the stock due to such rumours during the period under consideration for calculation," said Abhimanyu Bhattacharya, partner at Khaitan & Co, a law firm.
What if the market rumours are on promoters, directors and kMP of the listed company?
In that case, the promoters, directors and key managerial personnel (KMP) are obliged to respond to the market rumours. They will have to confirm, deny or clarify the rumours to the listed company, which in turn will inform the stock exchanges.
What if a listed company doesn't COMPLY WITH THIS rule?
Companies which do not comply with these rules will have to pay a penalty to stock exchanges.
[The Economic Times]
