By- Shruti Srivastava & Ekta Agarwal
INTRODUCTION
In a recent development, the Securities and Exchange Board of India (SEBI) has introduced the SEBI (Listing Obligations and Disclosure Requirements) (Second Amendment) Regulations, 2023 (hereinafter ‘Amendment Regulations 2023’). These regulations entail a series of amendments to the existing framework governing the listing obligations and disclosure requirements for listed entities. The primary objective behind these amendments is to bolster corporate governance practices. The Amendment Regulations 2023 introduces a new regulation under Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (hereinafter ‘LODR Regulations’) concerning market rumors, which refer to unverified information or speculation circulating in the market regarding a particular company or its securities. Before the amendment, the listed company had the discretion to either confirm or deny any market rumor concerning it. However, with the introduction of the Amendment Regulations 2023, top 100 listed companies (with effect from October 1, 2023) and top 250 listed companies (with effect from April 1, 2024) are mandatorily required to verify these market rumors. In this article, the authors attempt to shed light on the amendment concerning market rumors to understand whether the amendment is a necessity of the hour or a regulatory flaw.
MARKET RUMORS IN INDIA: POSITION, THEN VS NOW
Regulation 30 of the LODR Regulations mandates a listed entity to disclose such events or information that are considered material, including but not limited to acquisition, investments and investigations. Paragraph A of Part A of Schedule III to the LODR Regulations contains those events that are mandatory to be disclosed. On the other hand, Paragraph B of Part A of Schedule III to the LODR Regulations contains events to be disclosed based on a subjective test of materiality. Regulation 30(11) of the LODR Regulations talks about market rumors. Before the amendment, market rumours in the Indian market were dealt with in two ways – either the entities under the Indian market could proactively confirm or deny any event or information to the stock exchange based on their discretion, or the stock exchange could assert its role by requesting the entities to provide clarifications on the reported event or information.
However, the Amendment Regulations 2023 has introduced an additional provision to Regulation 30(11) of the LODR Regulations, according to which the top 100 listed companies, starting from October 1, 2023, and subsequently the top 250 listed companies, effective from April 1, 2024, will be obligated to confirm, deny, or provide clarification on any specific reported event or information in mainstream media, wherein the mainstream media may include a) newspapers registered with the Registrar of Newspapers for India b) new channels permitted by Ministry of Information and Broadcasting under the Government of India c) content published by the publisher of news and current affairs content as defined under the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules 2021 d) newspapers or news channels or news and current affairs content similarly registered or permitted or regulated, as the case may be, in jurisdictions outside India. Furthermore, the confirmation, denial, or clarification must be provided promptly, within a maximum time frame of twenty-four hours from the initial reporting of the event or information.
The primary objective of the amendment is to effectively and expeditiously address and refute rumours to establish stability within the market and mitigate the potential negative impacts of unwarranted speculation. By way of this requirement of verifying rumors, the amendment intends to enhance transparency within the operations of listed entities and promotes fairness among all participants in the market.
THE ADDITION OF THE PROVISO: DOES IT PROVIDE ENOUGH?
While the amendment’s objective has been discussed, it is crucial to critically examine whether the same could be achieved. In the adjudication order in respect of Shri. N. Narayana and Shri. V. Natarajan in a matter of Pyramid Saimira Theatre Ltd, SEBI clearly stated, “planting false or misleading news which may induce the public for selling or purchasing securities would also come within the ambit of unfair trade practice in securities.” The order stated that premature disclosures of information can potentially contravene the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations). Regulation 4(2)(f) of the PFUTP Regulations states that if any information published or reported by a person dealing in securities is not true or the person making it does not believe it to be true, those dealings shall be considered fraudulent or unfair trade practice.
In the Reliance Industries Limited case, a report was published by Financial Times, London, dated March 24, 2020 which talked about the expected investment from Reliance Industries Limited (hereinafter ‘RIL’). SEBI issued an order on June 20, 2022 penalizing RIL for failing to clarify a market rumour regarding the Jio-Facebook deal. RIL justified its non-disclosure by stating that, when the articles were published, there was only a signed term sheet for the deal, and no definitive transaction documents were in place. However, SEBI disregarded this rationale, emphasising the importance for listed companies to clarify, confirm, or deny market rumors to maintain market information symmetry. SEBI implied that to ensure more transparency and coherence in the market structure, it is always a better idea for the listed entities to confirm or quash any news or information that can affect the market stability rather than just letting the rumour persist.
The logic and reasoning given by SEBI was challenged, and the case was subsequently appealed to the Securities Appellate Tribunal (hereinafter ‘SAT’), which, in its order dated September 27, 2022, stayed SEBI’s order. During the proceedings at SAT, a significant issue concerning the feasibility of any listed company responding to every piece of information circulated globally was raised. In addition to this, one question that arose for consideration was whether the term “may” juxtaposed with the term “shall”, as stated in Regulation 30(11), should be interpreted as mandatory or discretionary.
Even though the regulation has been brought to provide some symmetry in the information market, achieving the aim and objective of the regulation seems to be Herculean in nature as the scope of this regulation is so wide. In the first instance, it might appear to be a positive development aimed at mitigating investor speculations and short-term fluctuations in share prices of prominent listed companies that stem solely from rumours. However, the requirement to confirm, deny, or clarify every event or information reported in mainstream media, particularly those indicating rumours, may have unintended consequences. For instance, despite the Adani conglomerate’s eventual denial of the Hindenburg reports, their release sparked a substantial disruption in the market and caused significant fluctuations in their shares. Further, the acts i may potentially generate further speculation and contribute to increased price volatility. The fact that motivated market participants could potentially exploit this rule to their advantage by deliberately spreading speculations about a particular listed company, publishing them as opinion pieces through any chosen medium, and subsequently demanding that the company confirm, deny, or provide clarification on such speculations can also not be denied.
ADDRESING RUMOURS: THE UNITED STATES APPROACH IN GLOBAL JURISDICTION
Market rumours have been discussed in different jurisdictions across the globe. The US securities market commands an unrivalled position in the global financial landscape, and there is nothing new about it. Rule IM-5250-1 of the NASDAQ Listing Rules, which pertains to the disclosure of material information includes provisions that address the denial of false or inaccurate rumours and the confirmation of negotiations or developments in the event of accurate rumours being reported in the media. Even Section 202.03 of the NYSE Listed Company Manual regarding the management of rumours or unusual market activity stipulates that a company listed on the exchange is required to address rumors or abnormal changes in stock prices or trading volume.
However, the US Second Circuit in the case of SEC v. Texas Gulf Sulphur Co., established an old but widely accepted notion that when a corporation faces the choice between staying silent and allowing false rumours to spread or making a voluntary communication that carries the risk of potential legal consequences due to unintentional errors or inadequate assessment of facts, the corporation is likely to choose the former option.
Moreover, numerous articles are frequently published in the media regarding the perspectives, expectations, and preliminary assessments made by research analysts, stock brokers, media organizations, and other relevant entities. These articles typically focus on various aspects, such as the financial performance of listed entities, product performance, corporate actions (such as bonus shares, dividends, and buybacks), as well as recommendations to buy or sell securities associated with listed entities. It would be impractical for a company to confirm or deny all the rumours. The amendment might also yield counterproductive consequences by needlessly amplifying market speculation at an early stage.
CONCLUSION
Through this amendment, SEBI eliminated the provision containing “may” to protect the investors better. The presence of such rumors in the market often leads to significant selling of securities and buy-offs, consequently affecting existing shareholders. An example illustrating this impact is the case of Hindenburg Research’s report on Adani, as discussed previously.
The implementation of efficient communication channels is imperative to promptly address rumors and mitigate any potential dissemination of misinformation that could potentially impact the stability of the market. However, given the wide scope of the regulation, it poses a formidable challenge to implement the same effectively. The successful implementation of the regulation requires a fundamental change in both approach and mindset.
( Shruti Srivastava & Ekta Agarwal are law undergraduate at National Law University and Judicial Academy, Assam. The author may be contacted via email at shruti@nluassam.ac.in and ekta@nluassam.ac.in).
Cite as: Shruti Srivastava & Ekta Agarwal, Addressing Market Rumors via the LODR Amendment: Necessity of the Hour or a Regulatory Flaw?, 13 September 2023) <https://rmlnlulawreview.com/2023/09/13/addressing-market-rumors-via-the-lodr-amendment-necessity-of-the-hour-or-a-regulatory-flaw/> date of access.
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