Is that True? Verification of Market Rumours made Mandatory. - MMJC

Background:

Generally speaking, verification of reported events or information which may have material effect on the listed entity is essential to avoid establishment of a false market sentiment or impact on the securities of the entity. In recent years, a growing influence on market sentiments is being noticed of not just print media, but also television and digital media which sometimes contribute to sudden price movements of specific scrips on stock exchanges based on unverified information about the listed entity. In order to stay contemporary, listed entities need to keep pace with all forms of media, both print and electronic / digital and ensure prompt verification of such rumours, so that they can respond to such rumours quickly before the market price their scrips get impacted by such rumours, one way or another.

Introduction to the Amendment:

Securities and Exchange Board of India (‘SEBI’) vide its amendment notification dt: June 14, 2023, amended Regulation 30(11) of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2023 [‘LODR’] and inserted provisos which are mandating rumour verification by certain listed entities as mentioned therein and as elaborated in below paras. These listed entities would now be required to establish a robust mechanism for rumour verification and timely dissemination of accurate information. Considering the fragmentation and cryptic reach of electronic and social media presently, (viz. 1000+ print and digital media means in India and abroad) rumours may be spread in 360 degrees, and it practically stands challenging for a listed entity to respond.

The existing provision before the amendment is stated as follows:

Regulation 30(11) of the LODR: The listed entity may on its own initiative also, confirm or deny any reported event or information to stock exchanges(s).

Currently (before the amendment becoming effective), rumour verification is a voluntary compliance. But it was applicable to all listed entities and not restricted to certain listed entities. Now SEBI has shifted this compliance requirement from voluntary to mandatory to certain categories of listed entities as mentioned below:

Regulation 30(11) – After Amendment:

After sub-regulation 11 the following provisos and Explanations shall be inserted namely:

Regulation 30(11) of the LODR: The listed entity may on its own initiative also, confirm or deny any reported event or information to stock exchanges(s).

“Provided that top 100 listed entities (with effect from October 01, 2023) and thereafter top 250 listed entities (with effect from April 01, 2024)  shall confirm, deny or clarify any reported event or information in the mainstream media which is not general in nature and which indicates the rumours of an impending specific material event or information in terms of the provisions of this regulation are circulation amongst the investing public, as soon as reasonably possible but not later than twenty hours from the reporting event or information.

Provided that if the listed entity confirms the reported event or information, it shall also provide the current stage of such reported event or information.

Explanation: The top 100 and 250 listed entities shall be determined on the basis of market capitalization as at the end of the immediately preceding financial year”

From the above amendment, it can be seen that the requirement to provide any verification on rumours, which was earlier voluntary for all listed entities, has been made mandatory for top 250 listed entities in a phased manner as mentioned in the above-mentioned proviso.

Anomalies and questions relating to rumour verification:

• Specific events or information only needs to be clarified– It needs to be highlighted here that what needs to be clarified is rumours relating to specific event or information in the mainstream media. It is not mandatory to confirm or deny or clarify rumours that are general in nature. Question thus arises is how would listed entities be able to demarcate between specific event or information and general information pertaining to a listed entity? For this it would be important for listed entity to evaluate whether majority details of the event or information is being spoken about in mainstream media OR is it only a probability, without any definitive details, which is being discussed in mainstream media? It is not defined or explained what would ‘not general in nature’ mean? So, this analysis will have to be done by listed entities on a case-to-case basis.
• Is rumour verification once applicable always applicable– Rumour verification is being made applicable to listed entities falling under top 100 and top 250 based on market capitalisation as at the end of immediately preceding financial year. It needs to be highlighted that as per Regulation 3(2) of LODR Regulations “The provisions of LODR Regulations which become applicable to listed entities on the basis of market capitalisation criteria shall continue to apply to such entities even if they fall below such thresholds.” Hence it can be seen that once provisions of particular regulations become applicable on the basis of market capitalisation then it shall continue to remain applicable. So even if a listed entity falls outside market capitalisation of top 250 or 100 in future, then also it will have to continue to comply with same.
• Whether it is necessary to ‘confirm, deny or clarify and mention specify stage of event’ when clarification on market rumours is raised by the stock exchange under regulation 30(100 of LODR Regulations? Regulation 30(10) of LODR Regulations specifies that the listed entity shall provide specific and adequate reply to all queries raised by stock exchange(s) with respect to any events or information. Regulation 30(11) of LODR Regulations provides for voluntary rumour verification by listed entities except for top 100 and top 250 listed entities. Regulation 30(10) uses the word “shall” and it is applicable for all listed entities. So, if clarification on market rumours is raised by stock exchange under Regulation 30(10) of LODR Regulations, then it is mandatory on the part of any listed entity, irrespective of market capitalization, to provide specific and adequate reply to all queries raised by stock exchange(s).
  • It may be noted that SEBI has added a proviso about ‘confirm, deny or clarify specific event or information’ in Regulation 30(11) and not Regulation 30(10). Hence, in cases where clarification on market rumours is raised by the stock exchange under Regulation 30(10) of LODR Regulation, then irrespective of whether the rumour is general or specific is nature, listed entities are bound to provide specific and adequate replies. However, listed entities are not bound to confirm, deny, or clarify about the rumour, unless it is of a specific nature.
  • Further, if the rumour is specific in nature, then irrespective of whether the stock exchange has asked for clarification or not, the top 250 listed entities will need to ‘confirm, deny or clarify specific event or information’.
  • Further, there may be scenarios where a listed entity which is not covered in top 250 listed entities may be confirming, denying, or clarifying specific event or information on a voluntary basis. In such cases also, if the listed entity is confirming the rumour, then it is bound to provide the current stage of such event or information, even if it is making this disclosure voluntarily.

• Word ‘clarify’ added as against word ‘confirm or deny’ under Consultation Paper-Consultation Paper dt: November 12, 2022, on Review of disclosure requirements for material events or information under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 had proposed to ‘confirm’ or ‘deny’ rumours. But in the amended LODR Regulations, SEBI has now added words ‘confirm or deny or clarify’ under Regulation 30(11). As per SEBI Board note for its Board meeting dated 29^th March 2023, SEBI had received representations stating that a rumour or reported event / information is false from the standpoint of the listed company but would be valid from the standpoint of a third party which listed entity may not be in knowledge of. In such situations listed entities shall be allowed to clarify on the event or information. SEBI acceding to this request added the word ‘clarify’ under Reg. 30(11) of LODR Regulations.

Conclusion:

On perusing the above measures for rumour verification, it becomes clear that specific provisions relating to rumour verification would go a long way in reducing information asymmetry in market.

The Article is written by

CS Hasti Vora – Research Associate – hastivora@mmjc.in

CS Vallabh Joshi – Senior Manager – vallabhjoshi@mmjc.in,

CS Deepti Jambigi Joshi – Partner – deeptijambigi@mmjc.in

The article is published at Taxmann

https://www.taxmann.com/research/company-and-sebi/top-story/105010000000023086/is-that-true-verification-of-market-rumours-made-mandatory-experts-opinion