The Securities and Exchange Board of India (SEBI) released a consultation paper on December 28, 2023 amending its regulations with respect to the verification of market rumours (Consultation Paper). Market rumours refer to unverified information or speculation that circulate in the media or social platforms and may influence the trading behaviour of investors.

The paper proposes that listed companies verify rumours only if they pertain to material events or information and only if there are significant movements in their share prices. But will this be a boon, protecting investors from manipulative whispers, or a bane, stifling legitimate discussion and harming market efficiency? This blog delves into the intricacies of SEBI's proposal, analysing its potential benefits and drawbacks for investors to direct the market rumours.

Proposed Shift in Rumour Verification
The Consultation Paper proposes four key amendments to the existing regulations on market rumour verification under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 ("LODR Regulations"). The first proposal is to limit the scope of rumours that require verification by the listed entity to those that pertain to material events or information as defined under Regulation 30 of the LODR Regulations.

This would exclude rumours that are based on general market conditions, macroeconomic factors, industry trends, etc. In addition to the existing criteria of 'material event or information,' the paper suggests for introduction of a threshold for price movement to trigger the verification requirement. Under this proposal, listed entities would not be obligated to verify rumours unless they result in a significant fluctuation in the company's stock price within a specified timeframe.

The current regulation stipulates a 24-hour timeframe for companies to verify and respond to rumours. The Consultation Paper recommends a relaxation of this timeframe, taking into account the complexity of the investigation and the availability of information. Presently, clarifications issued by companies are solely disseminated through stock exchanges. The Consultation Paper suggests expanding this requirement by mandating companies to provide clarifications through their websites and other relevant channels.

Unintended Consequences of the Disclosure Mandate: Analysing the issue of response in a 'timely manner'

One of the questions sought to be answered in the Consultation Paper is whether it should be mandatory for Promoters, Directors, Key Managerial Personnel, and, Senior Management to furnish sufficient, precise, and prompt responses to inquiries or requests for explanations raised by the listed entity. This requirement aims to ensure compliance with the stipulations outlined in Regulation 30(11) of the LODR Regulations.

The mandate aiming to hold promoters, directors, and other stakeholders accountable is accompanied with several advantages. These include enhanced transparency and accountability of the senior management. It can also result in reducing market manipulation, insider trading, or rumour-mongering. However, the enforcement of this mandate is not devoid of negative externalities. If the information confirms that the query so raised or the explanation sought is groundless, the verification would be an uncalled-for and redundant step. This has the potential to expose a company as well as its management to unnecessary legal or regulatory risks. The ambit of 'material information' is vast and thus, mandatory verification may serve to be a bootless errand as avoidable and irrelevant queries have to be answered by the senior management.

Although compliance with Regulation 30 (11) is primary, undertaking such steps to ensure compliance could be menacing. The competitive advantage or strategic interests of companies may also be affected if the disclosed information is sensitive or confidential. On one hand, the disclosed information can enhance transparency, but it may also create information overload or confusion for the investors and the public.

Certain sensitive information, if disclosed prematurely, could harm the company's competitive edge. Reliance Jio's 5G network launch strategy involved strategic partnerships and technological advancements such as acquiring the highest spectrum in the country , developing indigenous 5G technology and collaborating with global players like Qualcomm and Google. Hence, premature disclosure of these details could have given competitors an edge. This mandate may also be misused by malicious actors who submit frivolous inquiries to burden and harass management. A proper mechanism to safeguard against such frivolous inquiries and harassment must be developed.

In 2023, rumours regarding Zomato's potential delisting surfaced online. While some inquiries might have been genuine, others appeared malicious, aimed at harassing management and creating unnecessary confusion among investors. While open communication within the company is crucial, mandatory disclosure in response to every rumour, regardless of its source or intent, could have unintended consequences.

Protecting Sensitive Information Even Without Verification: Analysing the treatment of information as UPSI
Another query posed in the Consultation Paper is whether, if a listed entity designates certain information as undisclosed price-sensitive information ("UPSI") and does not verify a market rumour related to that information, such information should still be categorized as UPSI rather than being considered 'generally available' information.

Insider trading regulations uphold fairness in the market by prohibiting the exploitation of UPSI. However, when rumours regarding classified information circulate, determining their status and the consequent disclosure requirements presents a complex challenge. These regulations, notably the SEBI (Prohibition of Insider Trading) Regulations, 2015 and the LODR Regulations, 2015, specifically Regulation 30 concerning the disclosure of events or information, play a pivotal role in this domain. Timely and accurately disclosing material information like potential regulatory actions is crucial to prevent market manipulation based on rumours.

Handling such rumours entails various potential implications. Treating them as UPSI requires recognition of potential insider trading liability if the information is utilised for trading. Yet, failing to authenticate the rumour could cast doubts on its authenticity and the rationale for its classification as UPSI. On the other hand, deeming the rumour as 'generally available' necessitates careful deliberation. If the rumour gains extensive traction, the information may lose its price-sensitive nature. However, determining the level of dissemination necessary for information to be considered 'generally available' remains ambiguous.

Numerous concerns and challenges arise in this context. One of these concerns is that companies may grapple with substantial compliance burdens, pressured to verify and disclose every rumour to avoid potential allegations of withholding UPSI. There is also a risk of market manipulation, as some individuals may spread rumours to manipulate stock prices and take advantage of unequal access to information.

In response to these challenges, several recommendations emerge. Clear guidance from SEBI is imperative, particularly regarding the treatment of unverified rumours and establishing a threshold for information to be deemed 'generally available'. Companies should adopt a risk-based approach, taking into account the materiality of the information, its potential impact, and the extent of the rumour's dissemination, to determine whether disclosure or verification is warranted. The establishment of clear internal protocols for identifying, assessing, and responding to rumours involving classified information is also crucial.

International Reference
Drawing on international experience can be insightful in this regard. In the United States, the Securities and Exchange Commission's Regulation Fair Disclosure ("Reg FD") parallels India's LODR Amendments, aiming to curb selective disclosure of material non-public information. Reg FD mandates simultaneous public or selective disclosure under confidentiality agreements, similar to India's insider trading regulations. Companies may face reputational damage and regulatory penalties for non-compliance. The challenges include defining & "material non-public information" and ensuring enforcement consistency, highlighting the balance between transparency and protecting business interests.

Conclusion
The proposed mandate to require prompt responses from senior management to inquiries under Regulation 30(11) of the LODR Regulations aims to enhance transparency and accountability. However, potential negative consequences, such as exposing companies to legal risks and burdening management with frivolous inquiries, suggest careful consideration and amendments to ensure a balanced implementation.

The recommendation which states the response should be 'timely', does not spell out or define the minimum or maximum time. This is a double-edged sword as it may compel the company to respond hurriedly or drag out the response for a prolonged time. Therefore, clearer guidelines are the need of the hour.

It is evident that the adverse implications of such a directive may surpass the potential positive outcomes. The concept of the directive is constructive, yet it necessitates modifications to ensure there is no bias against the senior management. Furthermore, it would be beneficial to provide the senior management with a specific timeframe to respond. This is because, though the requirement of a 'timely manner' gives flexibility, it also brings in uncertainty. There is a need to specify how many days or weeks this requirement actually envisages. A specific timeline of days or weeks will be more beneficial than an ambiguous response in a 'timely manner'. This would aid in establishing clear expectations and minimizing potential misinterpretations.

Protecting sensitive information and maintaining market fairness requires a nuanced approach. This involves acknowledging challenges, advocating for regulatory clarity, and implementing robust internal protocols. Through these measures, companies can effectively navigate the complexities of unverified rumours, upholding market integrity without compromising confidentiality.

End-Notes:

• https://www.sebi.gov.in/reports-and-statistics/reports/dec-2023/consultation-paper-on-amendments-to-sebi-regulations-with-respect-to-verification-of-market-rumours_80237.html
• https://business.outlookindia.com/policy/sebi-extends-24-hour-market-rumour-response-timeline-for-large-mid-cap-companies
• https://www.business-standard.com/companies/news/jio-s-5g-play-how-the-strategy-varies-from-other-indian-and-global-telcos-123103000638_1.html
• https://startuptalky.com/jio-5g-case-study/
• https://business.outlookindia.com/corporate/investor-alert-zomato-ceo-refutes-2-billion-acquisition-speculations
• https://www.thehindu.com/news/national/reliance-jio-to-invest-2-lakh-crore-in-5g-rollout-in-metros-by-diwali/article65825714.ece
• https://www.sciencedirect.com/science/article/pii/S0148619523000231

Written By:

• Anushree Srivastava and
• Varuni Gawai