MC Explains: Sebi rule on rumour verification. Here's all you need to know

The new rules assume a lot of significance when seen in the context of corporate restructuring including buybacks, takeovers, or capital raising as the price at which such corporate actions are executed are linked to the recent share price movement

Ever since the Securities and Exchange Board of India (SEBI) released norms related to rumour verification by listed companies on May 21, the new set of rules have been in the news.

Market participants have welcomed the framework as it allows entities to go ahead with M&As or fund raising activities without factoring in the spike in the stock price if the rumour appearing in any mainstream media is confirmed by the company within 24 hours.

Here’s all that you need to know about the new rules and what constitutes a rumour or mainstream media and how do other regulators address such concerns.

What are the new rules all about?

On May 21, SEBI issued a circular, stating that industry standards for verification of market rumours have been formulated based on the deliberations of the Industry Standards Forum that comprises of representatives from three industry associations -- ASSOCHAM, CII and FICCI.

Simply put, the framework stated that if there is a rumour related to an entity and the company confirms the rumour within 24 hours of the event or information being out in the mainstream media, then the ensuing change in the stock price will not be factored to ascertain the pricing of, among other things, preferential issue of shares, QIPs, buyback, takeover, delisting or any other action for which SEBI rules stipulate that the volume weighted average price for a certain period has to be taken into account.

Also read: Sebi’s new rule to limit impact of news leaks on deal pricing will bring cheer to dealmakers, companies

In other words, the corporate action can still go ahead basis the unaffected price provided the rumour appearing in the mainstream media has been confirmed, as mentioned earlier, within 24 hours.

What constitutes mainstream media?

This could be the tricky part from a compliance perspective for a company as there would be a number of national and international media that a firm will have to track.

For the purpose of this framework, top 20 English national dailies with a minimum circulation of one lakh have been taken into account – only those that are registered with the Directorate of Audio Visual Publicity (DAVP), Ministry of Information & Broadcasting and also audited by the Audit Bureau of Circulation, or by an auditor appointed by the Registrar of Newspapers for India (RNI).

Further, five business dailies along with a few regional dailies – subject to certain conditions – have also been included along with seven business channels. Thereafter, eight other news sources – a mix of news wires, online platforms and magazines – have also been included.

More importantly, social media platforms like WhatsApp, X (Twitter), Instagram, Facebook and Telegram etc have been excluded from the definition of mainstream media.

In terms of international media, top financial dailies from US, Singapore, Mauritius, Luxemburg and UK – top five jurisdictions in terms of FPIs – qualify as mainstream media though companies will have to identify foreign jurisdictions where they have material business operations and identify list of business/financial news sources.

How do other countries address this concern?

Rumour verification is an important aspect of the capital market ecosystem across the world including some of the most developed and deep markets. In the US for instance, there is a mechanism wherein rumours can be confirmed but still confidentiality can be managed. This is done by way of companies confirming the rumour only to the exchanges and not with the public at large.

In other jurisdictions, including the UK and Hong Kong, there is no clearly laid down timeline for confirming a rumour but they also allow “delayed disclosure” in case legitimate interests of a company are being compromised. They, however, add that such delay should not mislead the public.

Why is the new framework important?

The new rules assume a lot of significance when seen in the context of corporate restructuring including buybacks, takeovers, or capital raising as the price at which such corporate actions are executed are linked to the recent share price movement.

At times, the sudden and huge spurt in the price could act as a deal breaker and hence the capital market regulator decided to put in place a mechanism wherein the rumour can be confirmed as well and the deal would also not get affected due to the way the stock price reacts.

While there is always room for improvement based on actual experience, most market participants believe the new rules look to be a win-win for all stakeholders.