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

Sebi issues new rules on confirm or deny rumours

Listed companies and deal-makers can breathe easy now if the news of an ongoing deal is leaked. The impact on price will be far more muted.

Earlier this week, market regulator the Securities and Exchange Board of India (Sebi) issued a circular, saying if a company confirms or denies a deal-related market rumour within 24 hours, any impact on the share price on account of the leak would be excluded from deal pricing. The move is aimed at nudging companies towards better disclosure standards when it comes to deals.

The rules will largely benefit companies looking at private placements through the institutional placement route along with cases where the company is acquiring another firm, legal experts say.

All capital market offerings made by listed companies are subject to pricing norms, which consider the average price of the stock over a period of one to six months, depending on the type of offering.

Leak-proofing the deal

In the past, some merger and acquisition (M&A) deals involving listed companies were affected by the rising price of the stock after news of impending agreements were reported in the media.

Hexaware, majority owned by private equity firm Barings PE Asia, was one such case where the stock price ran up after news of deal talks led to buyers pulling out of the deal on multiple occasions. The company eventually delisted and then sold to Carlyle Group.

Now, if a rumour pertaining to the deal comes in the public domain and the company verifies it, then for purposes of calculation of average weighted price, price movement of the stock on the day the rumour was leaked and the following day will not be considered.

Sebi has already entrusted industry bodies to come up with finer details through common industry standards.

“The rumour verification amendments have brought in significant clarity and objectivity and are expected to be quite helpful for deal-making as well for compliance functions of listed companies,” said Anchal Dhir, Partner, Cyril Amarchand Mangaldas.

“Also the price protection framework introduced is a welcome development as one of industry’s key concerns was statutory linkage of pricing of listed company deals with pre-deal announcement traded price and the impact of rumour verification on pricing of such deals.”

The rules have been brought to encourage companies towards proactive disclosure of deal-related information. Sebi had proposed rules for confirmation of such rumours two years ago. However, the circular wasn’t implemented due to industry’s concerns that any premature disclosure could have an adverse impact on the stock price.

"I believe this is a great move by SEBI. By tackling the disruptive influence of market rumors on pricing, the Regulator is trying to ensure fairer and more transparent pricing mechanism." said V. Prashant Rao head, ECM Investment Banking, Anand Rathi Advisors. "This initiative will not only safeguard investor interests but will also benefit Companies through a more accurate pricing environment, shielded from unwarranted speculation."

To address the concern, Sebi floated a consultation paper in December 2023, proposing tweaks to the earlier draft, including a change in the definition of what is to be construed as a rumour.

It was in this second consultation paper that Sebi proposed to exclude stock price movement after rumour confirmation while calculating the offer price.

The rules will be applicable for the top 100 listed companies from June 1, and top 250 listed companies from December 1, 2024.

“This will enhance price certainty for large public M&A deals. Under the Takeover Code, the price for an open offer is based on the stock price in the period leading-up to deal signing.  Premature leaks of large transactions can distort stock prices and impact price certainty for acquirers,” Sanjam Arora, Partner, Trilegal, said.