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SEBI's Revised LODR Regulations: Empowering Disclosure and Curtailing Market Rumors

In the wake of the unprecedented disruptions caused by the COVID-19 pandemic, the Indian securities market embarked on a remarkable journey of growth and expansion.

After the pandemic, the Indian stock market saw more capital and new Demat accounts, which got investors excited. SEBI Chairman Ajay Tyagi encouraged informed investing and smart decisions in these changing times. He highlighted the importance of research, cautioned against investing based on rumors, and emphasized the use of licensed intermediaries.

The caution coupled with the immediate effects of the judgment in the case of Reliance Industries Limited and Ors v. Securities and Exchange Board of India following which SEBI made a major change to Regulation 30(11) of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015.

This amendment, aimed at reducing market rumors and enhancing transparency, tightened company disclosure rules. Before the change, Regulation 30(11) allowed listed companies to choose whether to confirm or deny reported events. The amendment made SEBI's information sharing more proactive.

Under the updated LODR rules, the top 100 listed firms must promptly confirm, deny, or clarify non-standard media reports starting from October 1, 2023. This rule applies to significant events or information that could affect investors. Companies must respond within 24 hours of such reports to ensure accurate market information.

Starting April 1, 2024, this obligation will apply to the top 250 listed businesses, emphasizing SEBI's commitment to an open securities market. These top entities' market capitalization at the end of the last financial year ensures a dynamic and representative selection.

This blog explores SEBI's LODR changes and their impact on information disclosure in the Indian securities market. We assess the scope and ambit of the newly amended regulations coupled with the potential challenges faced by the entities in compliance with the regulations.

Reliance Industries Limited Case - The Genesis of Market Rumour Amendment
In the recent judgment of Reliance Industries Limited and Ors v. Securities and Exchange Board of India, it was gathered that there was a lot of news flow around Facebook investing in Jio in the months of March and April 2020 prior to the corporate announcement.

It was published in the Financial Times (FT), London for the first time on March 24, 2020 post market hours and thereafter was widely circulated in Indian media about the acquisition of Reliance's 10% stake by Facebook. Post-publication of said news articles, the scrip price of the Company went up by almost 15% on March 25, 2020.

Regarding the aforementioned, it was noted that Reliance Ltd. failed to adhere to the principles of fair disclosure of undisclosed price-sensitive information, which state that such information should be promptly made available to the public if it is accidentally, intentionally, or selectively disclosed. Reliance Ltd. also failed to provide any clarification on the matter.

The phrase "The listed entity may also, on its own initiative, confirm or deny any reported event or information to stock exchange(s)" from SEBI (LODR) Regulations, 2015 was highlighted. While ignoring the justification, SEBI believed that in order to maintain information symmetry in the market, a listed company should clarify, confirm, or refute market rumors.

However, the Securities Appellate Tribunal ("SAT") decided to stay SEBI's ruling after receiving an appeal of this judgment on September 27, 2022. How practical would it be for every listed firm to respond to every type of information that is distributed from around the world was one of the main issues the SAT discussed during the submissions before it.

The judgment indeed marks the genesis of the market rumor amendment on one hand but also questions the feasibility of the proposed step. The modification no doubt aims at greater accountability and transparency but at the cost of imposing burdensome duties on the listed companies.

Objective Behind The Amendment:
The objective behind bringing the LODR amendment is to make fair dealing in the securities market by focusing on the following aspects:

Increased Transparency: By requiring rumor verification, the amendment strengthens the transparency of how listed entities operate and helps keep the playing field level for all market players.

Investor Protection: By basing their judgments on factual and confirmed information, investors can reduce the likelihood that they would act on rumors that could cause unwarranted volatility.

Market Stability: The amendment intends to stabilize the market and avoid excessive speculation, which can have a negative impact on stock prices and investor confidence, by swiftly addressing and refuting rumors.

Scope And Ambit
The scope of the amended provision is different from that of the proposal in the consultation paper to accommodate the following material changes:

The top 100 and then the top 250 listed entities must confirm, refute, or clarify market rumors after the amendment. Market capitalization at the end of the previous financial year will select the top 100 and 250 listed firms.

A corporation may not know everything about a third-party rumor, according to the board note. A direct refutation of the rumors could affect the listed firm and investors. The company can 'clarify' the rumor instead of denying or confirming it as suggested in the consultation paper.

The board included domestic and foreign media sources in mainstream media due to the listed firms' global operations and investor base. Through the amendment, Regulation 2(ra) mainstream media includes newspapers registered with Indian newspaper registrars, news channels permitted under MIB of GOI, content permitted under IT Act, 2001, and all similar news sources permitted and regulated outside India.

The requirement states that market rumor should be particular to an impending material event/information circulating in the investing public.

The listed entity must confirm, deny, or clarify the market rumor within 24 hours of major media coverage. According to the new provision, the entity must report the present stage of the event or information it confirms.

Considering the industry concerns represented regarding the market rumors floating on social media and the hardship in accounting for them, the provision has specifically not included social media as a source of news within the definition of "mainstream media".

A market rumor will require confirmation, denial, or clarification only if it relates to a specific material event/information that is imminent or forthcoming and not otherwise. A general event/information without specific details will not be enough to trigger the application of the provision. Hence, this distinction creates a fine line between "general" and "material" events/information or market rumors.

Challenges To Listed Entities
The volume of market rumor sources is the biggest issue for listed firms in complying with the modified clause. In regional languages, India has 20,278 daily publications and 392 news stations. The data also shows that 37,36,00,000 newspapers are published daily worldwide. A listed company cannot track these enormous numbers of sources every day and confirm, deny, or clarify market rumors in 24 hours.

Listed companies must create a fully functional department with sufficient AI/technology infrastructure to aggregate company-related news items from around the world to respond to a market rumor in time. Outsourcing news source compilation could become a lucrative industry.

Premature information leaks about M&A or acquisition deals, e.g.. Adani's takeover of NDTV, in the listed entity and subsequent confirmation, denial, or clarification may cause enormous share price volatility, threatening the deal's viability. The entity must be careful while confirming or denying market rumors.

Under SEBI's Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market (PFUTP) Regulation 4(2)(f), denying a market rumor of a possible acquisition and completing the acquisition quickly can be considered fraud. In V Natarajan v. SEBI, the Shares Appellate Tribunal ("SAT") found that "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". Though the entity acted in good faith and in accordance with LODR, the provision does not afford a defense.

Listed firms must tighten their NDAs since they cannot use them to defend against substantial market rumors. It's crucial to keep deal specifics to a few people.

The Market Rumours rules aim to ensure fairness in the stock market. However, compliance will require significant time and resources, including tech infrastructure setup and staff training. The Corporate Communications and Company Secretary's Teams must collaborate closely on news releases to clarify the company's position, with attention to PFUTP rules. The Compliance team should also enhance their writing skills for well-prepared releases.

Given the risk of premature information leaks, it's crucial to have a prepared plan in place to handle potential issues. Complying with these new rules will require significant changes in processes and mindsets. Therefore, affected companies should proactively prepare in advance.

Written By: K Prashant Agrawal and Ms. Pragati Paragi

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