Rule on rumour verification adds to compliance burden

The proposal, which was approved at the regulator’s recent board meeting on 29 March, mandates listed companies to verify market rumours pertaining to their operations, as was reported across various media outlets, and disclose the veracity of the news.

The framework will be applicable to the top 100 companies by market capitalization starting 1 October, and will apply to the top 250 firms from 1 April 2024.

Legal experts said this new rule will significantly increase the disclosure burden on listed companies, as they will be obligated to offer clarifications on a wide range of market rumours. Furthermore, the firms may find themselves in precarious situations if a rumour pertains to any ongoing deals.

There have been instances where news regarding ongoing deals are prematurely leaked, even during the initial stages of negotiations, experts said. Consequently, Sebi regulations may compel firms to prematurely disclose developments.

While Sebi’s board has approved the rule, the market regulator is yet to notify the final guidelines. More importantly, Sebi is expected to provide a definition of what will be construed as ‘market rumour’ in the final rules, said legal experts.

“Premature disclosure of proposed M&A activity will not only scuttle deals but also lead to speculative trading," said Akila Agrawal, head, mergers and acquisitions, Cyril Amarchand Mangaldas. “We should have more clarity on the type of information that needs to be disclosed or what exactly amounts to a market rumour," she added.

Companies expect the new law to be only applicable to rumours which involve material developments, said market participants. Sebi rules mandate every listed firm to maintain a list of thresholds, above which any news would be considered a material development. For example, any acquisition worth over ₹ 100 crore, or a plant shutdown if the facility contributes 10% or more to the company’s revenues.

The challenge is how Sebi will define the material market rumour rules, said legal experts. If the definition of market rumour is all-encompassing, then the companies may end up confirming or denying dozens of rumours almost every week. However, if the definition is too lenient, then the law may not be effective, they added.

“Sebi’s proposed amendment to the LODR Regulations can create challenges in the market, as the top 100 listed entities are required to verify and confirm or deny or clarify market rumours from 1 October," Moin Ladha, partner, Khaitan and Co., said. “It may not be feasible to define materiality. Further, in cases involving negotiations that are underway, it will be difficult to confirm or deny, and that may have a counterproductive impact," he said.

This new law is based on a discussion paper floated by Sebi last November, when it proposed a number of changes to the disclosure rules. Sebi had opined that the proposal was essential to avoid “establishment of a false market sentiment", and added that such rumours appearing not just in print media but on TV and digital media were increasingly impacting stock movement.

“We can get a fair bit of clarity on the regulator’s thought process by referring to the consultation paper which requires clarifications to the news in “mainstream media". Companies and their compliance officers can have some pre-decided metrics on what to consider as mainstream and issue clarifications accordingly," Shruti Rajan, partner, Trilegal, said.

Sebi had rationalized several disclosure requirements for listed companies in 2019 allowing them greater headroom to decide on what is important and what is not. However, recently, it noticed that many firms were flouting disclosure norms. In the last three-four months, Sebi has floated several discussion papers proposing the tightening of various disclosure norms.