Kiss & Tell: Recent Amendments to SEBI (Listing Obligations and Disclosure Requirements) Regulations for Disclosures on Rumours

Reliance-Facebook: The not-so secret entanglement

On 24-3-2020 at precisely 14.54 GMT the Financial Times published a report; “Facebook Eyes Multibillion-Dollar Stake in Reliance Jio”.¹ The publication soon became the catalyst for a 15% rise in the scrip of Reliance Industries Limited (RIL) from the previous day’s closing price on 25-3-2020.²

However, behind closed doors, the only agreement entered into between Jio Platforms Limited (subsidiary of RIL) and Facebook, at the time, was a mere term sheet of a proposed end date for a conclusive agreement on an investment between the two. The agreement for the investment was actually executed on 21-4-2020 and soon after disclosed to the stock exchanges on 22-4-2020.

To contextualise the price sensitivity of the rumour, one can weigh the impact of the rumour on the scrip to the change post official disclosure. The former almost hit a 15% increase while the latter was only around 10% against previous closing day price.³

SEBI made several allegations against RIL in their show-cause notice.⁴ The main allegation was a violation of Regulation 30(11) of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015⁵ [SEBI (LODR) Regulations, 2015] which at the time stated that any listed company may confirm or deny any reported event to the stock exchanges. SEBI alleged that this was against the principles of fair disclosure of UPSI (unpublished price sensitive information); even in the event of UPSI being revealed with no fault to the entity, it must still have an obligation to make sure that such information becomes generally available over being disclosed selectively. A key factor to note here is the wording of Regulation 30(11) which mentions that it is the entity’s own prerogative to clarify market rumours. The regulation merely gives the entity the option to do so.

SEBI further listed a breach of several rules including the code of conduct for closure of the trading window, violations of “Principle No. 4 under Schedule A — Principles of Fair Disclosure for Purposes of Code of Practices and Procedures for Fair Disclosure of UPSI” which was to be read with Regulation 8(1) of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015⁶ [SEBI (PIT) Regulations, 2015] which was again to be read with Regulation 30(11) of the SEBI (LODR) Regulations, 2015.⁷

SEBI’s order issuing a penalty against RIL was subsequently stayed by the Securities Appellate Tribunal.⁸ Unbeknownst to them, this set off the chronology of events leading up to the newly amended provisos to Regulation 30(11).

Anatomy of the amendment

Initially, as established, Regulation 30(11) dealing with reported market rumours gave the option to the listed entity to independently confirm or deny the same “on its own initiative”. However, given the escalating significance of digital media and its far-reaching impact, the Board seems to recognise that to stay contemporary in the age of digital media, there must be a prompt verification of rumours that can substantially impact scrip; positively or negatively.

It tackled this issue with its proposal through a Consultation Paper dated 12-11-2022 in the form of an addition of a proviso to Regulation 30(11).⁹ The proviso would mandate all top 250 listed entities as per market capitalisation (at the end of the immediate previous financial year) to provide verifications on market rumours that have material effect. From this there may also rise questions of which rumours have material effect, the test for the same is whether the rumoured event, if not a rumour, would be required to be disclosed to the stock exchanges based on the other provisions under Regulation 30. This would include both an affirmative verification or a denial, which would have to be disclosed publicly.

For a better idea into the parameters considered when drafting the amendment, one can see the following changes made to the initial proposal in the consultation paper.

1. Gradual imposing of regulations

The proviso lays out two different time periods, 1-10-2023 and 1-4-2024. The top 100 listed entities will be bound to the new rumour verification guidelines from the former date, this gives the next 150 listed companies (from the top 250) a buffer period to create departments/take up necessary measures to be able to implement the new regulations.

2. Defining “mainstream media”

There also arose questions of defining “mainstream media”, since the definition today could potentially include social media as well. This concern was realised through an amendment to Regulation 2 of the SEBI (LODR) Regulations, 2015 which gave the term “mainstream media” clearly defined parameters through clause (ra) which would include:

(i) Print media registered with the Registrar of Newspapers for India.

(ii) News channels registered under the Ministry of Information and Broadcasting.

(iii) Content published through the internet which follows the definition under the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021¹⁰..

(iv) Other sources of media that have been registered to a similar effect in jurisdictions outside India.

3. “Clarify”

Additionally, the term “clarify” was added to the initial phrasing of “confirm or deny” rumours. This addition was made in the events where the listed entity may not have adequate knowledge of the same, such as in the cases of insolvency resolution processes initiated against the entity by third parties such as financial creditors. This would mandate clarification that could not be limited to a confirmation or denial.

4. Contradictory provisions

Further, Annexure II of the Continuous Disclosure Requirements for Listed Entities — Regulation 30 of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015¹¹ states that an event can only be disclosed upon “receipt of approval of both i.e. Board of Directors and shareholders”, which is read to mean disclosure upon confirmation of an event. In terms of the Reliance-Facebook case, since the investment agreement had not been finalised or even decided on, it could not have been clarified. It was further recommended that the Annexure be amended to the effect that in cases of market speculation, reported through mainstream media, such matters could be commented upon.

The current Regulation 30(11) comes with two provisos and an attached explanation. It first states that the top 100 and top 250 entities, from their respective dates, “shall confirm, deny or clarify” on specific reported events by the mainstream media within 24 hours of the reporting of such event. It provides further that in case of a confirmation, the stage of such an event must be disclosed as well. The explanation to the regulation merely states how the top 100 and top 250 entities will be determined; which is through the means of market capitalisation at the end of the previous year.¹²

52 out of 71: Issues with proposals and SEBI’s justification

Looking into the SEBI Board note from the Board meeting held on 29-3-2023 which passed all the proposals in the same, it showed that there was a majority (52 out of 71) that disagreed with the proposals on how market rumours should be dealt with in the consultation paper.¹³

The major concerns against the proposal can be broadly grouped into the following:

1. Non-disclosure agreements

A concern arose in the case of events where the listed entity in question had entered into a non-disclosure agreement to not disclose any information. Such a mandatory provision would pose a risk against entities to enter into confidential agreements. However, the response from the Board, put forth the argument that simple NDAs could not override a regulatory obligation. Further in the context of market rumours, technically the information is already out there, making the NDA obsolete anyway.

2. Rumours on developing events

It was additionally brought up that there may be multiple scenarios where the entities themselves had little certainty over the rumour such as in cases where the negotiations are taking place or have just started like in the case of the Reliance-Facebook matter. However, with this situation as well the Board claimed that the stage of the negotiation could very well be disclosed to the stock exchanges as a means of lessening ambiguity over rumours.

3. Disclosures making Indian entities unattractive to foreign counterparts

The concern regarding harsh disclosure regulations in terms of discouraging investment in Indian entities was also a prevalent contention against the proposal. The regulator addressed the same by citing the existence of similar regulations in foreign jurisdictions as well. Similar regulations can be seen in NYSE’s Listed Company Manual and NASDAQ’s Listing Rules.¹⁴

4. Rumour verification leading to disadvantageous position for entity

In scenarios where the listed entity is still in negotiations, which may be in the form of keeping the other party in the dark about certain pieces of information, such disclosure regulations could prove to be damaging. The regulator here puts onus on the entity to better safeguard such information. SEBI states that they must see fit to ensure that any information that could put them in the aforementioned situation if revealed, will be in the entity’s best interest to not be revealed at all. This will then be incumbent on the entity’s security measures.

5. Abuse of mandatory regulations on rumours

A potential ramification of said proposal is, of course, intentional misuse. This could be through competitors, disseminating speculative information to media outlets to gather any information, or even through media agencies themselves, with the objective of gathering news. Since the liability is on the listed entity and not the issuer of information, the entity will have to be answerable even at times of no fault of their own.

This particular issue was addressed through the types of rumours that will be entertained to require disclosure. If reducing the scope to information that is specific and having potential of being UPSI or considered of importance under Regulation 30. This will reduce the ambit for general rumours being spread just to force entities into disclosing information. However, this being said, there is still potential for this proposal to be abused but again, that may be the case with any proposal.

India versus United States: Better miller of the rumour mill

The Board note on the amendment briefly makes note of NYSE and NASDAQ regulations, this comparative analysis will look into the jurisprudence of rumour verification through the lens of the United States.

Looking at old case law, typical jurisprudence in the United States is rumour and speculation averse. Such as in a Second Circuit case, Securities and Exchange Commission v. Texas Gulf Sulphur Co.¹⁵ where the downside to disclosure was discussed through clarifications that could have “encouraged the rumour mill they were seeking to allay”¹⁶. It provided affirmation to the “may” that was as initially stated in Regulation 30 of the SEBI (LODR) Regulations, 2015. Further looking at the liability bared by corporations when disclosing in terms of the “risk that a slip of the pen or failure properly to amass or weigh the facts — all judged in the bright gleam of hindsight — will lead to large judgments”.¹⁷

This is also seen in Starkman v. Marathon Oil Co.¹⁸, wherein a merger proposal was negotiated between Marathon Oil and Mobil Corporation. When the offer was revealed after discussion with the Board and a set price was agreed upon, the shareholders demanded that the disclosure should have been given during the negotiation stage. It was here that it was established in American jurisprudence that “a duty to disclose the possible terms of any transaction and the parties thereto arises only after an agreement in principle, regarding such fundamental terms as price and structure, has been reached”.¹⁹

However, this was changed with the NYSE Manual, which was also the first to incorporate rules on rumour verification. This can be seen in Para 202.03 of the Manual on “Dealing with Rumours or Unusual Market Activity”. The paragraph looks into the possibility of information regarding any impending agreements being leaked to the public and requires “frank and explicit” announcement whether or not the rumours are false or true. It further, in weighing the inconvenience caused against the need to verify and deems rumour verification to be essential. From the wording of the paragraph, it looks as if the intention is for incidents where there is a leak of UPSI. Dissimilar to its equivalent in SEBI (LODR) Regulations, 2015, which looks at it from the angle of reported media. Except for this there are little dissimilarities, with the mandatory “immediate candid” statement and disclosure of stage of development.

To segue into the NASDAQ rulebook, one can look at the very lengthy Rule No. IM-5250-1 under NASDAQ Rules on “Disclosure of Material Information”. It very similarly has conditions for confirming and denying reported information however, it also has provisions for unusual circumstances wherein it does not necessitate disclosure such as in the events where confidentiality is required and where immediate disclosure would prejudice the entity from fulfilling its objectives. This is similar to several points of concern raised against the consultation paper’s proposal but yet again they have limited this to NASDAQ companies and also stated situations where the aforementioned does not override in cases of necessity of disclosure and in the aforementioned cases there exists an obligation to disclose the same to NASDAQ.

When looking at the two regulations, there are some key points of difference in the regulations in both India and the United States. In terms of the US, there are additional requirements to inform NASDAQ itself at least 10 minutes prior to the official notice made to the public, there seems to be no such provision for India. Similarly, in terms of additional notifications needed to be sent to Nasdaq Market Watch Department prior to the dissemination of any material news, there seems to be more involvement of NASDAQ in terms of day-to-day regulation of rumour verification as opposed to SEBI. One can also see that where SEBI’s (LODR) Regulations, 2015 has the quantity limits on verification by the top 250 entities, NASDAQ does not have a similar provision and applies to all “NASDAQ” companies.

Conclusion

The new amendment on rumour verification is hard to fit into either box of having a completely positive effect or a completely negative effect. From recognition of the age of the internet and the need to update its regulation, SEBI has come up with a means of enhancing transparency which will no doubt boost investor confidence.

This paper has looked at the consultation process, the arguments for and against and finally a comparative analysis. Through it all, one could see the concerns raised in terms of misuse of the provision, discouragement for foreign investors being weighed against the beneficial aspects of the amendment.

To conclude, SEBI’s initiative does represent a step towards the addressing of market rumours and creating an arena for fairness and transparency in disclosures. With the ever-evolving financial landscape of India, market efficiency and investor protection are a difficult balance, but this amendment still is one step closer for India to become a better handler of the rumour mill.