Context
With effect from October 1, 2023, India’s top 100 listed entities (based on market capitalisation) would have to mandatorily confirm, deny, or clarify market rumours to the stock exchanges, and this requirement extends to the top 250 listed entities with effect from April 1, 2024. The Securities and Exchange Board of India (“SEBI”), by way of notifying amendments to the LODR Regulations on June 14, 2023 (“LODR Amendments”), has introduced this mandatory requirement under Regulation 30 read with Schedule III of the LODR Regulations (referred to below as the “Market Rumours Amendment”).
The LODR Amendments are broadly based on (i) the recommendations made in three consultation papers released by SEBI between November 2022 and February 2023; and (ii) the proposals approved at the SEBI Board Meeting held on March 29, 2023.While the amendments aim to strengthen the corporate governance and disclosure framework, the Market Rumours Amendment remains the most contentious of all.
The Market Rumours Amendment
Prior to the LODR Amendment, Regulation 30(11) contained a general provision stating that – “The listed entity may on its own initiative also, confirm or deny any reported event or information to stock exchange(s)”.
Now, in addition to this general requirement, two specific provisos have been incorporated, stating as follows:
“Provided that the top 100 listed entities (with effect from October 1, 2023) and thereafter the top 250 listed entities (with effect from April 1, 2024) shall confirm, deny or clarify any reported event or information in the mainstream media which is not general in nature and which indicates that rumours of an impending specific material event or information in terms of the provisions of this regulation are circulating amongst the investing public, as soon as reasonably possible and not later than twenty four hours from the reporting of the event or information:
Provided further that if the listed entity confirms the reported event or information, it shall also provide the current stage of such event or information”.
(The top 100 and 250 listed entities shall be determined on the basis of market capitalisation, as at the end of the immediately preceding financial year).
The expression ‘Mainstream media’ has been defined to include both print and electronic modes of the following:
i. Newspapers registered with the Registrar of Newspapers for India;
ii. News channels permitted by Ministry of Information and Broadcasting under Government of India;
iii. Content published by the publisher of news and current affairs content as defined under the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021; and
iv. Newspapers or news channels or news and current affairs content similarly registered or permitted or regulated, as the case may be, in jurisdictions outside India.
‘Mainstream media’ is not limited to domestic media, but also includes international newspapers, news channels, and news and current affairs content that is registered/ permitted/ regulated in any foreign jurisdiction.
The Market Rumours Amendment perhaps has its genesis in SEBI’s Adjudication Order in the matter of Reliance Industries Limited[1](which has been stayed by the SAT[2]), where a view was taken that the Compliance Officers were under an obligation to confirm or deny the details of the proposed Jio-Facebook deal, after it was leaked to the Financial Times.
The regulatory intent can also be understood by referring to SEBI’s Consultation Paper[3] and Board Note[4] concerning review of Regulation 30 (referred to below as “Consultation Paper” and “Board Note” respectively), which highlight the importance of verifying reported events/ information, which may have material effect on the listed entity, to avoid establishment of a false market sentiment.
As per the Board Note, out of the 71 comments received regarding the Market Rumours Amendment, 52 voiced dissent and specifically opposed this proposal. By illustrating a hypothetical scenario of a company in talks for an acquisition deal, the following implementation challenges were highlighted:
- Restriction from disclosing such premature news because of the Non-Disclosure Agreement (“NDA”) between the Parties;
- The proposed acquisition may be at a very nascent stage with no certainty over its consummation;
- The foreign counterparts of Indian listed companies may become wary of engaging with Indian companies;
- Confirmation or denial over preliminary negotiations may be disadvantageous to the listed entity as they will lose their edge in such negotiations;
- Competitors and media agencies may have the ability to misuse the proposed amendment by deliberately publishing inaccurate or speculative news reports with the objective of forcing the listed entity to make a statement confirming or denying the reported event.
This was countered by SEBI through an international comparison of the practices followed in other advanced jurisdictions, and the Board Note makes a specific reference to Section 202.03 of the NYSE Listed Company Manual (“NYSE Manual”), which inter alia provides for the following requirements with regard to responding to market rumours:
- If rumors or unusual market activity indicate that information on impending developments has leaked out, a frank and explicit announcement is clearly required.
- If rumors are in fact false or inaccurate, they should be promptly denied or clarified. A statement to the effect that the company knows of no corporate developments to account for the unusual market activity can have a salutary effect.
- If rumors are correct or there are developments, an immediate candid statement to the public as to the state of negotiations or of development of corporate plans in the rumored area must be made directly and openly. Such statements are essential despite the business inconvenience which may be caused and even though the matter may not as yet have been presented to the company’s Board of Directors for consideration.
Scope and Ambit
In comparison to the proposal outlined in the Consultation Paper, the wording of the Market Rumours Amendment has undergone significant modification in the LODR Amendment in order to incorporate the following material changes:
- If a market rumour emanates from an external source/ third-party, then the listed entity may not have complete knowledge about the veracity of the rumour. In such situations, listed entities should be permitted to ‘clarify’ the rumour as opposed to providing an exact confirmation/denial.
- The market rumour should not be general in nature and should indicate that rumours of an impending specific material event/ information are circulating amongst the investing public.
- If the listed entity confirms the reported event/ information, the current stage of the same should be provided.
- Pursuant to industry representations highlighting the difficulties surrounding clarifying rumours floating on social media, social media has not been specifically included within the definition of ‘mainstream media’.
The Oxford English Dictionary defines ‘impending’ as “imminent, close (at hand), near, nearing, approaching, coming, forthcoming, upcoming, to come, on the way, about to happen, in store, in the offing, on the horizon, in the air/wind, brewing, looming, threatening, menacing.” It is worthwhile to note that the expression ‘impending developments’ has also been used in the NYSE Manual (which has also been referred in the Board Note) which indicates that this expression has been consciously incorporated to delineate the scope of the Market Rumours Amendment.
It appears that the requirement to clarify/deny/ confirm a market rumour will apply only if the rumour relates to a specific material event/ information that is imminent, forthcoming, or about to happen, and not otherwise. Further, this requirement may not be triggered for rumours that are general in nature, and do not provide any specific details[5] – thereby creating a fine line of distinction between ‘general’ and ‘specific’ market rumours.
Infrastructure for Ensuring Compliance
As per the latest data, there are 20,278 newspapers (i.e. daily publications) registered in India[6], and more than 390 operational news channels[7], all of which publish and operate in different languages across India. Many of these newspapers also do not have digitised versions, thereby bringing about additional challenges in tracking all the content published in relation to a company on a daily basis.
Further, across the world, there are more than 35,50,00,000 newspapers in circulation[8] – and Covered Listed Entities would have to monitor the content published in each of these publications circulating across all 7 continents and 195 countries! Interestingly, news content will have to be monitored even in those foreign jurisdictions where the Covered Listed Entity/ Corporate Group does not have any specific business operations.
Covered Listed Entities will now be required to develop robust AI/ technology-based infrastructure to identify whether there is any impending market rumour. Further, a specialised IT cell may also have to be set up for daily compilation of newspaper clips and content published on news channels – and for ensuring that potential market rumours are promptly flagged to the Compliance Officer’s office.
Compiling information about the company that is published globally will be an even more onerous task – making it essential for companies to ensure that their IT infrastructure is robust enough to capture information that is circulating across all foreign jurisdictions. Companies could also outsource this task to third-party agencies that specialise in daily compilation of news reports.
Implications for M&A Deals
Will generic clarifications now suffice?
In situations where details of a potential M&A deal are leaked in the market, companies hitherto used to follow the practice of providing a generic clarification which, in most cases, inter alia stated that they continuously evaluate various strategic opportunities and remain in discussions with potential targets – and that there is currently no material event/ information that requires stock exchange disclosure under applicable law.
Given that the Market Rumours Amendment requires a company to specifically confirm, deny or clarify an impending market rumour, it appears that such generic clarifications/ statements may no longer pass muster. If the company specifically confirms the news regarding the potential M&A deal, it will be required to also provide the current stage of the deal.
At what stage would the proposed deal be considered as an impending material event?
Given that there are multiple stages in the life-cycle of any M&A deal, we do not have complete regulatory clarity on the stage at which the potential deal could be considered as an ‘impending specific material event/ information’ warranting a specific confirmation/ denial in terms of Regulation 30(11).
Past experience suggests that in any large M&A deal, there are various uncertainties that can endanger the deal, such as differences between the buyer and seller on valuation, key covenants in the transaction documents (such as exit rights), tax considerations etc.
Even in situations where there are serious discussions/ negotiations between the buyer and the seller, the above factors can act as an obstacle at the very last minute, thereby forcing one of the parties to back out and withdraw its proposal. Given the above uncertainties, the deal would not be confirmed until Board approval is obtained, and the transaction documents are signed. The stage at which a specific confirmation/ denial would be required hence assumes relevance – as such a confirmation of the market rumour would not guarantee the ultimate consummation of the deal.
Keeping these implications in mind, in situations where details of the deal are leaked, parties will have to place special emphasis on the drafting of the confirmation/ denial – and the past practice of providing a ‘standard template’ generic clarification may no longer suffice.
Acquisition of a Listed Target
From a public M&A standpoint, the waters could get even more muddied in situations when a Covered Listed Entity acquires a listed target. Premature leakage of the news of the deal could jeopardize its viability. It is so because the information leak can potentially lead to a significant volatility in the share price of the listed target and unleash a significant market reaction, which in turn can impact the open offer price based on the volume weighed average market price (VWAMP) under Regulation 8 of the Takeover Code.
It is relevant to note that the legal architecture for public M&A in India is very market-price driven under both the SEBI Regulations (ICDR Regulations for a primary transaction and the Takeover Code for a secondary transaction), as also the FEMA pricing formula under the NDI Rules, which fixes floor price for the acquisition or subscription of shares by a non-resident.
Under the circumstances, any premature leak of a potential transaction and a confirmation of the same could create a huge volatility in the share price, whereby the very viability of the deal may get endangered. Given the implications under Reg 4(2)(f) of the PFUTP regulations (which is explained below), any confirmation or denial of any such market rumours needs to be very carefully crafted.
Tightening of NDAs
As highlighted in the Board Note, in most cases, the details of the deal get leaked because either of the parties (or their employees, external advisors, etc.) had breached the terms of the NDA. While the requirements under the NDA cannot act as a defence in cases where a company does not confirm/deny an impending market rumour, it is now all the more essential to build in robust provisions in the NDA – for ensuring that the details of the deal are well-enveloped within a select group of individuals within the company. Suitable exemptions should also be incorporated for confirmation/denial of the deal under Regulation 30(11), if details of the deal get leaked.
No standstill provision if news of the proposed deal is denied
In the UK, the “Put Up or Shut Up” Rule (“UK PUSU Rule”) under the Takeover Code is triggered in situations where there is a leak announcement, and requires a bidder to announce a fully financed binding offer within 28 days or announce it will not be making an offer – in which case the bidder would be subject to a six-month standstill[9]. Unlike the UK PUSU Rule, the LODR Amendments do not impose any standstill period if the buyer denies the market rumour surrounding the deal.
Hence, if a prospective buyer denies the details of the deal that have been leaked, there is no prohibition on the buyer from subsequently going ahead to acquire the listed target. While the LODR Amendments may not expressly prohibit such a volte face, this could potentially have severe regulatory implications under the FUTP[10].
Potential FUTP Implications
If a market rumour is denied by a prospective buyer and the acquisition is subsequently announced within a few weeks, this may potentially be viewed by SEBI as a fraudulent and unfair trade practice under the FUTP. In this context, it is relevant to note that Regulation 4(2)(f) of the FUTP provides that dealing in securities shall be deemed to be a manipulative, fraudulent or an unfair trade practice if it involves knowingly publishing or causing to publish or reporting or causing to report by a person dealing in securities any information relating to securities, including financial results, financial statements, mergers and acquisitions, regulatory approvals, which is not true or which he does not believe to be true prior to or in the course of dealing in securities.
Further, reference may also be made to the order of the Securities Appellate Tribunal (“SAT”) in V Natarajan v. SEBI[11]which held 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”.
Whilst the Board Note states that stakeholders had specifically highlighted the FUTP implications of this amendment, no defences/ carve-outs have been provided to address the FUTP angle – which has created a cloud of apprehension over whether good-faith compliance with LODR can invite liability under FUTP.
Companies will hence have to closely examine the FUTP implications, while finalising the wording of the confirmation/ denial that will be provided to the stock exchanges.
Concluding Thoughts
While the Market Rumours Amendment advances the regulator’s quest to ensure fair play in the securities market, compliance with this new requirement will require significant resource allocation and time-commitment. Along with establishing a resilient AI/ tech-based infrastructure and providing adequate training to employees, close coordination would be required between the Corporate Communications Team and the Company Secretary’s Team, to carefully draft any media release confirming/ denying/ clarifying the company’s position, particularly keeping in mind the FUTP implications. Steps should also be taken to improve the drafting skills of the members of the Compliance team, so that every media release is carefully crafted along the above lines.
Given that the possibility of a leak can never be completely ruled out, creation of a crisis management framework is now all the more essential to deal with this new requirement. Compliance with this new requirement will accordingly require a paradigm shift in approach as well as in mindset. It would hence be essential for Covered Listed Entities to promptly initiate steps for ensuring that their infrastructure is set in order well-in advance.
[1] SEBI Adjudication Order in the matter of Reliance Industries Limited, bearing reference number ORDER/BM/LD/2022-23/ 17202-04, dated June 20, 2022.
[2] Reliance Industries Limited and Ors v. Securities and Exchange Board of India, SAT Order dated September 27, 2022, in Misc. Application No. 751 of 2022 and Appeal No. 603 of 2022.
[3] SEBI Consultation Paper on Review of disclosure requirements for material events or information under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, available at SEBI | Review of disclosure requirements for material events or information under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
[4] SEBI Board Note, Amendments to requirements for disclosure of material events or information by listed entities under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, also available at the following link SEBI | Board Meetings
[5] This has also been clarified in the SEBI Board Note, at Para 8.4.1.
[6] Registrar of Newspapers, Analysis of Registered Publications, available at Press in India 2021-22 Vol 1.pdf (rni.nic.in)
[7] India | Reuters Institute for the Study of Journalism (ox.ac.uk)
[8] Newspapers Statistics – Worldometer (worldometers.info)
[9] Rule 2.7 of the London City Code on Takeovers and Mergers.
[10] Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.
[11] SAT Order dated June 29, 2011, in Appeal No. 104 of 2011.
