Introduction
On 21.05.2024, the Securities and Exchange Board of India (‘SEBI’) released a framework titled ‘Consideration of unaffected price for transaction upon confirmation of Market Rumour’ (‘Framework’) through a circular SEBI/HO/CFD/CFD-PoD-2/P/CIR/2024/51 (‘Circular’). The Circular with the annexed framework is issued to enhance market integrity and ensure fair valuation.
Before delving into the framework, let us understand the background and the necessities leading to the issuance of the Circular.
Background
Rumours always create chaos and often lead to irreparable damage, which could result in financial loss and reputational damage. Similarly, market rumours pertaining to the company’s business often led to price volatility in stock prices, causing discrepancies between the stock's market price and its true value.
To address this issue, SEBI amended SEBI (Listing Obligations and Disclosure Requirements) (‘LODR Regulations’)[i] by inserting reg. 30(11) states that entities are required to verify market rumours that result in material price movements. Additionally, the second proviso to reg. 30(11) of the LODR Regulations states that unaffected price shall be considered for transactions on which pricing norms specified by SEBI or Stock Exchange (‘SE’) are applicable, provided that the rumour is confirmed within 24 hours from the trigger of material price movements. Further, the unaffected price shall be considered by excluding the effect on the price of the equity shares of the listed entity due to the material movement and confirmation of the rumour.
Hence, to address the issue, the Circular was issued by the SEBI by exercising the powers conferred under s.11(1) and 11(A) of the Securities and Exchange Board of India Act, 1992 (‘SEBI Act’) read with reg. 101 of the LODR Regulations by annexing the Framework.
The issued Framework can be summarised below:
Calculation of Adjusted Volume Weighted Average Price (VWAP): Para 1 of the Framework provides for the calculation of adjusted volume weighted average price (‘VWAP’) for considering the unaffected price. Para 1.1 states that the variation in daily WAP from the day of the material price movement until the end of the next trading day after the rumour confirmation is attributed to the rumour and its confirmation (‘WAP variation’).
Para 1.2. of the Framework states that WAP shall be calculated from the day of the material price movement onwards, which shall exclude WAP Variation from the daily WAP in the look-back period. The material price movement shall be the material price movement until the end of the next trading day after the rumour is confirmed. The daily WAP from the day of the material price movement onward, excluding WAP variation, is used as the adjusted daily WAP.
Illustration for Calculation of VWAP: Para 2. of the Framework provides an illustration for the calculation of VWAP under the proposed Framework in the case of preferential issues to qualified institutional buyers (‘QIBs’) under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
Price Variation and Band Limits: Para 3 of the Framework states that if the rumour confirmation leads to a price variation hitting the price band limit on the next trading day, the price variation on subsequent trading days will be included for adjustment until the price no longer hits the band limit.
Applicability of Unaffected Price: Para 4 of the framework states that the unaffected price applies only if the listed company confirms the rumour related to the transaction within 24 hours of the material price movement.
Validity Period for Unaffected Price: Para.5. of the Framework states that the unaffected price is valid for either 60 days or 180 days, depending on the transaction stage, starting from the confirmation date of the market rumour until the ‘relevant date’ (such as public announcement or board approval) as defined by existing regulations. The specific stages and applicability periods are outlined in the Industry Standards of reg. 30(11) of the LODR Regulations.
Multiple Confirmations: Para 6. of the Framework provides an illustration that if the listed entity confirms a rumour about a transaction and later rumours with significant updates require further confirmation, the unaffected price will apply to each instance of rumour confirmation as per reg. 30(11) of the LODR Regulations.
Scope
The Framework will initially apply to the top 100 listed entities starting 01.06.2024 and extend to the next top 150 listed entities (ranked 101-250) from 01.12.2024. It will only be applicable in cases where the listed entity confirms the rumour of a transaction within 24 hours of the material price movement.
Our Analysis
The Framework aims to safeguard ‘dealmakers’ by protecting negotiated prices from artificial inflation due to rumours. It seeks to curb speculative trading and stabilize prices, ensuring fairness to shareholders. However, the complex procedure for calculating daily WAP and VWAP could be challenging. Additionally, it does not provide protection to retail investors; instead, it focuses on institutional buyers by protecting their negotiated transactional prices from speculative spikes. The validity period for considering unaffected prices (60 or 180 days) may not always align with market realities.
End Note
[i] Inserted by the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Second Amendment) Regulations, 2023 w.e.f. 15.07.2023.
Authored by Kushagra Gahlot, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.
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