Alerts & Updates 24th May 2024

SEBI issues a flurry of changes to tackle material price movement due to market rumours and to ensure a level playing field

Authors

Manendra Singh Partner | Mumbai
Tanvi Goyal Associate Partner | Mumbai
Ambareen Khatri Senior Associate | Mumbai

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  • India’s securities market regulator, Securities and Exchange Board of India (SEBI) has introduced amendments to various regulations. The thrust of these amendments is to ensure that material price movements (MPM) due to market rumours do not affect the price in transactions where prices drive such transactions such as takeover under open offer, buy-back and preferential allotment. With a view to facilitate capital raising and ease of doing business, SEBI has laid down criteria for verification of market rumours in terms of material price movement in the equity shares of listed companies. In particular, a detailed Industry Standard Note has been issued to facilitate a uniform approach and assist listed entities in complying with their obligations in respect of confirmation/ denial/ clarification of market rumours and to set out standard operating procedures for compliance with the rumour verification requirement.

    Key changes of these amendments have been provided below:

    A. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations)

    • The applicability of the provisions of LODR Regulations to a listed entity based on market capitalisation have been modified;
    • Enhancement of rumour verification regulations resulting from material price movement;
    • Extension of timeline for filling the vacancy of a key managerial personnel (KMP) where authority approval is required;
    • Providing timelines for prior intimation to stock exchanges for certain specified proposals at board meetings;
    • Revision of gap between two risk management committee meetings; and
    • Extension of timeline for compliance of regulations for high value debt listed entities (HVDLE).

    B. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Regulations) Exclusion of the impact of MPM and confirmation of rumour when computing the open offer price under the Takeover Regulations.

    C. SEBI (Buy-Back of Securities) Regulations, 2018 (Buy-back Regulations) – Exclusion of the impact of MPM and confirmation of rumour when determining the volume-weighted average market price of a company’s equity shares and for lower end price range calculation for buy-back.

    D. SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations) – Tweak in the definition of generally available information for exclusion of unverified event or information.

    The above changes have been analyzed below:

  • A. AMENDMENT TO LODR REGULATIONS
    Amendment Analysis
    Modified computation of market capitalisation

     

    The applicability of the provisions of LODR Regulations to a listed entity based on market capitalization have been modified.

    • List of entities by recognized stock exchanges- The recognized stock exchanges shall prepare a list of entities who have listed their specified securities, ranking such entities based on their average market capitalisation from 1st July to 31st December of that calendar year.
    • Applicability timeline – The relevant provisions under the LODR Regulations shall then become applicable to a listed entity that is required to comply with such requirements for the first time (or, after any interim period, if applicable) after a period of three months from 31st December (i.e. 1st April) or from the beginning of the immediate next financial year, whichever is later.
    • First time application or after a period of cessation – Entities who are complying for the first time or after a period of cessation, shall put in place systems and processes for compliance with Regulation 34(2)(f)[1] within a period of three months from 31st December (i.e. on or before 1st April) or from the beginning of the immediate next financial year, whichever is later.
    • Continued compliance – The listed entity shall continue to comply with relevant provisions that were applicable to it based on the market capitalisation of previous year and continue(s) to remain applicable based on its rank in the list prepared by recognized stock exchanges as per above.
    • Continued application till the rank changes – These provisions which become applicable to a listed entity based on criteria of market capitalisation, shall continue to apply to such an entity unless its ranking changes in the list prepared in accordance with above and such change results in the listed entity remaining outside the applicable threshold for a period of three consecutive years.
    • Discontinuation of application – For listed entities which remain outside the applicable threshold for a period of three consecutive years as provided above, the provisions that apply on the basis of criteria of market capitalisation shall cease to apply at the end of the financial year following the 31st December of the third consecutive year[2].

    The aforesaid changes relating to market capitalization computation have been made under Regulation 3 of LODR Regulations and shall come into force from December 31, 2024.

    Enhanced market rumour verification upon MPM
    • Verification of market rumours on MPM – The top 100 listed entities and thereafter top 250 listed entities w.e.f. from date the specified by SEBI[3] are required to comply with the following:

    Trigger for verification requirement – required to verify market rumours, upon occurrence of MPM as may be specified by the stock exchanges.

    Verification of all events/ information and not just “material” information – now any reported event or information in the mainstream media which is not general in nature, and which indicates that rumour of an impending specific event or information (previously specific “material” event or information) is circulating amongst the investing public is required to be verified.

    Verification timeline – as soon as reasonably possible but in any case, (previously “and”) not later than twenty-four hours from the trigger of price movement.

    • No effect on equity share’s price due to MPM and confirmation of rumour if subject to pricing norms – If such a listed entity confirms any reported event or information within 24 hours from the trigger of a MPM, and if the event or information is subject to pricing norms under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”), Takeover Regulations or Buy-back Regulations or any other pricing norms specified by SEBI or stock exchanges, then the effect on the price of the equity shares of the listed entity due to MPM and confirmation of the reported event or information may be excluded for calculation of the price for that transaction as per the framework specified by SEBI[4].
    • Adequate, accurate and timely response to queries – The promoter, director, key managerial personnel, or senior management of a listed entity shall provide adequate, accurate and timely response to queries or explanations requested by the listed entity shall adhere to the provisions of Regulation 30(11) wherein the listed entity may on its initiative, confirm or deny any reported event/ information to stock exchange. Furthermore, the listed entity must promptly disseminate the responses received from these individuals to the stock exchanges.

    SEBI has vide its circular dated May 21, 2024 (available here) provided for industry standards to ensure compliance with Regulation 30(11) of LODR Regulations for verification of market rumours.

    Industry Standard Note (ISN) for verification of market rumour
    • In consultation with SEBI, an ISN has been issued to facilitate uniform approach and assist listed entities in complying with their obligations in respect of confirmation/ denial/ clarification of market rumours and sets out standard operating procedures for compliance with the rumour verification requirement;
    • ISN provides clearly the guidelines on identifying the sources where any rumour is published and clarifies on:

    – Definition of Mainstream Media;

    – Meaning of ‘not general in nature’;

    – Even if the market rumour is specific and impending, a confirmation/  denial/clarification of the market rumour will be required only if the market rumour  results in a ‘material price movement’, as per the framework issued by the stock  exchanges;

    –  Market rumours reported between issuance of pre-intimation notice under Regulation 29(1), and conclusion of the Board Meeting.

    • ISN also provides rumour verification standards for various stages of a potential M&A as well as non-M&A transaction (such as whistle blower, change in KMPs);
    • ISN can be accessed at Notice Number (bseindia.com)
    Timeline for filling a KMP vacancy when authority approval is needed Where the listed entity is required to obtain approval of regulatory, government or statutory authorities for filling the vacancy in the office of KMPs viz. Chief Executive Officer, Managing Director, Whole Time Director or Manager and Chief Financial Officer then such a vacancy must be filled up not later than six months from the date of vacancy as opposed to the three months’ timeline.
    Fixed timeline and additional items for prior intimation to stock exchanges
    • The listed entity shall now give prior intimation to the stock exchange of at least two working days in advance, not counting the date of the notice or the meeting, about the board of directors’ meeting where any of the specified proposals viz. financial results, proposal for buyback of securities, proposal for voluntary delisting, fund raising by further public offer, etc. will be considered and the intimation is additionally required to mention the date of the board meeting.
    • It has further been clarified that prior intimation for determination of issue price in a qualified institutions placement is not required if such placement is done in accordance with the provisions of the ICDR Regulations.
    • The timelines for prior intimation for the following items have been revised from existing eleven working days to two working days in advance and added to the list provided under above:

    – any alteration in the form or nature of any of its securities that are listed on the stock exchange or in the rights or privileges of the holders thereof; and

    – any alteration in the date on which, the interest on debentures or bonds, or the redemption amount of redeemable shares or of debentures or bonds, shall be payable.

    Revision of gap between two consecutive risk management committee meetings The gap between consecutive meetings of the risk management committee is now extended to a maximum of 210 (two hundred and ten) days, compared to the previous limit of 180 days.
    Extension of timeline for compliance for HVDLE The timeline for compliance of Regulations 15 to 27 of the LODR Regulations to a “high value debt listed entity” as defined thereunder, on a ‘comply or explain’ basis has been revised to March 31, 2025 from existing March 31, 2024 and compliance has to be on a mandatory basis thereafter.

    This amendment has been made vide the SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2024 dated May 17, 2024 (available here).

    ELP Comments
    The amendments seek to lessen the effect on the price of the shares of the listed entity due to material price movement. Additionally, listed companies will now need to closely monitor market movements and media reports, ensuring they quickly and accurately share information with the stock exchanges. It has been made clear that unaffected price shall be considered for transactions on which pricing norms specified by SEBI or the stock exchanges are applicable, provided that the rumour pertaining to such transaction has been confirmed within 24 hours from the trigger of material price movement. This, therefore, puts the relevant listed entities on alert to ensure that the timelines are followed. Further, the ISN clarifies on the guidelines which will help the listed entities to identify how and why the rumour verification is to be done and is a welcome move. 

     

  • B. AMENDMENT TO TAKEOVER REGULATIONS
    Amendment Analysis
    Unaffected offer price of the target company Under the Regulation 8 which provides for the determination of the offer price of the target company under the Takeover Regulations, the new addition provides that the effect on the price of the equity shares of the target company due to MPM and confirmation of reported event or information may be excluded as per the framework specified under Regulation 30(11) of the LODR Regulations.
    Unaffected price offered as consideration Further, under Regulation 9 which provides for the mode of payment of the offer price including equity shares being offered as consideration under the Takeover Regulations, the new addition provides that the effect on the price of the equity shares which are offered as consideration, due to MPM and confirmation of reported event or information may be excluded as per the framework specified under Regulation 30(11) of the LODR Regulations.

    This amendment has been made vide the SEBI (Substantial Acquisition of Shares and Takeovers) (Amendment) Regulations, 2024 dated May 17, 2024 (available here) and comes into force from the date of its publication.

    ELP Comments
    This amendment shall encourage the top listed companies to address market rumours openly, as they would be ensured that stock price volatility will not discourage their potential bidders. Additionally, acquirers can disregard market price changes due to information leaks and the target company’s clarifications when setting the open offer price which may in turn lower their overall merger and acquisition cost.

    However, considering that the framework specified under Regulation 30(11) of the LODR Regulations vide the Circular for Framework for Unaffected Price (discussed above) is presently applicable to top 100 listed entities with effect from June 1, 2024 and thereafter top 250 listed entities with effect from December 1, 2024, the benefit of this amendment under Takeover Regulations will be available only to these top listed entities.

  • C. AMENDMENT TO BUY-BACK REGULATIONS
    Amendment Analysis
    Unaffected price for determination of volume weighted average market price Under Regulation 19 which provides for the procedure to be followed by a listed entity for buying back its shares or other specified securities in physical form in the open market through stock exchange, the new proviso states that the effect on the price of the equity shares of the company due to MPM and confirmation of reported event or information may be excluded as per the framework specified under Regulation 30(11) of the LODR Regulations for determination of the volume weighted average market price (the price at which shares and other specified securities are brought back).
    Unaffected price for lower end price range calculation Under Regulation 22B which provides for procedure for the buy-back offer price, the new addition provides that the effect on the price of the equity shares of the company due to MPM and confirmation of reported event or information may be excluded as per the framework specified under Regulation 30(11) of the LODR Regulations for calculation of the lower end of the price range for buying back under this regulation.

    This amendment has been made vide the SEBI (Buy-Back of Securities) (Amendment) Regulations, 2024 dated May 17, 2024 (available here).

    ELP Comments
    Through this amendment, SEBI has aimed to ensure that the prices used for buy-back transactions for the top listed entities more accurately reflect the company’s typical market conditions excluding the effects of substantial price movements and confirmed events as per the specified framework.

    However, considering that the framework specified under Regulation 30(11) of the LODR Regulations vide the Circular for Framework for Unaffected Price (discussed above) is presently applicable to top 100 listed entities with effect from June 1, 2024 and thereafter top 250 listed entities with effect from December 1, 2024, the benefit of this amendment under Buy-back Regulations will be available only to these top listed entities.

  • D. AMENDMENT TO PIT REGULATIONS

    SEBI has introduced the following amendment in the definition of “generally available information” under the PIT Regulations:

    Old Regulation 2(1)(e) New Regulation 2(1)(e)
    “generally available information” means information that is accessible to the public on a non-discriminatory basis;

    NOTE: It is intended to define what constitutes generally available information so that it is easier to crystallize and appreciate what unpublished price sensitive information is. Information published on the website of a stock exchange, would ordinarily be considered generally available.

    “generally available information” means information that is accessible to the public on a non-discriminatory basis and shall not include unverified event or information reported in print or electronic media;

    NOTE: It is intended to define what constitutes generally available information so that it is easier to crystallize and appreciate what constitutes unpublished price sensitive information is. Information published on the website of a stock exchange, would ordinarily be considered generally available.

    This amendment has been made vide the SEBI (Prohibition of Insider Trading) (Amendment) Regulations, 2024 dated May 17, 2024 (available here).

     

    We trust you will find this an interesting read. For any queries or comments on this update, please feel free to contact us at insights@elp-in.com or write to our authors:

    Manendra Singh, Partner, Email – ManendraSingh@elp-in.com ;

    Tanvi Goyal, Associate Partner, Email – TanviGoyal@elp-in.com

    Ambareen Khatri, Senior Associate, Email – AmbareenKhatri@elp-in.com

  • References

    [1] Requires the top 1,000 listed entities based on market capitalisation to include a Business Responsibility and Sustainability Report (BRSR) in their annual report.

    [2] Provided that for those listed entities that follow January to December as its financial year, the provisions shall cease to apply at the end of three months from 31st December of the third consecutive year (i.e. on 31st March).

    [3] For top 100 listed entities with effect from June 1, 2024, and to top 250 listed entities (i.e., next top 150) with effect from December 1, 2024, as provided vide SEBI circular dated May 21, 2024 (available here) (“Circular for Framework for Unaffected Price”).

    [4] SEBI has provided the framework for considering unaffected price for transactions upon confirmation of market rumour vide Circular for Framework for Unaffected Price.

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.