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Krishnendra Joshi: Could you give a overview of the newly introduced rumour verification and price protection framework under SEBI (LODR) Regulations
Abhishek Dadoo: The newly introduced price protection framework under SEBI (LODR) 2024, aims to mitigate the potential risk of deal failure on account of unexpected price escalation in shares of a listed company. This is achieved by artificially correcting the base price for various transactions which prescribe a floor – for instance: preferential issue, QIP, takeover, delisting, etc. To illustrate simply, if a market rumour about a preferential issue in a listed company results in price escalation (say, from INR 100 to INR 120), and such rumour is confirmed within 24 hours, then the unexpected price movement of INR 20 (being INR 120 – INR 100) would not be factored towards the floor price for the preferential issue. The actual price adjustment formula of course is more nuanced and linked to the weighted average price and circuit filters of the stock. On a lighter note, we have internally coined the thumb rule for the rumour verification and price protection framework as ‘TMSD24’ (T: track publications for leaks, M: in case of leak, check for material price movement, S: in case of material price movement, check if rumour is specific, D24 – if rumour is specific, then disclose within 24 hours).
Krishnendra Joshi: What is the applicability of the rumour verification requirement after the amendment under SEBI (LODR) Regulations and how is the material price movement calculated under the new regime?
Abhishek Dadoo: SEBI regulations require listed entities to confirm, deny or clarify market rumours (impending and specific) which are reported in the mainstream media, upon material price movement. (“rumour verification requirement”). The rumour verification requirement shall be applicable to 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. Such “material price movement” calculated in accordance with the price movement framework issued by the stock exchanges (on May 21, 2024) is now considered for the rumour verification requirement instead of criteria specified under Regulation 30 of LODR Regulations for determining materiality of events or information.
What does the SEBI circular dated May 21, 2024 say when it comes to determining material price movement?
Abhishek Dadoo: If the listed entity confirms a market rumour within 24 hours from the trigger of material price movement, then the effect on the price of its equity shares due to the material price movement and confirmation may be excluded where pricing norms specified by SEBI or the stock exchanges are applicable for calculation of the transaction price, in accordance with the framework provided by SEBI circular (May 21, 2024) for considering unaffected price (“Framework”).
The Framework provides the mechanism for calculation of the adjusted VWAP for considering unaffected price, (calculated by excluding the WAP variation in the daily VWAP in the look back period from the day of the material price movement until the next trading day after rumour confirmation).
The unaffected price will be available for a period of:
60 days from the date of confirmation of the market rumour, in case (i) a binding term-sheet is signed in respect of an M&A transaction; or (ii) all the material commercial terms have been agreed between the parties, and the management decides to take the transaction to the board (or a delegated board committee) for its consideration and final approval; or (iii) in respect of the securities of a listed bidder or listed acquirer, as the case may be, in case the transaction involves the securities of a listed bidder/ listed acquirer as well, and a confirmation in this regard is made as a part of the rumour verification; and
180 days from the date of confirmation of the market rumour, in case if there’s a competitive bidding process for a potential M&A deal (the same shall be available to all bidders).
Krishnendra Joshi: How is the amendment likely to impact public M&A deals in India?
Abhishek Dadoo: The rumour verification and price protection framework is certain to benefit Public M&A – it seeks to achieves the long elusive goal of information symmetry in the market place and at the same time guarantees the commercially agreed price (which is not impacted by a runaway market). This framework rightly covers various spheres of Public M&A transactions, inter-alia, including (i) preferential issue of securities, including as part of a scheme of arrangement; (ii) a qualified institutions placement; (iii) open offers; (iv) delisting offer; (v) buyback; or (vi) any other transaction where the pricing is regulatorily required to be linked to the traded price of the scrip.
Krishnendra Joshi: Will foreign investors rejoice in public M&A deals under the new regime?
Abhishek Dadoo: Foreign and domestic investors are equally benefited – since stability of the target’s market price is a key element in public M&A deal making – for instance, the market price plays a key role in determining the minimum open offer price in a control transaction (which accounts for a substantial portion of potential cash flow for any acquirer). By mitigating the risk of an increased open offer price – the new framework provides much needed comfort to investors in securely negotiating and completing public M&A deals without the fear of an unexpected hurdle.
Krishnendra Joshi: How does SEBI's rumour verification and price protection regime compare to major market governance regulations, globally?
Abhishek Dadoo: SEBI regulations are broadly aligned with the NYSE manual on confirming or denying market rumours – with the NYSE diktat being more stringent by providing an additional layer of investigations by the exchanges in certain circumstances.
While SEBI regulations only trigger on breaching certain pricing thresholds, SGX rules require the entity to confirm or deny any rumour "which is likely to have, or has had, an effect on the price of the issuer's listed securities or would be likely to have a bearing on investment decisions" – thus focussing upon a pre-emptive approach rather than ex post facto approach. The SGX rules cast an additional duty to inform the initial distributor of the rumour (e.g. newspaper which published the rumour). Interestingly, SGX rules carve out an exception for a rumour or report predicting future sales, earnings or other data, where no response from the issuer is ordinarily required.
Both the SGX rules and NYSE manual acknowledge the concern of business inconvenience – however, they consider such disclosure to be essential (even if the matter is yet to be presented to the issuer's board for consideration).
Krishnendra Joshi: As a closing comment, do you foresee any further amendment in the price protection framework. Are there any gaps that the regulators need to address?
Abhishek Dadoo: The rumour verification and price protection framework has ushered in a new and bold regime – it is bound to have certain teething issues in the first few months. We can expect certain clarifications on aspects such as method of calculation of material price movement, specificity of rumour / information etc. Overall, the regime appears to be built on a strong foundation and is only likely to see improvements (based on industry inputs and otherwise) in time to come.
