SEBI observed that market institutions adhere to volume-based charge structures for the same. File
| Photo Credit: Reuters

The story so far: Markets regulator, the Securities and Exchange Board of India (SEBI) on Monday instructed stock exchanges and other market institutions to levy “uniform and equal” charge structure for all its members, irrespective of the nature of the transaction. The directive was bad news for stockbrokers since it is expected to potentially guide towards a regime entailing higher broking charges from stockbrokers. On Tuesday, scrips of Geojit Financial fell 7% at close on BSE, Motilal Oswal 3.1%, 5Paisa about 3.5% and SMC Global Securities 2.6%. The directions take effect from October 1.

What is the context of the directions?

Stock exchanges impose certain charges on stockbrokers for carrying out transactions on their platform. In turn, stockbrokers recover these charges from their clients (or end customers).

SEBI observed that market institutions adhere to volume-based charge structures for the same. In other words, the charges levied are based on slabs that are segregated based on the volume of the transaction(s) undertaken. Thus, the greater the volume a broker generates, the lesser their transaction fee to the exchange. The same mechanism also works in the U.S. housing NASDAQ and NYSE. Additionally, SEBI also observed that the related entities recover these charges on a daily basis whereas the exchanges receive aggregate charges from the stockbrokers on a monthly basis. The mechanism, as observed by SEBI, has resulted in aggregate charges collected by brokers being higher than the charges paid to the exchange – exhibiting a discrepancy between daily and monthly volumes. The regulator also held concerns about an incorrect or misleading disclosure being made to the client about the charges levied by the exchange. Furthermore, it believes, the charge structure of the exchanges could also create a hindrance for them to impart “equal and fair access” to all market participants. Therefore, with the directive it proposes to create a “level playing field between members” irrespective of their size or the volume of their transactions.

So, what has SEBI directed?

To address the paradigm, SEBI has directed exchanges and other market institutions to levy a “uniform and equal” charge structure for all their members (in this context, stockbrokers). The structure must not be differentiating based on the volume or activities of the member.

The regulator has further sought charges recovered from the end client must be “true to label”. That is, if a stock exchange institutes certain charges on the end client from brokers, it would be the former’s prerogative to ensure that they receive the same amount only.

Additionally, SEBI has sought that due consideration be given to existing per unit charges (on transactions) levied by the exchanges. This is to ensure that the end clients are able to benefit from reduced charges – starting from the unit basis itself.

What repercussions are we looking at?

The difference between the amount paid and charged from their customers forms an essential revenue stream for stockbrokers. The direction is expected to directly impact this paradigm. However, the impact could potentially not be the same across the board. It would vary as per the entity’s dependence on this stream of revenue. Some may possess alternative streams as well. For perspective, Nithin Kamath, CEO and Founder of Zerodha explained in a blog that Zerodha earns about 10% of its revenue as this difference. On similar lines, Geojit Financial in a communication to BSE informed the difference income in FY 2023-24 amounted to Rs 40 lakhs – constituting 0.067% of the total income and 0.22% of profit before tax. Satish Menon, Executive Director at Geojit Financial told The Hindu that 80% of the company’s brokerage income comes from cash markets. “We are of the view that SEBI circular will have an impact on discount brokers, and we can expect an increase in the brokerage rates offered by discount brokers,” he observed.

About Zerodha, Mr Kamath wrote in the blog that the range increased from about 3% to the present state because of the increase in revenue from options trading. “Today, 90% of our revenue from these rebates come from option trading alone. With the new circular, brokers will no longer earn these rebates (difference amount),” he said. The CEO also held that they may have to “probably let go of the zero-brokerage structure” on equity trading. His blog explained that Zerodha was able to provide zero brokerage on equity because it subsidised equity investments with revenue from the F&O trading activity. “This structure could now potentially change. As a business, we may have to introduce a brokerage fee for equity delivery investments, which is currently free, or/and increase F&O brokerage,” he stated.

U.S. short-seller Hindenburg Research had shared an advance copy of its damning report against the Adani Group with New York-based hedge fund manager Mark Kingdon about two months before publishing it and profited from a deal to share spoils from share price movement, according to market regulator SEBI.

The Securities and Exchange Board of India (SEBI), in its 46-page show-cause notice to Hindenburg, detailed how the U.S. short seller, the New York hedge fund and a broker tied to Kotak Mahindra Bank benefited from the over ₹150 billion routs in the market value of Adani Group’s 10 listed firms post-publication of the report.

The SEBI charged Hindenburg with making “unfair” profits from “collusion” to use “non-public” and “misleading” information and induce “panic selling” in Adani Group stocks.

Hindenburg, which made public the SEBI notice, in its response, has described the show-cause as an attempt to “silence and intimidate those who expose corruption and fraud perpetrated by the most powerful individuals in India” and revealed that the vehicle used to bet against Adani’s flagship firm Adani Enterprises Ltd belonged to Kotak Mahindra (International) Ltd, a Mauritius-based subsidiary of Kotak Mahindra Bank Ltd. (KMIL).

KMIL’s fund placed bets on Adani Enterprises Ltd for its client Kingdon’s Kingdon Capital Management.

The SEBI notice includes extracts of time-stamped chats between an employee of the hedge fund and KMIL traders for selling future contracts in AEL.

Kotak Mahindra Bank has stated that Kingdon “never disclosed that they had any relationship with Hindenburg nor that they were acting on the basis of any price-sensitive information”.

SEBI — which last year told a Supreme Court-appointed panel that it was investigating 13 opaque offshore entities that held between 14% and 20% across five publicly traded stocks of the Adani Group — has sent notices not just to Hindenburg but also to KMIL, Kingdon and Hindenburg founder Nathan Anderson.

Lawyer’s claim

Senior lawyer Mahesh Jethmalani, who had in the past spoken for the Adani Group, in a post on X claimed that Kingdon had a Chinese link. Kingdon is married to “Chinese spy” Anla Cheng, he claimed.

“Accomplished Chinese spy Anla Cheng, who along with her husband Mark Kingdon, hired Hindenburg for a research report on Adani, engaged the services of Kotak to facilitate a trading account to short sell Adani shares; made millions of dollars from their short selling; eroded Adani market cap enormously,” he alleged.

Kingdon, which had a controlling stake in KMIL’s K-India Opportunities Fund Ltd, had a pact to share with Hindenburg 30% of profit made from trading in securities based on the report, the SEBI letter said, adding this profit share was cut to 25% due to the extra time and effort needed to reroute trades via the K India fund.

The market regulator said Kingdon transferred ₹43 million in two tranches to build short positions in AEL. The K India fund built short positions for 8,50,000 shares ahead of the report release and squared off these positions soon after the report was released.

According to SEBI, Hindenburg published a report titled ‘Adani Group: How the World’s 3rd Richest Man is Pulling The Largest Con in Corporate History’ on January 24, 2023 (United States time – January 25, 2023, according to IST) during pre-market hours.

Fall in price

“Prior to the release of the Hindenburg Report, concentration in short-selling activity was observed in the derivatives of Adani Enterprises Ltd,” it said. “Pursuant to the release of the said report, the price of AEL fell by around 59% during the period from January 24, 2023 to February 22, 2023” — from ₹3,422 to ₹14,04.85 per share.

SEBI said K India Opportunities Fund Ltd – Class F (KIOF Class F) opened a trading account and started trading in the scrip of AEL just a few days prior to the publication of the report and then squared off its entire short position post-publication of the Hindenburg Report, making significant profits of ₹183.23 crore (₹22.25 million).

“The net profit after trading and legal expenses comes to ₹22.11 million,” SEBI said.

As part of the deal, Kingdon owed Hindenburg ₹5.5 million, of which ₹4.1 million had been paid as of June 1, the notice said.

In its response to SEBI, Kingdon Capital said it had got legal option that it could “enter into a research services agreement with a third-party firm that publicly releases short reports on companies, pursuant to which Kingdon Capital would be given a draft copy of the report before it is made publicly available and would have the opportunity to accordingly made investments before the report’s public dissemination”.

A show-cause notice is often a precursor to formal legal action that may include imposing financial penalties and barring participation in the Indian capital market. SEBI can also seek government help to geoblock the research firm’s website.

21 days’ time

SEBI has given Hindenburg 21 days to respond to its allegations.

Hindenburg, which published the SEBI notice on its website, in its response stated that it made just ₹4.1 million from its declared positions on Adani stocks and criticised the regulator for not focusing its investigation into the January 2023 report “providing evidence” of the conglomerate creating “a vast network of offshore shell entities” and moving billions of dollars “surreptitiously” into and out of Adani public and private entities.

It said that while SEBI was seeking to claim jurisdiction over a U.S.-based investor, the regulator’s notice “conspicuously failed to name the party that has an actual tie to India: Kotak Bank,” which created and oversaw the offshore fund structure used by Hindenburg’s investor partner to bet against Adani.

The regulator “masked the “Kotak” name with the acronym “KMIL”, it added.

KMIL refers to Kotak Mahindra Investments Ltd, the asset management company.

Chief Justice of India D.Y. Chandrachud with SEBI Chairperson Madhabi Puri Buch during the inauguration of new office premises of Securities Appellate Tribunal, in Mumbai, on July 4, 2024.
| Photo Credit: PTI

Chief Justice of India D.Y. Chandrachud on July 4 advised market regulator SEBI and the Securities Appellate Tribunal (SAT) to exercise caution amid a significant surge in equity markets and pitched for more tribunal benches to ensure that the “backbone is stable”.

Inaugurating the new SAT premises in Mumbai, CJI Chandrachud pitched for authorities to consider opening up new benches of the SAT given the higher workloads because of higher quantum of transactions and newer regulations.

Referring to newspaper articles calling the crossing of the 80,000 points milestone by the BSE as an ecstatic moment, where India is entering a “stratospheric domain”, the CJI pointed out that such events emphasise the need for regulatory authorities to ensure that everyone holds their “balance and nerves” amid the wins.

“The more you see the surge in the stock market, the greater the role, I believe, for SEBI and SAT, as institutions which will exercise caution, celebrate the successes but at the same time, ensure that the backbone is stable,” the CJI said.

He added that SEBI and appellate fora like SAT assume “immense national importance” in fostering a stable and predictable investment environment, and explained how this can benefit in economic growth for the country.

“When investors feel assured that their investments are protected by law and that there are effective mechanisms for dispute resolution, they are more likely to invest in the country’s markets. This influx of investment can lead to better economic outcomes such as increased capital formation, job creation and overall economic growth,” the CJI said.

The role of SAT in the “dog eat dog” world of finance is that of a referee in ensuring that everybody plays by the rules, he said, stressing on the need to be updated by keeping pace with new developments.

With the rapid growth in the number of market participants and transaction volumes, there is a likelihood of an increase in disputes and may be even instances of regulatory non-compliance, he said.

In addition, issues like market conduct and corporate governance have increased appeals filed with SAT “manifold”, the CJI said, pitching for an early filling up of the vacancies at SAT to ensure that the tribunal functions effectively and at full capacity.

CJI Chandrachud, who called the event as a “homecoming” because he had appeared in the tribunal first as a lawyer, also pitched for more SAT benches pointing out that the statutes allows for it.

He later told reporters that creating additional benches is a “policy issue” and he has flagged the issue as the Chief Justice of India given the growth in the work. “It is an aspect which should be considered by those who have responsibility for taking these decisions,” he said.

SAT’s presiding officer Justice P.S. Dinesh Kumar said there are 1,028 pending appeals in the SAT and it has disposed of over 6,700 appeals since its inception in 1997.

The CJI said timely actions and correction of aberrations is very important in the financial sphere, and cited a 5-bench judgement on a critical matter recently which came within a month of the original order as a case in point.

The CJI also shared the thinking during the selection of the SAT head recently to point out that there is a perception in the “highest level of government” that it is a key tribunal in terms of economic regulation.

“Therefore it is necessary to have a person who may not necessarily be someone who has practiced securities law or presided over securities cases but who has the basic and robust approach to regulation,” he said.

He also launched a new website of the SAT on Thursday which has been created by the National Informatics Centre, and stressed on the need to devote adequate attention to the issue of technology.

With the advancements in the digital arena, there is a need to reimagine the concept of access to justice, he said.

The Securities and Exchange Board of India (SEBI) has directed stock exchanges and other MIIs to implement a uniform and equal charge structure for all members. File
| Photo Credit: Reuters

Shares of stock broking firms declined on July 2, a day after markets regulator Sebi directed stock exchanges and other market infrastructure institutions (MIIs) to implement a uniform and equal charge structure for all members rather than varying charges based on their volume or activity.

At the close of trade, the stock of Angel One tanked 8.72%, Geojit Financial Services tumbled 6.83%, Motilal Oswal Financial Services dropped 4.19%, SMC Global Securities went lower by 2.81%, Dolat Algotech declined 2.28% and 5paisa Capital dipped 0.05% on the BSE.

During the day, shares of Angel One tumbled 10.50%, Geojit Financial Services tanked 7.59%, Dolat Algotech dropped 5.39%, Motilal Oswal Financial Services went lower by 4.63%, 5paisa Capital declined 4.51% and SMC Global Securities fell 4.13%.

The regulator instructed stock exchanges, clearing corporations, and depositories constituted as MIIs to ensure that any charges recovered from the end client are ‘True to Label’.

It means that if a certain charge is levied on the end client by members — stock brokers, depository participants, clearing members — it should be ensured by MIIs that the same amount is received by them.

“To begin with, the new charge structure designed by MIIs should give due consideration to the existing per unit charges realised by MIIs, so that the end-clients are benefited from the reduction of charges,” Sebi said in a circular on Monday.

The regulator has asked MIIs to comply with these additional principles while designing the processes for charges levied on their members, which are to be recovered from the end clients.

MIIs, being public utility institutions, act as first-level regulators, and are entrusted with the responsibility of providing equal, unrestricted, transparent and fair access to all market participants.

File picture
| Photo Credit: Reuters

Kotak Mahindra International Limited said on Tuesday that U.S. short-seller Hindenburg Research has never been an investor in the K-India Opportunities Fund.

Kotak was responding to allegations that Hindenburg colluded with its client Kingdon Capital Management and used a Kotak group offshore fund to short Adani group shares last year.

“The Fund was never aware that Hindenburg was a partner of any of its investors,” Kotak said in a media statement.

It added that investments were made in the fund by its investors and not on behalf of any other person.

Kotak further said that it is cooperating with India markets regulator.

New Delhi:

Markets regulator Securities and Exchange Board of India (SEBI) has issued a show cause notice to Hindenburg Research LLC, Nathan Anderson, and the entities of Mauritius-based foreign portfolio investor Mark Kingdon for trading violations in the scrip of Adani Enterprises Ltd. leading up to Hindenburg Report and thereafter. 

The regulator has alleged that Hindenburg and Anderson have violated regulations under the SEBI Act, SEBI’s Prevention of Fraudulent and Unfair Trade Practices regulations, and SEBI’s Code of Conduct for Research Analyst regulations.

While FPI Kingdon has allegedly violated the SEBI Act, SEBI’s Prevention of Fraudulent and Unfair Trade Practices regulations, and SEBI’s Code of Conduct for Foreign Portfolio Investors.

The regulator pointed out that the Hindenburg and the FPI entities undertook a misleading disclaimer that the report was solely for the valuation of securities traded outside India when it clearly pertained to listed entities in India. 

The regulator said that Kingdon aided Hindenburg to indirectly participate in Adani Enterprises by collaborating with the short seller to trade in the company’s futures in the Indian derivatives market and shared profits with the research firm.

Hindenburg continues to defend its January 2023 report.

Mumbai:

Brokers and mutual funds should stop using unregulated financial influencers for marketing and advertising campaigns, markets regulator SEBI said today.

The Securities and Exchange Board of India (SEBI) said financial influencers engaged in investor education will be exempt from the new restrictions.

The decision was taken to address concerns related to “certain persons, including unregulated entities, inducing investors to deal in securities based on inappropriate claims,” SEBI said in a press statement issued after a board meeting.

A surge in retail investors’ participation in equity markets during the pandemic has led to a rise in so-called influencers pushing financial advice via social media platforms.

India had 154 million trading accounts as of April 2024, according to SEBI data, a more than four times jump from the 36 million trading accounts in April 2019.

It will be the responsibility of the regulated entity to ensure that individuals with whom it is associated do not breach the rules of conduct set by SEBI, including avoiding the promise of assured returns.

SEBI’s board also approved changes to delisting rules that would make it easier for companies to exit from stock exchanges.

Congress Rahul Gandhi shows a stock market movement chart during a press conference in New Delhi on June 6, 2024.
| Photo Credit: AP

The story so far: The Indian stock market witnessed extreme volatility right after the release of the exit poll results earlier this month and on June 4 when the results of the latest Lok Sabha election were declared. The benchmark indices, the Nifty and the Sensex, have since managed to recover the losses. The Congress alleged that Prime Minister Narendra Modi and Home Minister Amit Shah had manipulated the stock market through their statements to favour certain investors.

What is the controversy about?

The Nifty and the Sensex gained 3.2% and 3.4%, respectively, to hit all-time highs on June 3, the first day of trading after the exit poll results, which were released over the preceding weekend, suggested that the BJP would win a resounding majority in the election. The biggest gainers were stocks of companies that were seen to be close to the government, such as the Adani Group stocks, and stocks of public sector companies which were expected to benefit during Mr. Modi’s third term in power. Both the benchmark indices, however, slumped by almost 6% the very next day after the actual results failed to match exit poll predictions. The decline on June 4, which was the worst single-day fall in the stock market since March 2020 in the wake of the COVID-19 pandemic’s outbreak in India, wiped out investor wealth worth about ₹30 lakh crore. Prior to the exit poll results, the Prime Minister and the Home Minister had made statements encouraging investors to buy stocks before June 4 in order to benefit after the election results.

What is the Opposition’s allegation?

The Congress has alleged that Mr. Modi and Mr. Shah deliberately made comments exhorting retail investors to purchase stocks before the day of the election results and that this was an attempt to manipulate the market to favour certain foreign investors. To back this claim, the party’s data wing head Praveen Chakravarthy has drawn attention to the doubling of the value of stocks traded for cash in the market on May 31, the last trading day before the release of the exit poll results. The total value of stocks traded on May 31 was ₹2.3 lakh crore against ₹1.1 lakh crore the previous day. Mr. Chakravarthy has noted that more than half the buying that happened on May 31 came from foreign investors and further added that foreign investors were largely net sellers prior to May 31, when they suddenly turned net buyers of stocks. According to him, the PM’s statements encouraging investors to buy stocks before June 4 would have benefited these foreign investors who managed to load up on stocks before the exit poll results gave a sharp 3% bump to the stock market on Monday. The Opposition parties claim that these foreign investors had insider information about the exit poll results. They also add that the foreign investors managed to offload their stocks on Monday to retail investors who were not just late to the party but also suffered huge losses on Tuesday. The Opposition parties have called for a joint parliamentary committee (JPC) to probe the matter.

What do the market regulator’s rules say?

The Securities and Exchange Board of India’s Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market (FUTP) Regulations state that “planting false or misleading news which may induce sale or purchase of securities” is illegal. But there are exceptions. Comments on the overall market trend when broadcast to the wider public through mass media such as TV and newspapers, are not considered to be the same as information secretly leaked to certain investors to benefit from a coming market move. If not for such exceptions, it would be impossible for anyone to voice their opinion on the market. So, experts contend that unless, say, an investigation can prove that Mr. Modi acted in collusion with certain investors to boost the market prior to the exit poll results, there is probably nothing illegal about his statement urging investors to buy before June 4.

How has the Centre responded?

Union Minister Piyush Goyal responded to the Opposition’s accusations by arguing that foreign investors actually bought stocks at a high price and sold at a low price while Indian investors deftly used the market’s volatility to sell high and buy low. NSE data appeared to back this contention as it shows the umbrella category of ‘retail investors’ were net sellers of stocks on May 31 and June 3, when the market rose, while they were net buyers of stocks worth ₹21,179 crore on June 4, when the markets crashed. Foreign portfolio investors (FPIs), meanwhile, were net buyers on May 31 and June 3 when the markets went up and were net sellers on the day the markets crashed. Some market experts, however, point to the fact that the NSE’s ‘retail investors’ category includes not just small ordinary retail investors but also non-resident Indians (NRIs), HUFs, individual/proprietorship firms and partnership firm /Limited Liability Partnership (LLP) that encompass the investment vehicles used by ultra high net worth and high net worth individuals. These experts observe that shares worth a net amount of more than ₹21,000 crore were bought by ‘retail investors’ from FPIs and domestic mutual funds and that such heavy buying was unlikely to have been done by small ‘retail investors’ alone.

Further, while FPIs bought stocks worth ₹96,155 crore on May 31, the highest-ever in history, they also sold stocks worth ₹93,977 crore on the same day. In other words, despite the sudden rise in trading activity, foreign investors were not huge net buyers of stocks on May 31. This is, however, not to categorically say that there was no mischievous activity during the day. Data on net purchases or sales may not reflect how individual foreign investors with insider information may have benefited. Further, whether an investor group profited or lost money can also depend on exactly when during a trading session they managed to buy or exit a stock regardless of whether the indices closed higher or lower that day. Only a thorough investigation based on granular data can offer an answer to whether there was manipulation.

Image for representational purposes only.
| Photo Credit: Reuters

The story so far: In order to tackle any impact on the price of a scrip because of a market rumour, the Securities and Exchange Board of India (SEBI) on May 21 introduced a framework centred around its ‘unaffected price.’ The metric would help obtain the price of the scrip before a rumour influenced its price. The idea is to maintain a reasonable price for a scrip, excluding any undesired influence before the rumour is confirmed or refuted. This helps both the company and the investor utilise a more unaffected and thus precise pricing for undertaking their regular business activities (such as mergers, acquisitions or buybacks). The framework is to be implemented in phases: it would apply to the top 100 listed entities from June 1 onwards and the top 250 entities from December 1 onwards.

How is the framework looking to utilise ‘unaffected price’? 

To put it simply, the ‘unaffected price’ of the scrip would indicate its price before a particular rumour emerged became public. It would only be triggered if the rumour is confirmed by the company in question within 24 hours from when the scrip exhibited sizeable upward or downward movement. It would work a shielding mechanism which is triggered only when companies adhere to timeliness and transparency.  

For perspective, a rumour about an acquisition, merger and demerger, sale of a lesser- performing asset, buybacks (when companies intend to buy the shares available in the open market), joint ventures or management changes can potentially raise the price of the scrip. The inflated price of the scrip because of the rumour, that is, primarily because of an informational asymmetry, averts the ability of market participants to obtain a rational price. This mechanism aims to tackle this paradigm.

Vamsi Krishna, CEO at StoxBox, explained to The Hindu that rumours relating to the award/cancellation of orders, management changes, acquisitions and takeovers and financial performance result in “unruly” moves in share prices. The unaffected price mechanism, Mr Krishna states, would put in place a fair price discovery mechanism to protect the interest of market participants. “The new mechanism would ensure that there is a level playing field for buybacks, M&As and other transactions (retail and institutions) and speculative activity is curbed to an extent,” Mr Krishna adds. 

Further, as explained by HDFC Securities in a LinkedIn post, it would help improve market integrity by instilling better confidence in investors through listed companies that respond faster and clarify more transparently, and would push forward a better distribution of information. 

What exactly is the metric? 

A market rumour affects the volume weighted average price (VWAP) of the scrip. VWAP is an indicator of the average price at which the share traded through the day. It also factors in the volume of each of the trades to attain an average. Incorrect pricing of VWAP directly affects the scrip from being priced correctly for the business transactions described above.  

What is the maths behind determining ‘unaffected price’? 

The framework stipulates the variation in daily weighted average price from the day of the material price movement till the end of the next trading day after the confirmation of the rumour would be attributed to the rumour and its subsequent confirmation.

Let’s say a rumour emerges on a certain Tuesday — a day after a Monday when the stock had closed at Rs 200. Since the rumour emerged on Tuesday, it forms the day of the material price event which has impacted the scrip to close shop with a WAP of Rs 230. At close on Wednesday (24 hours later), after the company confirms the rumour at intraday – the scrip’s WAP stands at Rs 245. And on Thursday, the next trading day after the rumour is confirmed – its WAP is at Rs 260. In this case, the adjusted WAP, which would help attain the ‘unaffected price’, would be Rs 60. That is, the difference between Rs 200 a day before the rumour spread and Rs 260 the next trading day after the rumour was confirmed.  

Important to note, the framework stipulates that the adjusted daily WAP from the day of the material price movement (in our example, Tuesday) till the end of the next trading day after the confirmation of the rumour shall be the same as the daily WAP preceding the day of the volatile movement. That is, Rs. 200 would be the daily WAP until Thursday in our example. Thereon, Rs. 60 (adjusted WAP) would be utilised to compute the adjusted Daily WAP. In a way, this ensures that the impact is cushioned temporarily (until an official confirmation) against a knee-jerk reaction in the immediate aftermath.  

A FICCI note explains that if Company A is buying shares of Company B, then the mechanism would be triggered for Company B upon confirmation by the former. In case of a demerger, the mechanism would be triggered for both. 

What is its applicability?  

The unaffected price shall be applicable for a period of 60 or 180 days based on the stage of transaction. This would be from the date the rumour was confirmed till the ‘relevant date’ when there is a public announcement, board approval, or other event, as the case may be.  

Whilst trying to determine the structure of the mechanism, SEBI deemed the 60-day period to be “reasonable.” For any of the regular business transactions mentioned above, the market regulator felt the suggested period would be enough to seek the necessary board approvals from their respective boards. In the meantime, the mechanism would back these entities by providing a safety cushion— thus safeguarding the price of a scrip from any undesired fluctuation.  

The 180-day period would come in particularly useful for acquisitions. Typically, in an acquisition scenario involving multiple prospective buyers, the entity on sale takes time to finalise the sale, primarily negotiating favourable terms for the sale. This process may entail a couple of months. The 180-day safety shield would thus come in particularly handy for a more suitable realisation of prices in the buffer or the ‘shopping’ period.  

Should another rumour emerge pertaining to the same transaction, which could be from the mainstream media providing material updates about the initial transaction, the unaffected price subsequent to the confirmation of this rumour shall be applicable for the next 60 days. 

New Delhi:

The top 100 listed companies by market capitalization will have to confirm or deny any market rumour reported in the mainstream media from today.

The rule will be applicable for top 250 companies from December 1.

Under the Sebi’s rule, these companies will have to ‘confirm, deny, or clarify any reported event or information in the mainstream media that is not general in nature and that indicates that rumours of an impending specific material event’ are circulating amongst the investing public within 24 hours from the reporting of the information.

Sebi through its newly introduced rumour verification framework has excluded the price volatility in arriving at average market price for the purpose of corporate actions in a bid to make it fair for all investors at large.

“The move would dissuade leaking of information that would affect the valuation in the given corporation action. This initiative of Sebi would help strengthen the rumour verification framework. It would help in achieving a fair market thereby making it a preferred market for investors all over the world,” Makarand M Joshi, founder, MMJC and Associates, a corporate compliance firm, said.

While calculating the price for various corporate actions such as buyback through book building, buyback through stock exchange, qualified institutional placement, preferential allotment, takeovers, effect on shares price due to material price movement and confirmation of reported event or information can be excluded.

It means that while calculating price for corporate actions the period during which material price movement was seen in the stock due to confirmed rumours would be excluded.

Market rumours pertaining to a company’s business can create significant volatility in stock prices, often leading to transactions that don’t reflect a company’s true value. This market rumours could be related to anything, including exiting of top management, cancellation of an order and financial health.

“Sebi’s framework addresses this issue by establishing a mechanism to determine the unaffected price — the price of a stock before the rumour surfaced. This price would be used for transactions unless the rumour itself caused price fluctuations in subsequent trading days,” Trivesh, Chief Operating Officer of Tradejini, had said.
 

(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)