Consider this. A publication finds out that a listed company is in talks for an acquisition by another. It publishes that information and stock prices see a major swing. Some investors benefit greatly while others lose big time. Within hours, the two companies clarify that no such talks are on.

This is a classic case of how company-related rumours can affect markets and investors. Usually, the market regulator steps in and takes stock of such hearsay to moderate any major stock price fluctuations. Last week, the Securities and Exchange Board of India released a consultation paper to amend certain SEBI regulations on where it needs to step in to verify such market rumours.

Before we look at what SEBI has proposed, let’s understand what kind of “rumours” float around in the market.

The rumour mill: Sometimes, companies themselves make these disclosures to stock exchanges to prevent further speculation. For example, last month, food delivery giant Zomato had to deny that it offered to acquire shipping company Shiprocket for $2 billion before the regulator sought clarification:

“We have noticed that there are certain news articles circulating in the mainstream media with the subject ‘Zomato offers to acquire Shiprocket for $2 billion’. We deny this statement and would like to caution investors against such incorrect news floating in the market… Company does not comment on media speculation but is clarifying this information out of abundant caution, given the large size of the deal mentioned in the news article and the uncertainty that it may create in the market.”

There are also cases where the market regulator, through the stock exchanges, seeks clarifications from companies. For example, in the case of Adani Ports and SEZ:

“The Exchange has sought clarification from Adani Ports and Special Economic Zone Ltd on December 05, 2023, with reference to news appeared in https://www.moneycontrol.com dated December 5, 2023 quoting ‘Adani stocks zoom up to 20% after report says US agency finds Hindenburg’s allegations irrelevant’”.

Most recently, SEBI sought clarification from Vodafone Idea on reports of it tying up with Elon Musk’s Starlink for services in India. Vi had to then clarify that it was not in any discussions with Musk’s venture.

What SEBI wants: Under Regulation 30 (11) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, a listed company could “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” are circulating within 24 hours of such events being reported. This verification will be mandatorily applicable to top 100 listed entities from 1 February and the top 250 listed entities from 1 August.

So, what exactly has SEBI proposed now? It wants to change the criterion to verify such rumours to when the “material price movement” takes place instead of a “material event”. In this context, material price means the movement in a stock’s market value after market rumours or predictions; this can be measured against the price at which it was trading before such rumours emerged. On the other hand, a material event could be anything that can impact the stock price—acquisitions, outcome of board meetings, adoption of new lines of business, closure of an arm, or any unplanned event that could impact a business’s turnover, net worth, or profit and loss.

But relying on “material events” to verify rumours has a downside, especially when it comes to the unplanned ones. Such events are more discretionary in nature, and it is mostly up to companies to gauge whether they classify as “material events” at all. This approach is prone to some degree of subjectivity on the company’s part.

This could be why SEBI believes that verifying rumours on the basis of the impact to a company’s stock may be a better approach. After all, stock prices are a key variable, and can be quantified easily. Moreover, investors’ interest largely hinges on stock prices.

Let’s zoom in a bit on SEBI’s recommendations about “material price movement”.

Material price movement: In its paper, the regulator has proposed that it will determine changes in stock movement on the basis of a listed entity’s stock price range and the broader movement in the benchmark indices—Sensex or Nifty 50. Under the new framework, the price movement is only attributable to a rumour and not other announcements.

Also, instead of looking at the absolute change in stock prices, it wants to consider variations in percentage terms and the listed entity’s share price range—a lower percentage variation for securities falling in a high price range and a higher percentage variation for those in a low price range.

It also wants to tweak the timeline for companies to clarify rumours. Currently, it is within 24 hours of events being reported in mainstream media; SEBI suggests that it should be within 24 hours from the stock price movement triggered by such rumours.

The market regulator also wants to ensure that the unaffected price—or the price at which a particular stock was trading before rumours surfaced—is considered when the listed entity confirms the market rumour due to material price movement.

Challenges: A major challenge would be quantification, especially in the case of lower market-cap stocks. As Business Standard puts it, the variation price bands put forth in the paper may have to be tweaked or the benchmark index against which such smaller stocks are measured might need to be changed.

Second, if rumours of a potential deal do get leaked and such a rumour is verified and confirmed, it could impact ongoing negotiations, especially in cases where talks are in early stages.

Lastly, there is lack of clarity on how these rules will work when a listed company is dealing with an overseas entity. For instance, what if there is a rumour about a merger and the Indian company involved is asked to verify it? It may not be able to do so because of non-disclosure agreements with the overseas entity.

The regulator has invited public comments on the paper till 18 January.