Reshaping Disclosure Rules: Managing the Implications of Recent Changes in the LODR Amendment

Introduction

The market’s quick propagation of misleading information and rumours has had a substantial negative impacted the environment of financial markets and mergers and acquisitions; realizing the significance of this issue, the Securities and Exchange Board of India (SEBI) presented a revolutionary amendment to the Regulations governing Listing Obligations and Disclosure Requirements (LODR). When it comes to the effectiveness of these amendments will be determined by the enforcement mechanisms used to implement these rules. Regulation 30(11) previously had a general clause that allowed the specified for a corporation to affirm or refute any event or information that has been published to the stock market on its own, making rumour confirmation optional.The top 100 listed companies must now “confirm, deny, or clarify any reported event or information in the mainstream media” (from October 1, 2023) and, eventually, the top 250 listed corporations (from April 1, 2024). The creation of a legal framework for businesses to examine and authenticate market rumours, as well as the necessity for businesses to confirm or reject the rumours, is one of the most significant aspects of the new LODR amendment. By ensuring that investors receive accurate and trustworthy information, this new method will promote greater openness by reducing the likelihood of misinformation-driven market volatility.

Stock Exchange

The requirement under Regulation 30 read with Schedule III of the LODR Regulation (the “Market Rumours Amendment”) was adopted by SEBI (Securities and Exchange Board of India) on June 14, 2023. The purpose of this requirement is to provide the stock exchange with confirmation, denial, or clarification of market rumours. The tale of Adani-Hindenburg and the Amazon-Future Group, which intensified the desire for maintaining market symmetry to defend the rights of all investors, led to the development of these legislation.

“Establishing a Flexible Framework for Effortless LODR Amendment Compliance: Key Company Policy Enhancements”

The most recent changes made by SEBI are meant to adapt to the changing market conditions. SEBI correctly stated that there is a need to safeguard the interests of firms listed on the exchange because, in the digital age, when social media is widely used, information spreads quickly. As there is no information verification system on social media, it is incredibly simple for rumours to spread on the digital platform. Because these rumours have an impact on the market and present risks to stakeholders and all investors, the listed entities are expected to adopt steps that make it simple to comply with regulations and speed up the public disclosure of any material occurrences / information. The social media can cause a rapid price fluctuation in the market, hence the it must be ensuring the timely verification of such rumours so that they may react to them before the market price of their stocks is adversely affected.

There are certain measures that listed companies can take to guarantee that the rumour verification requirement is being followed:

  1. DEVELOP A MECHANISM FOR RUMOUR VERIFICATION – Listed companies should develop a special procedure or system to quickly confirm the veracity of rumours or possibly false information.
  2. MEDIA RELATION STRATEGY- Companies should establish appropriate channels to guarantee the fast broadcast of verified information, such as stock exchanges, business websites, press releases, and investor forums where the public and investors may obtain the real facts about the listed companies.
  3. WHISTLE BLOWER MECHANISM – Every listed company must have a whistle blower mechanism for reporting false rumours that are circulating in the market. Good whistle blower method will benefit the business inside by encouraging employees to disclose any untrue rumours that are circulating within the organisation that, if not halted, may become public and have a negative impact.
  4. DESIGNATED SPOKESPERSON – Companies that are publicly Listed should appoint a designated spokesperson or investor relations officer who will be responsible for connecting with stakeholders and responding to any enquiries or rumours.

Implication of LODR on capital market

MARKET VOLATILITY: Driven by the bandwagon effect made possible by the increasingly widespread use of social media, Internet-based rumours have the potential to cause a decline in investor confidence and amplify the spread of financial risks. They also serve as a key source of market insights. Such circumstances have the potential to undermine the financial system and perhaps spark civil unrest. Positive rumours often have observable positive effects on stock valuations, whereas negative rumours frequently have stronger effects on well-known corporations, particularly in the context of “earnings” and “foreign takeovers,” with little effect on market fluctuations through rumours of corporate mergers and acquisitions. The market’s considerable abnormal returns in the days immediately after the appearance of these rumors within the market milieu serve as evidence of their veracity. However, manually identifying these rumors can be extremely time-consuming and subject to human biases. As traders and investors react to breaking developments, the possibility for increased market instability arises from the reforms’ capacity to verify market rumors.

Data privacy– Affirming a rumor in the market could mistakenly reveal private information that the company was not sufficiently ready to share. This unintentional disclosure could lead to unlawful disclosures about upcoming business plans, alliances, mergers, or acquisitions, undermining the company’s competitive edge and exposing sensitive customer and consumer data. This circumstance may serve as a catalyst for data breach, misuse, or abuse situations, having an impact on both the cognitive and emotional dimensions of trust. Therefore, the concepts of oversight and transparency work together and individually to mitigate the negative effects of all categories of vulnerabilities resulting from these suppositions11. Transparency and oversight work together to moderate the relationship between various types of vulnerability and performance.

MARKET MANIPULATION: Given the ongoing effort of market participants to foresee information that may have an impact on corporate financial performance and other people’s behavior, competition in the stock market revolves around the acquisition of information of various types, with different configurations and contents, disseminated through various channels. Similar to this, rumors can be addressed through remarks released at various times. Notably, a single rumor may repeat itself, emerging at different times from the same or other sources. These rumors may be related to corporate acquisitions, fraud, tax payments, asset sales, stock issuances, and other similar topics.

Conclusion

In conclusion, SEBI’s most recent changes to the LODR laws are a substantial response to the issues brought on by the quick spread of rumors and false information in the financial markets. These modifications create a framework for businesses to effectively handle and validate market rumors, ensuring the prompt and precise disclosure of important information. While these changes are essential for lowering market volatility, they also need to take data privacy and the possibility of market manipulation into account. These regulation adjustments are a crucial step in preserving market integrity and investor confidence in an era of quick information transmission. To succeed in the changing financial world, all stakeholders must be able to adapt to these changes.

Author: Tejanshu Vashishtha, A Student at National university of Study and Research in Law, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney.

References

SEBI | Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 [Last amended on November 09, 2021]

https://www.sebi.gov.in/legal/regulations/nov-2021/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-regulations-2015-last-amended-on-november-09-2021-_37269.html

zomatoblinkit: Investors sceptical about Zomato’s acquisition of Blinkit: Jefferies – The Economic Times (indiatimes.com)

Amendment To The SEBI LODR Regulations – Shareholders – India (mondaq.com)

Amendment To The SEBI LODR Regulations – Shareholders – India (mondaq.com)

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