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SEBI Proposal On Market Rumours Can Be Counterproductive, Say Experts

Price fluctuation, deal uncertainty, confidentiality and liability make SEBI's proposal challenging for M&A, say experts.

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Market regulator SEBI’s proposal for the top 250 listed companies to mandatorily confirm or deny market rumours about them can cause major disruptions for mergers and acquisitions, according to experts. 

The Securities and Exchange Board of India is seeking to codify the requirement of verification of mainstream media reports that may have a material effect on the listed company.

The language in the proposal is absolute and can cause problems, Umakant Varottil, associate professor at the National University of Singapore, said.

Certain leeway can be provided if the deal is confidential or the negotiation is incomplete, Varottil said, citing examples from international cases, in a webinar organised by the law firm Resolut Partners. 

According to Hetal Dalal, president at the proxy advisory firm IiAS, the regulator’s intent is understandable and this might force market participants to tighten the way and manner in which information is disseminated.

That said, the way the proposal currently reads can create complications, Dalal said. 

She highlighted the example of the recent news of a mineral water company’s acquisition. The selling party admitted to a TV channel that it’s selling but the buyer didn’t. The parties to the transaction itself can use the media to bump up the price and start a bidding war, she said. 

Reports in the media are not necessarily limited to M&A transactions. Therefore, the regulator should define transactions, developments that will require a response from the company. Every single thing cannot be confirmed or denied.
Hetal Dalal, President and COO, Institutional Investor Advisory Services

Clarity should also be provided on what would constitute mainstream media, and whether WhatsApp and other such platforms will need to be tracked as well, she said. 

Amudavalli Kannan, co-lead of the M&A practice at Resolut Partners, concurred saying that in situations where the term sheet is not finalised, there are no binding documents and the news is leaked, this requirement will put the deal in jeopardy. 

From an investor’s perspective, price certainty and deal certainty are lost overnight as the deal price is not something that can be fixed upfront, Kannan explained.  

It must track the historical price of your stock itself for a period provided in the regulations. So, if there are any sharp movements in the price, this gets reflected in the deal price as well. Premature disclosure can ramp up the price and make the deal unviable commercially.
Amudavalli Kannan, Co-Lead-Public M&A, Resolut Partners

Yet another problem highlighted by Kannan is where the investor is a global listed private equity fund with disclosure obligations and regulatory scrutiny.

“A premature disclosure by a counterparty in India may obligate them to make a premature disclosure there, making them subject to liabilities arising out of it," Kannan said.

Second, from a listed company’s perspective, a deal can be called off even after confirmation of the rumour. This could result in the company being accused of market manipulation—that is the price fluctuation that came along with the rumour.

What's The Ideal Approach To Materiality?

SEBI has also proposed a quantitative materiality threshold for disclosures by listed companies.

The regulator’s suggestion is prompted by situations where companies exercised their discretion to not disclose certain information, resulting in losses for public shareholders, Shreyas Bhushan, partner at Resolut Partners, said. 

So, SEBI has proposed a bright line financial threshold where any event that crosses the provided threshold has to be disclosed; effectively eliminating the subjectivity on the part of companies.
Shreyas Bhushan, Partner, Resolut Partners

Varottil agreed, saying that the existing regulations give a lot of wiggle room to boards to determine what’s material.

Too much discretion is not good as boards may exercise this discretion to not disclose, rather than to disclose, he said. 

But this approach has both advantages and disadvantages, he highlighted. 

From the regulator’s perspective, investigation and enforcement will become easier as it has to merely look at the numbers to determine what’s material. From the companies’ perspective, compliance becomes easy as they know what and when to disclose.

On the other hand, there could be material transactions that stay slightly below the threshold and thus escape disclosure, and transactions that are way above the threshold may not be material at all leading to an overload of information in the market.

An ideal approach would be a hybrid of both qualitative and quantitative approaches. The regulator should probably keep the 2% threshold as a directive and then provide discretion to the boards to determine what’s material and what’s not.
Umakanth Varottil, Associate Professor, National University of Singapore

The burden of proof should then be placed on boards to justify the exercise of discretion, he said.

Watch the full conversation here: