Consensus on framework for pricing transactions, deals important: Experts

The Securities and Exchange Board of India (Sebi) has proposed two frameworks for pricing transactions related to listed companies upon confirmation of a rumour. These, according to legal experts, address issues left open in the earlier amendment, but reaching a consensus on one seems challenging.

Late in December, the market regulator sought comments on changes proposed in rumour verification norms through a discussion paper. Based on suggestions by the Industry Standards Forum (ISF), Sebi has emphasised the need for listed companies to confirm or deny only when there is a material price movement, and to do so within 24 hours of such an impact on stock prices.

Under Sebi regulations, pricing for preferential issues, open offers, and several other transactions is based on the volume-weighted average price (VWAP), which is used to calculate a stock's average price over a period, factoring in the volume traded. Sebi has proposed using the “unaffected price” for such calculations.

The first proposed framework suggests that the look-back period for VWAP calculation should be from the date immediately preceding the confirmation of the rumour by a listed company – the date before the price impact. The second framework proposes excluding price variations on the trading day after rumour confirmation when calculating VWAP, adjusting the same in the look-back period.

“In the first framework (Framework A), it is difficult to isolate price variation owing to a market rumour from other material events or market conditions impacting price. Also, there may be greater opportunities to regulate price by intentionally manipulating market rumours,” said Suhana Islam Murshedd, partner, Aquilaw.

“The second framework (Framework B) could potentially have fewer challenges in terms of market manipulation since it seeks to disregard price variation owing to market rumours. That said, an adjustment in the daily weighted average price may lead to challenges in case such price impact extends to a longer period than reasonably foreseeable. Overall, Framework B seems to be less susceptible to variations,” she further said.

Sebi's discussion paper states that in case of rumours at multiple stages, price adjustment would be provided for all such days when material movement was observed.

Citing speculations around a deal between Torrent Pharma and Cipla, a legal expert advising on such deals said that a 60-day or 180-day period from the date of rumour confirmation may not protect acquirers from price variations due to rumours. “The period of 60 days may be short in such situations. There is no obligation to buy. The acquirer must not be punished for a rumour out in the reports; they are not the speculators,” he said.

Some legal players suggested that tendering of open offers may become more difficult as investors may prefer the market price. 

In the new proposal, Sebi also plans to place an obligation on promoters, directors, and key officials to respond to rumours related to them in a timely manner. “The obligation on directors and key managerial persons to issue clarifications will come into focus, especially amid speculation around resignations and move to a rival firm. Further, in certain cases, promoters may not find it in their favour to issue a confirmation regarding family rifts, or matters concerning their privacy. All this while, one cannot exclude the manipulators in the market,” said a partner at another legal firm.

The partner further said: “Speculations come at all stages of deal discussions. Investors and traders when entering the equities market must understand that there is risk and that there are speculations. Such speculations drive the market prices and it is difficult to protect them at all stages.”