In a significant move to manage the impact of market rumors on stock prices, the Securities and Exchange Board of India (SEBI) has introduced the concept of ‘unaffected price’. This initiative, announced in a circular on Tuesday, May 21, aims to address artificial stock price fluctuations and ensure market stability.
New Guidelines for Managing Stock Price Impact
SEBI’s new guidelines are designed to help listed entities verify and address market rumors that cause significant price movements. The regulator emphasized that this verification will be initially applicable to the top 100 listed entities starting from June 1, 2024, and will extend to the top 250 entities (including the next top 150) from December 1, 2024.
According to SEBI, “The unaffected price shall be considered for transactions on which pricing norms specified by SEBI or the stock exchanges are applicable, provided that the rumor pertaining to such transaction has been confirmed within 24 hours from the trigger of material price movement.”
Calculating the Unaffected Price
To accurately reflect the unaffected price, SEBI has provided a detailed methodology:
1. Variation in Daily WAP: The variation in the daily volume-weighted average price (VWAP) from the day of the material price movement to the end of the next trading day after the rumor is confirmed shall be attributed to the rumor and its confirmation.
2. Adjusted Daily WAP: This will be calculated by excluding the WAP variation from the daily WAP during the look-back period from the day of the material price movement onwards.
3. Consistent Daily WAP: The adjusted daily WAP from the day of the material price movement until the end of the next trading day after the rumor confirmation shall be the same as the daily WAP on the trading day preceding the material price movement.
SEBI further clarified, “The unaffected price shall be applicable for a period of 60 days or 180 days, as applicable based on the stage of transaction, from the date of confirmation of the market rumor till the ‘relevant date’ under the existing regulations (public announcement, board approval, etc., as the case may be).”
Impact on IPOs and Promoters
To ease the process for companies planning initial public offerings (IPOs), SEBI has simplified the criteria for changes in the size of the offer for sale (OFS). Any change requiring fresh filing will now be based on only one criterion—either the issue size in rupees or the number of shares.
Moreover, SEBI has made provisions for promoter group entities and non-individual shareholders holding more than five percent of the post-offer equity share capital. These entities can now contribute towards the shortfall in the minimum promoters’ contribution (MPC) without being classified as promoters.
This adjustment is particularly beneficial for companies that have undergone multiple funding rounds before listing, as it helps them meet the minimum promoter contribution requirement of 20 percent of the post-offer equity share capital.
Addressing Market Rumors
SEBI’s guidelines are aimed at mitigating the impact of market rumors on stock prices by establishing a clear and systematic approach to verifying and managing such rumors. By requiring listed entities to verify market rumors upon material price movement, SEBI aims to enhance transparency and trust in the market.
The stock exchanges will be responsible for issuing frameworks for defining and managing material price movements on their respective websites. This structured approach ensures that investors and market participants have clear guidelines to follow, thereby reducing the potential for manipulation and artificial price fluctuations.
SEBI’s introduction of the ‘unaffected price’ concept marks a significant step towards enhancing the integrity and stability of the Indian stock market. By addressing the impact of market rumors and setting clear guidelines for verifying and managing these rumors, SEBI aims to create a more transparent and fair trading environment.
These measures, coupled with the adjustments to IPO processes and promoter contributions, reflect SEBI’s commitment to protecting investors and maintaining market order. As these guidelines come into effect, they are expected to provide a more robust framework for handling market rumors and ensuring that stock prices reflect true market conditions rather than speculative fluctuations.
