In this week's Finshots Market we are going to do something slightly different. Instead of writing one explainer, we will publish two items. One, a deep dive in video format talking about the Tata Technologies IPO.
And we will have a story on SEBI and why it doesn't like rumours. You can read the story below
SEBI doesn’t like rumours
In June 2022, SEBI slapped a fine of ₹30 lakhs on Reliance Industries and two of its compliance officers.
Reliance’s closed lips!
You see, during the pandemic, Reliance Jio raised a staggering $5.7 billion from Meta (then Facebook). And when Reliance made the official announcement on 21st April 2020, investors were overjoyed. It was a big deal right in the midst of the pandemic.
But SEBI had a problem. The rumour mill had started spinning stories about this deal a month earlier. In fact, even international publications such as the Financial Times had talked about it back in March itself.
And investors had already started buying shares in anticipation of what would happen. Just based on news articles.
But through all the noise, Reliance kept mum. It didn’t give any comments.
And as per SEBI, Reliance’s silence was an abdication of its duty. In their books, once the news was picked up by such big media houses, Reliance was obliged to provide a clarification. The shareholders had a right to know what on earth was actually happening behind the scenes.
So they levied a fine.
And Reliance isn’t the only one that has got into a soup with the regulator with their tight-lipped behaviour. Remember the Zomato-Blinkit deal from last year?
Well, it started with rumours in the newspapers too. Until Zomato finally shot off a letter to the stock exchanges on 24 June. It announced its acquisition of grocery startup Blinkit for nearly ₹4,500 crores.
But this time, investors weren’t happy. They wanted Zomato to focus on profitability and not buy a cash-guzzling business. So, people sold the stock. And it fell by 20% over the next few days.
But this time, SEBI didn’t actually pull them up. Rather, the investors complained. They went to SEBI and said that Zomato didn’t confirm or deny the rumours in the news. So like fools, they all stayed invested in the stock. And then lost their hard-earned money.
They think Zomato should’ve at least given some sort of indication beforehand.
Apparently, the investors even pointed to the Reliance case and said, “Look SEBI, you pulled them up last year for similar non-disclosures.”
And it seems like all of this has been weighing on SEBI’s mind. They’ve been mulling it over and decided that companies need to be more responsible. SEBI wants to take away the ‘ifs’ and ‘buts’ for such disclosures.
So on Wednesday, it made an announcement. From the 1st of October 2023, the 100 biggest companies in India have to “verify or confirm, deny or clarify market rumours.” And from the 1st of April 2024, this list will expand to include the top 250 companies.
Now SEBI already floated a proposal on this matter back in November. It invited comments from the public. Just that we now have a timeline.
Now we still don’t know what constitutes a market rumour. SEBI hasn’t revealed much at all. All that it has said is that it’s tweaking its rule book. And that news about certain types of ‘agreements’ will now need a company’s proactive comments. Earlier, it had proposed that companies should disclose events that could have say a 2% impact on its turnover. But now it has simply said that it’ll put ‘quantitative benchmarks’ in place to determine what’s a significant piece of news or not.
Either way, on the face of it, this seems like a prudent move, right? SEBI is telling investors that it’s looking out for their interest in a world of rumours and fake news. That it’ll hold companies accountable if they’re trying to manipulate their share prices for their own vested interests.
But here’s the deal. Dealing with ‘news articles’ aren’t always black and white.
Let’s take the Reliance-Facebook deal itself.
If you look at it from Facebook’s perspective. The tech giant would want the details of the negotiations to be kept as quiet as possible. After all, they’re trying to drive a hard bargain. But if Reliance officially confirms the news, other interested parties could swoop in. They’ll say they’ll pay a higher price. And that’ll affect Facebook adversely.
But for Reliance, disclosing it is a good thing. It’ll give them leverage in the negotiations.
Facebook can complain about a disclosure.
Or let’s look at it another way. If Reliance had made a disclosure saying it was in talks for a deal, investors would’ve definitely rushed to buy the shares. It would’ve pumped the price up.
But…if the deal fell through, the price would drop. And investors might’ve complained saying that Reliance shouldn’t have said anything before the deal was consummated. That Reliance was simply creating a ‘false market’ for its shares in order to gain leverage in its negotiations. They will tell SEBI that Reliance’s disclosure actually hurt them.
Now that’s a problem too right? After all, research shows that takeover rumours only translate into actual deals about 50% of the time. So what’s the right time to actually make a disclosure?
Or will SEBI be okay with a if companies take a leaf out of Tilaknagar Industries’ playbook?
See, back in 2015, there were rumours that the alcoholic beverage company was in search of a buyer. And Tilaknagar released a statement saying:
“We are unable to comment on market speculation and wish to clarify that given the nature of TI’s business, sector dynamics and to make business progress, the Company at several time points is exploring various types of business associations, tie-ups, relationships etc. across players in the domestic and international markets, which may or may not fructify.”
That sounds like the perfect safe statement for all sorts of occasions, no?
In fact, the discussions were actually in progress. But it eventually fell through. Tilaknagar didn’t seem to have gotten into any trouble then.
Or let’s say you define a material event as anything that could swing the stock price in a big way. Could it even be news that the sales of a key product of a company have been dropping?
Because this happened with Apple back in 2018. The company has released its flagship iPhone X. It was supposed to propel sales to the stratosphere. And then…big media houses began reporting that the iPhone X wasn’t selling like hotcakes after all. It was underperforming. Then, stock market analysts jumped into the mix and began sounding warnings. They wanted Apple to take the loss and kill the iPhone X. Investors panicked and sold the stock. It quickly fell by over 5%.
Apple didn’t utter a word.
And a couple of months later, when it announced the results, everyone was surprised. The sales were actually pretty strong. The sales of the iPhone X beat everyone’s expectations. The share price rose as everyone jumped in to buy the stock again.
Now imagine if there was a law in place. One that asked companies to issue statements whenever a news report emerged that affected its share price materially.
And remember, the reports didn’t simply say that Apple will have a poor sales quarter. It said that the iPhone X was proving to be a problem. It was quite specific. So the question is — should Apple have issued a statement prior to the results and said something like, “While we’ve seen the negative reports about iPhone X’s sales, we’d like to confirm that sales are on track and in line with our expectations.”
After all, Apple has the obligation to protect its investors from ‘fake’ news, right?
Or would issuing a statement go against the entire concept of not disclosing price-sensitive information before official results are announced?
So yeah, SEBI’s intentions are good. But it’ll be quite interesting to see how the regulator and companies manage to navigate through the myriad of cases as to what constitutes a ‘material piece of news’.
Until then, people will play by the old adage in the markets — “Buy the rumour, sell the news.”
Tata Technologies IPO Reviewed
What does Tata Technologies do? What’s the deal with their EV segment? Why are they competing with their own companies? Could Land Rover & Tata Motors actually be a problem? And most importantly‒ Should you invest?
All this discussed in our long form video. Click the link here to watch the review.