SEBI Introduces Changes to Market Capitalisation Computation and Rumour Verification Regulations

Revised Market Capitalisation Computation Method

SEBI has shifted from a single-day market capitalisation calculation, previously determined on March 31 each year, to an average market capitalisation method. Under the new system, the ranking of listed entities will be based on their average market capitalisation from July 1 to December 31, with December 31 as the new cut-off date. This ranking will then determine the applicability of various regulatory provisions from the beginning of the next financial year or after a three-month grace period, whichever is later.

This change impacts ten specific provisions within the LODR regulations that are contingent on a company's market capitalisation ranking. These include requirements for appointing an independent woman director, maintaining a minimum of six directors on the board, quorum for board meetings, establishing a risk management committee, rumour verification, obtaining directors and officers insurance for independent directors, creating a dividend distribution policy, issuing a Business Responsibility and Sustainability Report (BRSR), holding an Annual General Meeting (AGM) within five months of the financial year-end, and live webcasting AGM proceedings.

SEBI's move to average market capitalisation addresses the volatility of daily market capitalisation figures and provides a more stable and accurate reflection of a company's market size and ranking relative to its peers. This adjustment is based on the recommendations of a SEBI-appointed expert committee chaired by former whole-time member S.K. Mohanty.

Enhanced Rumour Verification Protocols

Additionally, SEBI has amended regulations concerning the verification of market rumours. Specifically, Regulation 30(11) and (11A) of the LODR regulations have been updated to mandate top 100 and top 250 companies by market capitalisation to respond to market rumours within 24 hours of a significant price movement (MPM). This requirement applies if there is a material price movement, a rumour in mainstream media, and the rumour pertains to a definitive event or information that is impending or pending disclosure by the company.

Material Price Movement (MPM) Definition

The determination of MPM is based on daily price movements of securities. The framework, yet to be finalized, suggests that price changes will be categorized into three bands: less than Rs 100, Rs 100-200, and above Rs 200, with corresponding MPM thresholds of 5%, 4%, and 3%, respectively. Adjustments will also consider the general market index movement. If the MPM trigger occurs, companies must confirm or deny the rumour promptly.

Compliance Requirements

For companies required to comply with these regulations, the primary responsibility falls on the compliance officer, though internal processes may designate specific roles for monitoring and responding to MPMs and associated rumours. Companies are expected to implement technology solutions to alert them of MPMs and have mechanisms in place to search and verify rumours in mainstream media.

If rumours are confirmed within the 24-hour window, the effect on the share price due to the MPM and the confirmation will be excluded from calculations of unaffected prices in transactions under SEBI's pricing regulations for issues like preferential issues, Qualified Institutional Placements (QIPs), substantial acquisitions, and buy-backs.

Implications for Listed Entities

The new regulations, became effective from May 17, 2024, will require listed companies to maintain vigilance over market movements and media reports, ensuring rapid and accurate dissemination of information to the stock exchanges. Companies will also need to review and possibly update their internal policies and compliance frameworks to align with these regulatory changes.