In this week’s recap, we’re going to do something a little different. Instead of just writing the synopsis and a story, we will publish two articles. First, a deep dive in video format talking about the Tata Technologies IPO.
You can watch the video here.
And we’re going to have a story about SEBI and why it doesn’t like rumors. You can read the story below
SEBI doesn’t like rumours
In June 2022, SEBI fined Reliance Industries and two of its compliance officers 30 lakhs.
The reason?
Reliance’s closed lips!
See, during the pandemic, Reliance Jio raised a whopping $5.7 billion from Meta (then Facebook). And when Reliance made the official announcement on April 21, 2020, investors were over the moon. It was a big deal in the middle of the pandemic.
But SEBI had a problem. The rumor mill had started spinning stories about this deal a month earlier. In fact, even international publications like the Financial Times talked about it themselves back in March.
And investors had already started buying stocks in anticipation of what was about to happen. Based on news articles only.
But despite all the noise, Reliance remained silent. There were no comments.
And according to SEBI, Reliance’s silence was a waiver of its duty. In their books, Reliance was obliged to provide clarification as soon as the news was picked up by such major media houses. Shareholders had a right to know what on earth was going on behind the scenes.
So they imposed a fine.
And Reliance isn’t the only one whose narrow-mindedness has run afoul of regulators. Remember last year’s Zomato Blinkit deal?
Well, it also started with rumors in the newspapers. Until finally, on June 24, Zomato shot down a stock letter. It announced the acquisition of food 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 company. So people sold the stock. And it fell by 20% over the next few days.
But this time, SEBI didn’t really pull her up. Instead, investors complained. They went to SEBI and said that Zomato neither confirms nor denies the rumors on the news. So they all stayed in the stock like fools. And then lost her hard-earned money.
They think Zomato should have given at least some sort of hint beforehand.
Apparently, the investors even pointed to the Reliance case, saying, “Look, SEBI, you sued them for similar secrecy last year.”
And it seems all of this kept SEBI busy. They thought about it and decided that companies need to become more responsible. SEBI wants to take the “ifs” and “buts” out of such disclosures.
So there was an announcement on Wednesday. From October 1, 2023, the 100 largest companies in India must “verify or confirm, deny or clarify market rumours”. And starting April 1, 2024, this list will be expanded to include the top 250 companies.
Now, SEBI already presented a proposal on this topic in November. It asked for comments from the public. Just that now we have a schedule.
Now we still don’t know what constitutes a market rumor. SEBI didn’t reveal much at all. All it’s said is that it’s tweaking its rulebook. And that news of certain types of “agreements” now require a company’s proactive comments. She previously suggested that companies should disclose events that could have a 2% impact on their sales. But now it has simply said it will introduce “quantitative benchmarks” to determine what is or isn’t significant news.
Either way, at first glance this seems like a prudent move, right? SEBI tells investors to look out for their interest in a world full of rumors and fake news. That companies will be held accountable if they try to manipulate their share prices for their own interests.
But here’s the deal. Dealing with “news articles” isn’t always black and white.
Let’s take the Reliance Facebook deal itself.
If you look at it from Facebook’s point of view. The tech giant wants the details of the negotiations to be kept as secret as possible. After all, they are trying to make a tough deal. But if Reliance officially confirms the news, other interested parties could jump in. They will say they will pay a higher price. And that will negatively affect Facebook.
But for Reliance, disclosure is a good thing. It will put pressure on them in the negotiations.
Facebook can object to disclosure.
Or let’s look at it differently. If Reliance had disclosed that it was in talks about a deal, investors would definitely have rushed to buy the shares. That would have pushed the price up.
But…if the deal went through, the price would drop. And investors may have complained that Reliance shouldn’t have said anything before the deal went through. That Reliance was simply creating a “fake market” for its stock to influence its negotiations. They will tell SEBI that Reliance’s disclosure actually hurt them.
That’s a problem now, isn’t it? Finally, research shows that takeover rumors only lead to actual deals about 50% of the time. So what is the right time to actually make a disclosure?
Or will SEBI be okay with companies taking a leaf out of the Tilaknagar Industries playbook?
See, in 2015 there were rumors that the alcoholic beverage company was looking for a buyer. And Tilaknagar released a statement stating:
“We are in no position to comment on market speculation and would like to clarify that given the nature of TI’s business, industry dynamics and in order to advance business, the Company is exploring various types of business connections, connections, relationships, etc. at multiple points in time. between the players in the national and international markets, which may or may not bear fruit.”
That sounds like the perfect safe statement for all sorts of occasions, right?
In fact, the talks were actually ongoing. But it finally fell through. Tilaknagar didn’t seem to have gotten into trouble at the time.
Or let’s say you define a significant event as something that could send the stock price sharply higher. Could it even be news that sales of a company’s key product have dropped?
Because this already happened in 2018 at Apple. The company released its flagship iPhone X. It should propel sales into the stratosphere. And then…big media outlets started reporting that the iPhone X wasn’t selling like hotcakes after all. It was below average. Then stock market analysts jumped into the mix and began issuing warnings. They wanted Apple to take the loss and kill the iPhone X. Investors panicked and sold the stock. It quickly dropped over 5%.
Apple didn’t say a word.
And a few months later, when the results were announced, everyone was surprised. Sales were actually pretty strong. iPhone X sales exceeded all expectations. The share price went up as everyone got back in to buy the stock.
Now imagine there was a law. One that asked companies to issue statements whenever a news report emerged that significantly impacted the stock price.
And remember, the reports didn’t just say Apple was going to have a bad sales quarter. It was said that the iPhone X turned out to be a problem. It was pretty specific. So the question is – should Apple have issued a statement ahead of the results and said something like, “While we have seen the negative reports on iPhone X sales, we would like to confirm that sales are on track and in line with our expectations .”
After all, Apple has a duty to protect its investors from “fake” news, right?
Or would issuing a statement go against the whole concept of not disclosing price-sensitive information before the official results are announced?
tricky, right?
So yes, SEBI’s intentions are good. But it will be very interesting to see how the regulator and companies manage to navigate through the myriad cases of what constitutes “essential news”.
Until then, people will be playing at the markets according to the old adage – “buy the rumour, sell the news”.
Tata Technologies IPO reviewed
What does Tata Technologies do? What is your EV segment all about? 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 is discussed in our detailed video. Click the link here to view the review.
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