SEBI has introduced new guidelines to control how stock prices are affected by market news
SEBI has introduced new guidelines to control how stock prices are affected by market news, ensuring fair pricing for mergers, acquisitions, repurchases, and other transactions. Experts shared this update on Wednesday.
Often, market news about a company's activities can cause significant changes in stock prices that don't accurately reflect the company's true value. These reports can cover various topics, such as traffic levels, order fulfillment, and financial health.
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To tackle this issue, SEBI has proposed a system to determine the "unaffected price," which is the stock price before any news is released. Trivesh, the Chief Operating Officer at Tradejini, explained that this price will be used for transactions unless the same rumor continues to influence prices in future trading days.
In a circular issued on Tuesday, SEBI clarified how to calculate the adjusted volume-weighted average price (VWAP) to reflect unaffected prices in transactions. The new guidelines specify that adjusted VWAP should exclude price changes caused by rumors, thus showing the stock's value before the market reacts. This aims to prevent price disruptions caused by rumors when setting the acquisition price.
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The "unaffected price" generally means the stock price without the influence of market rumors. Since sudden price movements can impact the overall value of a transaction, SEBI suggests using the unaffected share price. According to the Listing Obligations and Disclosure Requirements (LODR) Regulations, unaffected prices must be considered for transactions that meet specific pricing criteria. This rule applies if the company confirms rumors of the transaction within 24 hours of significant price movements.
This immediate confirmation helps reduce prolonged speculation and provides clarity to investors. The requirement to verify market rumors will apply to the 100 largest listed companies as of June 1 and the 250 largest listed entities as of December 1.
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The main objective of this framework is to prevent speculative market activity from artificially influencing stock prices used in transactions. SEBI aims to create a more accurate and fair pricing mechanism by identifying and removing VWAP discrepancies caused by rumors. This approach helps minimize issues related to price fluctuations and ensures transactions reflect their true value.
The prices will remain unchanged for 60 to 180 days, depending on the trading platform, from the date of confirmation of the market news until the "relevant date" according to current regulations.
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