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The story so far: In order to tackle any impact on the price of a scrip because of a market rumour, the Securities and Exchange Board of India (SEBI) on May 21 introduced a framework centred around its ‘unaffected price.’ The metric would help obtain the price of the scrip before a rumour influenced its price. The idea is to maintain a reasonable price for a scrip, excluding any undesired influence before the rumour is confirmed or refuted. This helps both the company and the investor utilise a more unaffected and thus precise pricing for undertaking their regular business activities (such as mergers, acquisitions or buybacks). The framework is to be implemented in phases: it would apply to the top 100 listed entities from June 1 onwards and the top 250 entities from December 1 onwards.

How is the framework looking to utilise ‘unaffected price’? 

To put it simply, the ‘unaffected price’ of the scrip would indicate its price before a particular rumour emerged became public. It would only be triggered if the rumour is confirmed by the company in question within 24 hours from when the scrip exhibited sizeable upward or downward movement. It would work a shielding mechanism which is triggered only when companies adhere to timeliness and transparency.  

For perspective, a rumour about an acquisition, merger and demerger, sale of a lesser- performing asset, buybacks (when companies intend to buy the shares available in the open market), joint ventures or management changes can potentially raise the price of the scrip. The inflated price of the scrip because of the rumour, that is, primarily because of an informational asymmetry, averts the ability of market participants to obtain a rational price. This mechanism aims to tackle this paradigm.

Vamsi Krishna, CEO at StoxBox, explained to The Hindu that rumours relating to the award/cancellation of orders, management changes, acquisitions and takeovers and financial performance result in “unruly” moves in share prices. The unaffected price mechanism, Mr Krishna states, would put in place a fair price discovery mechanism to protect the interest of market participants. “The new mechanism would ensure that there is a level playing field for buybacks, M&As and other transactions (retail and institutions) and speculative activity is curbed to an extent,” Mr Krishna adds. 

Further, as explained by HDFC Securities in a LinkedIn post, it would help improve market integrity by instilling better confidence in investors through listed companies that respond faster and clarify more transparently, and would push forward a better distribution of information. 

What exactly is the metric? 

A market rumour affects the volume weighted average price (VWAP) of the scrip. VWAP is an indicator of the average price at which the share traded through the day. It also factors in the volume of each of the trades to attain an average. Incorrect pricing of VWAP directly affects the scrip from being priced correctly for the business transactions described above.  

What is the maths behind determining ‘unaffected price’? 

The framework stipulates the variation in daily weighted average price from the day of the material price movement till the end of the next trading day after the confirmation of the rumour would be attributed to the rumour and its subsequent confirmation.

Let’s say a rumour emerges on a certain Tuesday — a day after a Monday when the stock had closed at Rs 200. Since the rumour emerged on Tuesday, it forms the day of the material price event which has impacted the scrip to close shop with a WAP of Rs 230. At close on Wednesday (24 hours later), after the company confirms the rumour at intraday – the scrip’s WAP stands at Rs 245. And on Thursday, the next trading day after the rumour is confirmed – its WAP is at Rs 260. In this case, the adjusted WAP, which would help attain the ‘unaffected price’, would be Rs 60. That is, the difference between Rs 200 a day before the rumour spread and Rs 260 the next trading day after the rumour was confirmed.  

Important to note, the framework stipulates that the adjusted daily WAP from the day of the material price movement (in our example, Tuesday) till the end of the next trading day after the confirmation of the rumour shall be the same as the daily WAP preceding the day of the volatile movement. That is, Rs. 200 would be the daily WAP until Thursday in our example. Thereon, Rs. 60 (adjusted WAP) would be utilised to compute the adjusted Daily WAP. In a way, this ensures that the impact is cushioned temporarily (until an official confirmation) against a knee-jerk reaction in the immediate aftermath.  

A FICCI note explains that if Company A is buying shares of Company B, then the mechanism would be triggered for Company B upon confirmation by the former. In case of a demerger, the mechanism would be triggered for both. 

What is its applicability?  

The unaffected price shall be applicable for a period of 60 or 180 days based on the stage of transaction. This would be from the date the rumour was confirmed till the ‘relevant date’ when there is a public announcement, board approval, or other event, as the case may be.  

Whilst trying to determine the structure of the mechanism, SEBI deemed the 60-day period to be “reasonable.” For any of the regular business transactions mentioned above, the market regulator felt the suggested period would be enough to seek the necessary board approvals from their respective boards. In the meantime, the mechanism would back these entities by providing a safety cushion— thus safeguarding the price of a scrip from any undesired fluctuation.  

The 180-day period would come in particularly useful for acquisitions. Typically, in an acquisition scenario involving multiple prospective buyers, the entity on sale takes time to finalise the sale, primarily negotiating favourable terms for the sale. This process may entail a couple of months. The 180-day safety shield would thus come in particularly handy for a more suitable realisation of prices in the buffer or the ‘shopping’ period.  

Should another rumour emerge pertaining to the same transaction, which could be from the mainstream media providing material updates about the initial transaction, the unaffected price subsequent to the confirmation of this rumour shall be applicable for the next 60 days. 

The Securities and Exchange Board of India. File
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To enhance operational efficiency and reduce the risk to clients’ securities, markets regulator SEBI on May 5 decided to make the process of direct payout of such securities to the client’s account mandatory.

This will become effective from October 14, the Securities and Exchange Board of India (SEBI) said in a circular. Currently, the clearing corporation credits the pay-out of securities in the pool account of the broker, who then credits the same to the respective client’s demat accounts. Further, a facility of direct delivery to investors was introduced in February 2001.

After extensive deliberations with the stock exchanges, clearing corporations (CCs) and depositories, SEBI has decided that “the securities for pay-out shall be credited directly to the respective client’s demat account by the CCs”.

Moreover, clearing corporations should provide a mechanism for trading member (TM) or clearing members (CM) to identify the unpaid securities and funded stocks under the margin trading facility.

In case of any shortages “arising due to inter se netting of positions between clients” — internal shortages — SEBI suggested TM or CM should handle such shortages through the process of auction. Moreover, in such cases, the brokers should not levy any charges on the client over and above the charges levied by the clearing corporations.

In May 2023, SEBI specified various processes for handling clients’ securities with regard to pay-in and pay-out of securities. This was to protect clients’ securities and to ensure that the stock broker segregates securities of the client or clients so that they are not vulnerable to misuse.

The story so far: Markets regulator Securities and Exchange Board of India (SEBI) on May 17 floated a consultation paper proposing a framework for facilitating investments by domestic mutual funds (MFs) in their overseas counterparts, or unit trusts (UTs) that invest a certain portion of their assets in Indian securities. It observed that the existing framework does not explicitly permit domestic MFs to invest in overseas MF/UTs with exposure to Indian securities. “Therefore, it is understood that many mutual funds in the industry avoid investing in such overseas MF/UTs that have any kind of exposure to Indian securities,” it said. Comments about the proposed framework are solicited until June 7.  

What is the purpose of the proposed framework?  

Noting India’s strong economic growth prospects, SEBI observes that Indian securities offer an attractive investment opportunity for foreign funds. SEBI says this has led to several international indices, exchange traded funds (ETFs), MFs, and UTs allocating a part of their assets towards Indian securities. For perspective, in a consultation paper, MSCI Emerging Markets Index was noted to hold 18.08% exposure to Indian securities. Similarly, JP Morgan’s Emerging Markets Opportunities Funds held 15% in Indian investments, as per their latest factsheet (as on March 31, 2024).

Indian mutual funds, somewhat conversely, diversify their portfolios by launching ‘feeder funds’ which invest in overseas instruments such as (units of) MF, UTs, ETFs and/or index funds. Other than diversification, it eases the path to make global investments. However, ambiguity remains about investments which have Indian exposures, which deters domestic MFs from investing in these instruments which in turn invest in a basket of countries as a means of diversification and enhancing returns.  

SEBI’s cumulative assessment sees merit in potentially allowing investments of this kind with “limited exposure to Indian securities.” Within the proposed framework, the markets regulator also intends to place essential safeguards which would keep the Indian instruments “true to their label” and enable investors to take desired exposure in overseas securities. It is essential to note that, if the fund has significant exposure to Indian securities, the purpose of making an overseas investment is defeated. Secondly, an indirect investment through an (indirect) overseas investing instrument is not cost-effective for an end-investor in comparison to a direct investment made in Indian securities — thus, fulfilling no purpose.  

What proposals has SEBI tabled?  

Significantly, the upper limit for investments made by overseas instruments (in India) has been capped at 20% of their net assets. That is, overseas instruments being considered must not have an exposure of more than 20% in Indian securities. Deeming the cap “appropriate,” SEBI explains that this would help “strike a balance between facilitating investments in overseas funds with exposure to India and preventing excessive exposure.” 

The markets regulator has also sought that Indian mutual funds ensure contributions of all investors of the overseas MF/UT is pooled into a single investment vehicle. They must not be in a side-vehicle, that is, a parallel instrument alongside the main instrument with varying exposure. This again is essential for the invested money (of these domestic mutual funds) to attain its objective. Other than this, Indian mutual funds must also ensure that all investors of the overseas instrument are receiving gains proportionate to their contribution – and in no order of preference.  

Other than this, Indian mutual funds would also have to ascertain that the overseas instrument is managed by an “officially appointed, independent investment manager/fund manager” who is “actively involved in making all investment decisions for the fund.” SEBI stresses that these investments are to be made autonomously by the manager without any influence from the investors or undisclosed parties.  

SEBI is also seeking public disclosures of the portfolios of such overseas MF/UTs periodically for the sake of transparency. Finally, it warns against the existence of any advisory agreement (business agreement) between the Indian mutual fund and the overseas MF/UT. This is to prevent conflict of interest and avoid any undue advantage.  

What happens when overseas instruments breach the limit?  

If the overseas instrument breaches the 20% limit, the Indian mutual fund scheme which is investing in the overseas fund would slip into a 6-month observance period. This period is to be utilised by the overseas fund to rebalance its portfolio adhering to the cap. During this time, the domestic mutual fund cannot undertake any fresh investment in the overseas MF/UT. Further investment in the overseas instrument would be allowed only when the exposure drops below the limit.  

If the portfolio is not rebalanced within the observation period, the Indian mutual fund must liquidate its investment in the overseas instrument within 6 months. It would not be permitted to accept any fresh subscriptions to the scheme (for the investment type to the overseas fund/UT/indices), launch any new scheme or levy any exit load (that is, the fee for redeeming the mutual fund before a specific date) on its investors exiting the scheme. 

Are there other considerations at play? 

The first consideration is RBI’s upper limit for overseas investment by mutual funds which was breached in June last year. RBI Governor Shaktikanta Das stated earlier in February that there was no proposal to increase the investment limit for mutual funds. He acknowledged that requests for relaxation were made by mutual funds and other players. In light of this, Suresh Soni, CEO at Baroda BNP Paribas Mutual Fund told The Hindu, “The changes to regulations would not have any practical impact immediately, as the overall industry limit for overseas investments is effectively exhausted.” 

The other part of it relates to potential appetite, especially for associated risks — especially for a potential spillover effect because of the global linkages.  

Finance Minister Nirmala Sitharaman speaking at a BSE event earlier this month, expressed confidence in the markets and observed household savings were increasingly moving to investing in the equity market. She stated that middle-class families realise that even if risk-laden, it offered better returns. The finance minister had also stated that unique mutual fund investors in the country had grown from 1 crore in 2014 to 4 crore today. Data from the Association of Mutual Funds in India (AMFi) further informs that asset under management (AUM) of the Indian MF industry has grown six-fold in a decade from ₹9.45 trillion as on April 30, 2014, to ₹57.26 trillion as on April 30, 2024. This is indicative of a potential appetite to engage with markets.  

Further, Mr. Soni says, investments in international markets provide diversification opportunities to Indian investors. He added that they also provide investment opportunities in sectors or industries that may not be available in the Indian listed market space. “Therefore, they are a useful avenue for diversifying investor portfolios as well as generating significant risk adjusted returns,” Mr. Soni reasoned.