SEBI to Implement 'Unaffected Price' Rule on June 1, 2024, for Market Stability

Introduction

Market regulator SEBI recently introduced a novel mechanism known as the ‘unaffected price’ to minimize the impact of rumors circulating artificial high or low prices in the market. It is a move that falls under SEBI’s umbrella to counteract fluctuation of stock prices due to circulating rumors. The introduction of the said measure is one with the long-term view of protecting the new investors and the stability of the stock exchange.

Now let us proceed with the analysis and try to determine what the concept called ‘unaffected price’ implies.

Unaffected Price Concept | Key Highlights

• SEBI introduces the 'unaffected price' concept to stabilize stock prices in response to market rumors.

• New guidelines are designed to protect stock prices from artificial fluctuations caused by rumors.

• Beginning June 1, 2024, listed companies must verify market rumors when there are significant price movements.

• The 'unaffected price' is determined by adjusting volume-weighted average prices (VWAP) to exclude the impact of rumors.

• This concept is intended for 60 or 180 days depending on the stage of the transaction to ease the IPO processes.

• Such changes help promote the IPO processes by allowing those with more than 5% post-offer equity share capital to rectify deficiencies without being considered as promoters.

SEBI's Latest Circular on Unaffected Price | An Overview

SEBI has established the framework under Regulation 30(11) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, which has been updated by the SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2024.

Unaffected Price Meaning

The ‘unaffected price’ concept establish a price that does not react to rumors in the market. By the time it is complete and a big price change is realized, one of these prices is adjusted to filter out the rumor’s impact and its genuine effects on the price of the shares.

This ‘unaffected price’ is used in many methods of financial trading and in many forms of legislation.

Fundamentally, it is the price at which trades occur, and the cost prevents large price fluctuations as well as confirmed rumors from impacting value.

Verification Process and Applicability

SEBI has recent developments in listing rules necessitating the listed entities to confirm markers rumors after a high volatility in price movements.

• SEBI’s verification primarily begins from June 1, 2024, with the top 100 listed industries of that period.

• It will then expand to increase by 250 entities by December 1, 2024.

Validity Period for the 'Unaffected Price' Concept

As specified by the SEBI circular on ‘unaffected price,’ the ‘unaffected price’ is subsistence for either 60 or 180 days. However, this duration is variant and depends on the transaction stage.

It begins, first, from the rumor confirmation date up to the ‘relevant date’ as proposed in current rules.

Calculation Guidelines for determining the Unaffected Price

Determining the "unaffected price" is a laborious procedure that attempts to precisely represent a stock's actual value.

The computation entails deducting from the volume-weighted average price (VWAP) the price impact resulting from the rumor and its subsequent confirmation.

VWAP is the average price of a stock over the course of the day, weighted by the quantity of shares exchanged at each price point.This adjustment takes place between the day of the material price change and the trading day that comes after the rumor's confirmation.

Calculation Method for Adjusted VWAP:

• Firstly, the daily VWAP is adjusted based on the variation caused by the material price movement and the subsequent rumor confirmation.

• Next, the WAP Variation is determined, indicating the difference in the daily VWAP from the material price movement day until the end of the following trading day post-rumor confirmation.

• Then, the Adjusted Daily VWAP is computed by excluding the WAP variation from the daily VWAP in the look-back period from the material price movement day onwards.

• Finally, the Adjusted VWAP is calculated based on the adjusted daily VWAP for the entire look-back period.

By following these detailed steps, the 'unaffected price' can be accurately determined, providing investors and traders with a more reliable assessment of the stock's value.

Streamlining IPO Procedures

The regulation by SEBI has made some adjustments with an intention to make the process of an IPO less complex for companies.

• The market regulator SEBI also stated that variations in Offer for Sale (OFS) now depend on either in terms of value in rupee or in terms of the number of shares making the process easier.

• Most firms that are likely to go for an IPO have institutional constraints such as the ability to provide minimum promoter contribution.Thus, as part of the MPC norms, it has been made compulsory for companies to hold equity for at least one year before filing the DRHP.

• SEBI has made changes to the provisions which relate to bid closing date extension by reducing the minimum extension to one day in comparison to the previous provision wherein a minimum of three days were required for extension for events such as a banking strike.

Overall, these changes aim to simplify IPO procedures and offer more flexibility to companies in the process.

Implications for Investors and Traders

The circular released by SEBI safeguards the investors since it prevents market rumors from affecting stock prices. Overall, stakeholders will find more stability and certainty, aspects that positively influence investment decisions. The main advantage of traders is the lessening of speculative gossip on market making and enhancing a fairer market environment. In an overall sense, the circular aids in improving the market integrity and encourages market participants to be more confident.

Conclusion

Lastly, it's important to highlight that SEBI's adoption of the 'Unaffected Price' regulation, effective June 1, 2024, signifies a significant move to mitigate the impact of market rumors on stock prices. With a focus on enhancing market stability and transparency, SEBI has simplified IPO procedures and established clear guidelines for determining the 'Unaffected Price.' These changes benefit investors by providing greater clarity and facilitating informed decision-making. Similarly, traders can expect reduced speculation and an improved market environment. Overall, these measures safeguard market integrity and bolster participant confidence, fostering a more resilient market ecosystem.

For more details regarding the circular and its implications, please visit the SEBI page or refer to the official SEBI website.

Frequently Asked Questions

1. When does SEBI's 'Unaffected Price' rule come into effect?

SEBI's 'Unaffected Price' rule will be implemented from June 1, 2024, aimed at curbing market rumors and enhancing stability.

2. What is the purpose of SEBI's introduction of the 'Unaffected Price' concept?

SEBI aims to stabilize stock prices by introducing the 'Unaffected Price' concept, which protects against artificial fluctuations caused by rumors in the market.

3. How long is the validity period for the 'Unaffected Price' concept?

The validity period for the 'Unaffected Price' concept ranges from 60 to 180 days, depending on the transaction stage, as specified by SEBI.

4.  What does the calculation process for the 'Unaffected Price' involve?

Determining the 'Unaffected Price' requires adjusting the volume-weighted average prices (VWAP) to exclude the impact of rumors, following specific computation guidelines provided by SEBI.

5. How do SEBI's adjustments aim to streamline IPO procedures?

SEBI's amendments to IPO procedures, effective June 1, 2024, simplify processes such as Offer for Sale (OFS) variations and bid closing date extensions, providing more flexibility to companies planning IPOs.