In the vibrant landscape of the stock market, rumours spread like wildfire, igniting volatility and causing substantial fluctuations in share prices. These fluctuations often lead to irrational investment decisions, creating an unfair and unpredictable market environment.

Recognising the potential harm of these market rumours, the Securities and Exchange Board of India (SEBI) has taken a proactive step and recently unveiled a new framework for calculating the ‘unaffected price’ of securities.

This innovative framework seeks to determine a security’s price had the rumour not existed, providing a more accurate reflection of the stock’s true value. The framework not only provides a much-needed tool for investors to make informed decisions but also strengthens SEBI’s regulatory oversight, further solidifying its position as a vigilant market regulator. Let us discuss the potential challenges and limitations of the framework and its role in shaping the future of the Indian stock market.

SEBI’s methodology to determine a security’s price, if the rumour not existed at all involves a multi-step process. The first step involves identifying instances of significant price fluctuations that could be attributed to market rumours.

Further, the next step involves calculating an adjusted volume-weighted average price (VWAP) for the security. This is done by excluding the price impact of the rumour from the standard VWAP calculation.

Finally, the adjusted VWAP is then used as the basis for determining the unaffected price. This represents the price of the security, if the rumour had not occurred.

The introduction of the unaffected price framework has several implications for market participants. Investors benefit immensely from increased transparency and fairness in the market. The framework helps to ensure that their investment decisions are not unduly influenced by market rumours.

Companies experience reduced volatility in their share prices, leading to greater stability. This further enhances investor confidence and attracts more participation. Further, SEBI could effectively monitor and regulate market activity, preventing manipulative practices and maintaining market integrity.

So by mitigating the impact of market rumours, the framework reduces overall market volatility, leading to a more stable investment environment.

Secondly, the framework enhances investor confidence by promoting fairness and transparency in the market. This encourages greater participation in the share market.

Thirdly, by ensuring that prices reflect the true underlying value of securities, the framework improves market efficiency which is the ultimate objective of the market regulators.

Finally, the introduction of this framework further strengthens SEBI’s regulatory toolkit, enabling it to maintain market integrity and prevent manipulative practices.

Way forward

Though the unaffected price framework holds significant promise, there are also some potential challenges and limitations. For instance, accurately identifying market rumours and their impact on prices is a challenging task, especially in cases of subtle or complex rumours.

The proposed methodology may need to be refined and adjusted over time to ensure its effectiveness and accuracy.

Further, effective implementation and enforcement of the framework will be crucial to ensure its success. While there may be some challenges and limitations, the potential benefits of this framework are substantial, and it is likely to play a crucial role in shaping the future of the Indian stock market.

Saravanan is a Professor of finance and accounting at IIM Tiruchirappalli and Williams is the Head of India at Sernova Financial