Equity markets should be, and often are, driven by ‘value investors’; individuals who put in hard work researching a company’s fundamentals to determine a possible upsurge in the stock price, before putting money at stake.

Yet a majority of investors trade on ‘speculation’ and ‘rumours’.

While most market participants were unanimous in their belief that ‘speculation’ was the heart and soul of the market, for it was the major tool in the ‘price discovery’ of a stock, views varied about rumours.

Discussions among market participants and corporate quarters revolve around the word rumour. ‘What exactly constitutes a rumour?’ The Oxford Dictionary defines it as ‘a currently circulating story or report of uncertain or doubtful truth’. A senior market player described it as transmission of information among investors without verifying its veracity.

Experts also argue about the question: Should companies be bound to clarify rumours?

A corporate lawyer when consulted leafed through some developed market listed companies ‘Manuals’ and read out from one: “If rumours or unusual market activity indicate that information on impending developments has leaked out, a frank and explicit announcement is clearly required and second, if rumours are in fact false or inaccurate they should be promptly denied or clarified”.

“I have seen those trying to corner a stock being cornered themselves”

The CEO of a pharmaceutical company in Karachi was aghast: “This means we are required to keep our eyes and ears open to all the gossip doing the rounds in the market, everyday and every hour, and comment on them?” he asked.

“If we were to do that, we would be doing nothing else”.

Major companies, mainly multinationals therefore usually adhere to a ‘no comments policy’.

Many believe that in the interest of transparency, companies should come up with their version. Tariq Iqbal Khan, former chairman NIT, insisted that a company should come up with a clear position and where a rumour was incorrect the company should be bound to say so. “Silence in many cases amounts to ‘implied consent’”, Khan hammered a point.

And Section 42 (b) of the Code of Corporate Governance, 2012 stipulates: “A listed company is required to disseminate any material information, likely to affect the price of its shares to the relevant stock exchanges and the Securities and Exchange Commission of Pakistan, as soon as any such a decision is taken/finalised by its board of directors in its meeting held for the purpose, immediately after such a board meeting has taken place or as soon as a significant matter requiring disclosure has come to the knowledge of the company’s management”. All of that does make sense.

But where the air is thick with rumours relating to substantial acquisition of voting shares and takeovers, it would be cruel to put the onus of its confirmation on the target company’s management.

A market expert explained why, “Some times and usually in case of majority holding by a foreign parent, the local management may be unaware of the intentions and actions of the overseas majority stakeholder”.

A recent case is the rumours over sale of a controlling stake in K-Electric Limited (KEL).

In order to clear the cobwebs, the PSX enquired from the company, and one of the parties named in the transaction, to clarify market gossip. KEL shrugged its shoulders, and perhaps rightly so.

Yet reports are circulating about two competing Chinese energy companies vying for the overseas Abraaj Group’s 66pc holding in K-Electric. Even though reports say that the parties in the run have been asked to submit their binding offers by the end of this month, going by the Code of Corporate Governance, the KEL should not be required to file a notice of ‘material disclosure’ until a meeting of the board is held which certifies such a development.

“Rumour-mongers are not always the gainers”, says one stock market veteran: “I have seen those trying to corner a stock being cornered themselves”.

But those spreading rumours could perhaps be taken to task as Section 136 of the Securities Act 2015 states: “A person shall commit an offence if he circulates “any statement or disseminates information through the media which is, at the time and in light of the circumstances in which it is made is false or misleading with respect to any material fact and which he knows to be false or misleading”.

This leads to disclosure of an interesting yet lethal medium of spreading rumours that technology has made possible. Recent cases have come to light where someone picks up an old notice of a company on its letterhead, from the PSX web site, and Photoshop’s it a bit.

The old notice is removed and replaced by some false information, along with cutting and pasting the company secretary’s signature. The notice is circulated on social media, Facebook, twitter, whatsapp and through email. No one knows who initiated the move for every person who sends it to others writes across its head: ‘forwarded as received’.

Published in Dawn, Business & Finance weekly, August 22nd, 2016