Regulator SEBI is targeting firms linked to unregistered finfluencers; here’s why
The capital markets regulator is changing tack; it will go after regulated entities that associate with unregistered finfluencers
- Jul 19, 2024,
- Updated Jul 19, 2024 3:35 PM IST
The Securities and Exchange Board of India (Sebi) has made a series of interventions over the past year to check illegal stock advice being dispensed by financial influencers, or finfluencers, but with limited results. Finfluencer content continues to flourish in the face of repeated strictures from the regulator and the imposition of fines in some instances.
That has prompted Sebi to change tack. At a meeting at the end of June, Sebi’s board decided that it was time to crank the pressure up a notch. It will now impose penalties on entities it regulates if they associate with finfluencers who give stock advice illegally.
Presenting the new framework after that meeting, Sebi Chairperson Madhabi Puri Buch spelt out the changes. “As you know, we have jurisdiction over entities that we regulate,” the Chairperson remarked. It can regulate only registered investment advisors and research advisors who come under its purview.
Such organisations cannot affiliate with individuals who dole out investment advice without getting registered with Sebi. “The second is, irrespective of whether they are registered or unregistered, if they are making claims on portfolio performance, their service performance, etc., unless it is specifically provided for them to be able to give that information… then again, they are breaking the law,” Buch said.
A Sebi-registered broker can buy and sell securities on behalf of clients. Other regulated entities offer securities-related services but may not directly execute trades on the exchange. But Buch made it clear that the rules do not apply to those who are solely engaged in creating educational content.
For entities regulated by Sebi, associating with such content creators could result in hefty fines and even the cancellation of licences. Prithviraj Senthil Nathan, Partner at King Stubb and Kasiva, Advocates and Attorneys, says, “Sebi can… impose fines for violations under Regulation 26 of the Sebi (Stock Brokers) Regulations, 1992, and Chapter VIA of the Sebi Act.” He says the regulator can also suspend or cancel registration certificates under Regulation 27 of the Sebi (Stock Brokers) Regulations and Chapter V of the Sebi Act.
Besides, it can initiate criminal prosecution under Section 24 of the Sebi Act for serious offences like trading without registration. “[Sebi can] penalise for failures such as non-compliance with reporting requirements, improper record-keeping, market manipulation. [And it can] enforce disgorgement of unlawful gains, mandating corrective actions, and ensuring compliance with Sebi’s circulars and guidelines,” Nathan adds.
Be that as it may, market participants have welcomed these steps. Sanjay Saxena, Co-founder and CEO of India and Southeast Asia at fintech company CIFDAQ, says, “Measures like these ensure that investors are receiving guidance only from registered professionals, which will, in turn, foster transparency and trust in the financial markets. These new regulations will also discourage unauthorised financial promotion, support investor protection, and promote financial literacy.”
Yash Parashar, Managing Director of trading platform Finera Solutions, says, “This will especially impact finfluencers who are just starting the journey, showing double- or triple-digit returns to lure clients.” He says finfluencers putting up educational content could also get themselves registered to comply with the rules. The rules will more clearly highlight the line between educational content and stock advice that has blurred in recent times, says Anand K. Rathi, Co-founder of investment platform MIRA Money. “Many influencers were not focussed on proper education; rather, they were promoting products without calculating their potential downsides, which affected the industry in a big way. While a few did a good job, I would estimate 95% of them were interested in selling products without understanding them.”
Sebi has also enlisted the help of online platforms in curbing illegal activity. This will also help Sebi-registered entities identify and avoid those violating securities laws.
Dhirendra Kumar, Founder and CEO of financial advisory firm Value Research, says the revised regulation will certainly prevent brokers from associating with unregistered advisors. “However, as with every restriction, some finfluencers will probably find it lucrative to try to circumvent the restrictions. Therefore, detection, enforcement, and strong punitive action are important,” he says.
The effectiveness of Sebi’s move in protecting the public hinges on how much exposure investors actually have to such recommendations.
“The impact is already noticeable, with many companies ceasing to use influencers to promote their products. However, even today, on platforms like Telegram and Instagram, unauthorised individuals still suggest which stocks and mutual funds to buy,” says Rathi. The curbs have to be strict and the penalties severe, such as removing or blocking influencers’ accounts, to deter them from making such recommendations, he says.
The message is clear. And those who play by the rules can survive. Value Research’s Kumar says, “The finfluencer zoo has a wide variety of species. I am sure some will become endangered, while others will probably still flourish.”
@imNavneetDubey
The Securities and Exchange Board of India (Sebi) has made a series of interventions over the past year to check illegal stock advice being dispensed by financial influencers, or finfluencers, but with limited results. Finfluencer content continues to flourish in the face of repeated strictures from the regulator and the imposition of fines in some instances.
That has prompted Sebi to change tack. At a meeting at the end of June, Sebi’s board decided that it was time to crank the pressure up a notch. It will now impose penalties on entities it regulates if they associate with finfluencers who give stock advice illegally.
Presenting the new framework after that meeting, Sebi Chairperson Madhabi Puri Buch spelt out the changes. “As you know, we have jurisdiction over entities that we regulate,” the Chairperson remarked. It can regulate only registered investment advisors and research advisors who come under its purview.
Such organisations cannot affiliate with individuals who dole out investment advice without getting registered with Sebi. “The second is, irrespective of whether they are registered or unregistered, if they are making claims on portfolio performance, their service performance, etc., unless it is specifically provided for them to be able to give that information… then again, they are breaking the law,” Buch said.
A Sebi-registered broker can buy and sell securities on behalf of clients. Other regulated entities offer securities-related services but may not directly execute trades on the exchange. But Buch made it clear that the rules do not apply to those who are solely engaged in creating educational content.
For entities regulated by Sebi, associating with such content creators could result in hefty fines and even the cancellation of licences. Prithviraj Senthil Nathan, Partner at King Stubb and Kasiva, Advocates and Attorneys, says, “Sebi can… impose fines for violations under Regulation 26 of the Sebi (Stock Brokers) Regulations, 1992, and Chapter VIA of the Sebi Act.” He says the regulator can also suspend or cancel registration certificates under Regulation 27 of the Sebi (Stock Brokers) Regulations and Chapter V of the Sebi Act.
Besides, it can initiate criminal prosecution under Section 24 of the Sebi Act for serious offences like trading without registration. “[Sebi can] penalise for failures such as non-compliance with reporting requirements, improper record-keeping, market manipulation. [And it can] enforce disgorgement of unlawful gains, mandating corrective actions, and ensuring compliance with Sebi’s circulars and guidelines,” Nathan adds.
Be that as it may, market participants have welcomed these steps. Sanjay Saxena, Co-founder and CEO of India and Southeast Asia at fintech company CIFDAQ, says, “Measures like these ensure that investors are receiving guidance only from registered professionals, which will, in turn, foster transparency and trust in the financial markets. These new regulations will also discourage unauthorised financial promotion, support investor protection, and promote financial literacy.”
Yash Parashar, Managing Director of trading platform Finera Solutions, says, “This will especially impact finfluencers who are just starting the journey, showing double- or triple-digit returns to lure clients.” He says finfluencers putting up educational content could also get themselves registered to comply with the rules. The rules will more clearly highlight the line between educational content and stock advice that has blurred in recent times, says Anand K. Rathi, Co-founder of investment platform MIRA Money. “Many influencers were not focussed on proper education; rather, they were promoting products without calculating their potential downsides, which affected the industry in a big way. While a few did a good job, I would estimate 95% of them were interested in selling products without understanding them.”
Sebi has also enlisted the help of online platforms in curbing illegal activity. This will also help Sebi-registered entities identify and avoid those violating securities laws.
Dhirendra Kumar, Founder and CEO of financial advisory firm Value Research, says the revised regulation will certainly prevent brokers from associating with unregistered advisors. “However, as with every restriction, some finfluencers will probably find it lucrative to try to circumvent the restrictions. Therefore, detection, enforcement, and strong punitive action are important,” he says.
The effectiveness of Sebi’s move in protecting the public hinges on how much exposure investors actually have to such recommendations.
“The impact is already noticeable, with many companies ceasing to use influencers to promote their products. However, even today, on platforms like Telegram and Instagram, unauthorised individuals still suggest which stocks and mutual funds to buy,” says Rathi. The curbs have to be strict and the penalties severe, such as removing or blocking influencers’ accounts, to deter them from making such recommendations, he says.
The message is clear. And those who play by the rules can survive. Value Research’s Kumar says, “The finfluencer zoo has a wide variety of species. I am sure some will become endangered, while others will probably still flourish.”
@imNavneetDubey