Driven by rising concerns about investor protection in this digital age, the Securities and Exchange Board of India (SEBI) has released the much-awaited consultation paper on the association of SEBI registered intermediaries/ regulated entities with unregistered entities including ‘finfluencers’.
While SEBI continued to crack down on firms and unregistered entities or finfluencers who make use of social media for providing unsolicited trading tips, this is the first formal step to directly address the conduct of finfluencers.
On April 5, 2023, SEBI introduced an Advertisement Code (the “Advertisement Code”) for SEBI registered Investment Advisers (“IAs”) and Research Analysts (“RAs”).
IAs and RAs are governed by and are required to be registered with SEBI under the SEBI (Investment Advisers) Regulations, 2013 (“IA Regulations”) and SEBI (Research Analyst) Regulations 2014 (“RA Regulations”), respectively. While IAs are registered with SEBI to engage in the business of providing personalized investment advice based on aspects such as the client’s financial situation, goals, etc. for a consideration, RAs are registered persons considered experts who publish research reports or recommendations on the subject without any client-specific considerations.
SEBI’s Advertisement Code
From May 1, 2023, IAs and RAs are required to comply with the Advertisement Code while issuing any ‘advertisement’ – which includes all forms of communications, issued by or on behalf of an IA/RA, that may influence investment decisions of any investor or a prospective investor. The code mandates certain disclosure requirements and issuing standard warnings about risks associated with investment in the securities market. One hard-hitting requirement that SEBI has prescribed is that IAs and RAs must seek pre-approval for all ‘advertisement’ or ‘material’ before its issuance, from a SEBI-recognized supervisory body.
Pursuant to the Advertisement Code, BSE Administration & Supervision Ltd, a SEBI recognized body, released FAQs clarifying that advertisements issued for educational/ information purposes, knowledge sharing/ training or other content which has no influence upon investment decisions of any investor would not require a prior approval.
What is not addressed in the Advertisement Code is that most individuals involved in social media marketing are not registered with SEBI either as an IA or an RA and escape these regulations. Unregistered persons or ‘finfluencers’, regardless of their actual level of expertise, are continually using social media platforms to wield outsize influence on investment decisions of young investors.
SEBI has in its consultation paper, referred to ‘finfluencers’ as persons who provide information and/ or advice on various financial topics such as investing in securities, personal finance, banking products, insurance, real estate investment, etc. through social / digital media platforms, and have the ability to influence the financial decisions of their followers.
SEBI’s Actions Against Unregistered Finfluencers using Social Media
In an interesting development of May 25, 2023, SEBI issued a settlement order against a finfluencer named PR Sundar for providing advisory services without obtaining the requisite registration from SEBI, and prohibited him, his company Mansun Consultancy, and the co-promoter in the company from the securities market for a year.
In another instance, SEBI issued interim orders (“Interim Orders”) on March 3, 2023 in two cases relating to use of YouTube channels to manipulate stock prices of two companies, Sadhna Broadcast Limited (“Sadhna”) and Sharpline Broadcast Limited (together the “Listed Companies”). The noticees to these Interim Orders are unregistered persons and include promoters of the Listed Companies, founders of the YouTube channels, and noticees in the case of Sadhna include the Indian actor Ashrad Warsi and his wife. In both these cases, noticees used YouTube channels to disseminate false and misleading information and lure subscribers into buying shares of the Listed Companies, and then dumped the shares of the Listed Companies at inflated prices to make extraordinary profits, which is generally referred to as a ‘pump and dump’ scheme.
SEBI found the noticees in the Interim Orders to be prima facie in violation of Section 12A (a), (b) and (c) of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”); and various regulations framed thereunder including SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (“PFUTP Regulations”).
SEBI Act and PFUTP Regulations prohibit using or employing any manipulative or deceptive devices or contrivance in contravention of provisions of the SEBI Act and the PFUTP Regulations. The PFUTP Regulations also prohibits any person from indulging in any manipulative, fraudulent or unfair trade practices in the securities market.
These Interim Orders clearly demonstrate that the supervisory powers of SEBI under the existing PFUTP Regulations are wide enough to address cases of securities fraud (including stock price manipulation and mis-selling of securities) committed using social media platforms by unregistered persons / finfluencers as well.
However, while the cases discussed above clearly involve illegal elements which trigger the PFUTP Regulations, the more prevalent issues which do not contain any apparent ‘illegality’ are still left largely unregulated under the SEBI’s current preventive framework.
What’s Next?
In our view, on one end, it is crucial to encourage finfluencers to create valuable information and not pose many restrictions. On the other end, although the existing SEBI PFUTP Regulations are equipped to offer protection against worst forms of finfluencer misconduct involving clear fraud and manipulation, what lies in the middle and needs careful examination and consideration, is the lack of safeguards against information disseminated from finfluencing activities that are not ‘illegal’ but still impact the stock markets owing to the greatly expanded reach of finfluencers.
Enter the consultation paper issued by SEBI, wherein the regulator has finally addressed that while some finfluencers are genuine educators, many of them deal in regulated areas and are effectively operating as unregistered and unauthorised IAs and RAs. SEBI recognises that such finfluencers may not disclose potential conflicts of interest such as their association with or interest in the products, services or securities that they promote.
To deal with this, SEBI proposes to disrupt the revenue model for unregistered finfluencers, so that the perverse incentives in the ecosystem reduce. It is proposed that registered and regulated entities (such as mutual fund houses) should curb all connections or associations in any form, whether monetary or non-monetary, for any promotion or advertisement of their services/ products, with any unregistered entities (including finfluencers).
However, although SEBI seems to have made a distinction between unregistered finfluencers who are ‘genuine educators’ and the ones who are dealing in regulated areas without requisite qualifications and expertise in breach of SEBI regulations, it has not provided the legal basis for drawing this distinction.
This can be addressed by SEBI setting out a definitive criterion for what constitutes ‘financial advice’ which should only be permitted to be given by such persons who are registered with SEBI, and cannot be given by unregistered persons including finfluencers.
To this end, SEBI can take cues from its counterparts in other nations who have clarified on this aspect. For instance, in line with an information sheet released by Australia Securities and Investments Commission, SEBI can clarify that the description of different types of financial products, with no implied recommendation that one is better than another – does not influence investment decisions and should not be regulated. On the other hand, sponsored activities or stock-specific tips by sharing an opinion that significant returns are guaranteed or are extremely likely by investing in a particular stock gives the impression that such investment is safe and is influential – should be regulated by SEBI and unregistered persons should not be permitted to engage in such activities. It will be interesting to see if the proposed framework would be able to create an ecosystem wherein genuine finfluencers and SEBI registered entities can co-exist.
The above article has been written by Niyati Khullar, Associate at Pioneer Legal
Disclaimer: This article is meant for informational purposes only and does not purport to be advice or opinion, legal or otherwise, whatsoever. Views expressed in this article are personal views of the author and do not reflect the views of financialexpress.com