By Amol Agrawal
Sebi chairperson Madhabi Puri Buch has been giving speeches on the risky state of investment advisory in India. Buch says that nearly one third of investment advisors are not registered with Sebi and there is a rise of the so-called finfluencers. Finfluencers are social media influencers who, using their status, offer financial advice on social media platforms but may not have any financial expertise.
Why is it that Sebi is concerned with rise of unregistered investment advisors and finfulencers? First, the number of retail investors has increased sharply in the last decade. The number of demat accounts has increased by nearly ten times from 1.3 crore in 2012-13 to 11.4 crore in 2022-23. Second, the growth in retail investors would mean that they would need help and advice on their financial investments.
These developments of the expanding retail base and the need for investment advisory brings Sebi into the picture. Sebi would wish that retail investors seek guidance from registered and qualified advisers.
In 2013, Sebi issued Investment Advisers Regulations, almost anticipating the rise of retail investors. The regulations defined investment advice as giving personal advice to clients related to trading in individual or portfolio of securities. The advice can be in written, oral, or other means of communications. Any public advice on investments available in newspapers, magazines and on electronic platforms is not considered investment advice.
Accordingly, an investment adviser is anyone who provides investment advice to their clients. Further, regulations specify registration of investment advisers, minimum net-worth requirements, and appropriate education qualification for becoming a registered advisor. Sebi has also made a long list of advisers who are excluded from registration: persons giving general comments on financial markets in “good faith”. The list also includes insurance advisers, pension advisers, and mutual fund distributors registered with respective regulators. The lawyers and chartered accountants who provide investment advice as part of their services are also exempted from registration.
In the 10 years of regulations, the number of registered investors has shrunk to just 1,313, which is even lower than 1% of the total retail investor base. Most advisers have preferred not to register and technology has enabled finfluencers to offer advice without being registered.
The aforementioned set of developments in securities markets has interesting parallels with Indian banking markets. At the time of inception of the RBI in 1935, there were several banks in India following all kinds of banking practices but there were no banking regulations. One of the first tasks of the RBI was to define both banks and banking. The RBI also specified that only those who do banking can add the title bank against their business names. Post the Banking Regulation Act (1949), the RBI also stated that all the existing and new banks in India will have to seek a license from the central bank along with prudential requirements of minimum capital and net worth.
Despite the regulatory changes, the RBI took time to cleanse the banking system and allow only registered banks to offer banking services. The RBI encouraged banks to seek license and penalise those who were not willing to comply by closing/merging them. Apart from the RBI measures, there were a series of bank failures which also drove home the point to both bankers and their customers that regulated banks are the way forward.
One is seeing both similar and different trends play out in the case of investment advisers and Sebi. The investment advisers also existed before Sebi but the regulator did not issue directions to regulate them at the beginning. However, one can also argue that Sebi delayed regulating investment advisers as investment advice goes hand in hand with stock markets. The retail investors, unlike bank customers, were much fewer in number, limiting the scope of the investment advice. Once Sebi saw a rise in retail investors and the potential rise of investment advisers, it issued regulations to recognise and register the latter.
Apart from tightening regulations, Sebi is penalising and suspending unregistered investment advisers. It is also penalising registered advisers who are not complying with regulations. Sebi is also seeking to develop an ecosystem for fee collection by registered investment advisers. It has also specified an advertising code for using brand names for investment advice. Sebi is also trying to spread financial literacy so that investors do not fall for unsolicited financial advice. The registered investment advisers have formed an association of their own to signal to the investors. The Indian Banking Association also came up in 1946 in the early years of bank regulations.
Sebi is acting vigorously against unregistered investment advisers and unsolicited investment advice. It will be a long battle before the system shifts to registered advisers and solicited advice. Meanwhile, investors have to be aware and careful in their investments. Economists dread one question in a public gathering: “Which share should one invest in”? Now, if the economist happens to be the finance type, they will be the cynosure of the meeting, else they will be avoided. Given people’s worries over personal investments and nature of stock markets, investors should express caution and avoid free advice even from finance type economists.
The author teaches at Ahmedabad University. Views are personal