SEBI's Crackdown on FinInfluencers: Protecting Investors Amidst Rise of 'FinInfluencers' in Securities Market

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After COVID-19, more demat accounts and social media financial influencers have appeared. Many of these influencers provide investment advice without SEBI registration, necessitating regulation to ensure compliance with SEBI guidelines.

The onset of the COVID-19 pandemic has prompted many Indians to venture into the stock market, embracing investment as a means of savings. According to the report published by the Securities and Exchange Board of India (SEBI), the number of Demat accounts, which initially stood at 4 crores, has surged to more than 10 crores following the outbreak of the COVID-19 pandemic.

Concurrently, there has been an increase in the number of 'FinInfluencers' who, through social media platforms, offer advice to their followers on a wide range of financial topics, including investing in securities, managing personal finances, selecting banking products, understanding insurance, and making informed decisions about real estate investments, among other subjects.

Indeed, while some of these 'FinInfluencers' may genuinely aim to enhance the financial literacy of the nation, it's crucial to acknowledge that there might be influencers driven by personal interests and gains who operate as unregistered Investment Advisors and Research Analysts, which is a concern for market regulator.

Advertisement Code For Investment Advisors & Research Analysts.

As a first step, the market regulator through a circular dated April 5, 2023, has released the ‘Advertisement code for Investment Advisers (IA) and Research Analysts (RA)’ for ‘FinInfluencers’ who are also registered Investment Advisors and Research Analysts with SEBI.

The Advertisement Code covers communication by the IA’s and RA’s in any electronic, wired or wireless communication including electronic mail, text messaging, messaging platforms, social media platforms, radio, telephone, or any other form over the Internet. The code mandates that IA's and RA's seek prior permission from SEBI's recognized supervisory body before disseminating any form of communication.

Consultation Paper On SEBI Registered Intermediaries Associating With Unregistered FinInfluencer.

To further regulate and protect investor interests, as well as ensure access to unbiased information and investment advices from unregistered Investment Advisors (FinInfluencers), the Securities and Exchange Board of India (SEBI) issued a consultation paper on August 25th. This paper specifically addresses the "Association of SEBI Registered Intermediaries/Regulated Entities with Unregistered Entities (including Finfluencers)."

The consultation paper released by the market regulator cites the definition of an influencer given by the Advertising Standards Council of India, which defines an influencer as,

“Influencer means someone having access to an audience and power to affect such audiences’ purchasing decisions or opinions about a product, service, brand or experience, because of the influencer’s authority, knowledge, position, or relationship with their audience”

While discussing the business model of financial influencers, the consultation paper states that finfluencers who are not registered with the relevant financial sector regulator may lack the necessary qualifications or expertise, and as a result, they may not disclose potential conflicts of interest, such as their association with or interest in the products, services, or securities they promote.

The paper also notes that SEBI-registered intermediaries were relying on unregistered "FinInfluencers" to promote their products and services, and these unregistered influencers might encourage their followers to invest in securities or financial products in exchange for various incentives or benefits like -

  1. Referral fee for usage of the product, channel, platform, or services that they advertise – such referral fee may be variable (per use or per user), or fixed  (retainer model), or a combination of both. The commission may be in an upfront or trial manner;
  2. Non-cash benefits such as free usage of products or services;
  3. Compensation received directly from the social media or other platform where they share their content; and
  4. Profit sharing with the underlying product, channel, platform, or services.

The paper released by the market regulator further prohibits SEBI registered intermediaries/regulated entities or their agents/representatives from directly or indirectly, having any association/relationship in any form, whether monetary or non-monetary, for any promotion or advertisement of their services/products, with any unregistered entities (including finfluencers).

It further stipulates that the entities registered or regulated by SEBI, stock exchanges, or AMFI are prohibited from sharing any confidential client information with unregistered entities.

Additionally, Finfluencers registered with SEBI, stock exchanges, or AMFI (Association of Mutual Fund of India), regardless of their capacity, must prominently display their registration number, contact information, investor grievance redressal helpline, and provide relevant disclosures and disclaimers in all their posts. They are also required to adhere to the prescribed code of conduct applicable to their respective registrations.

The consultation paper also adds that the SEBI registered intermediaries should disassociate themselves from the unregistered entity and also bring to the notice of the enforcement agency concerned to take appropriate action, including filing a case under section 420 of the Indian Penal Code, 1860 for impersonation and fraud, as may be applicable.

The regulator is accepting public comments/suggestions for the consultation paper may be till September 15, 2023.

Past Instances of Regulatory Actions.

In recent times, the securities market regulator has taken action against unregistered entities involved in providing investment advice through social media platforms and profiting from such advice to investors.

On March 2, 2023, the regulator passed an ex parte interim order, debarring Bollywood Actor Arshad Warsi, his wife, and 29 other entities from trading in the market and freezing their bank accounts. They were accused of engaging in a pump-and-dump scheme and making illegal gains by advising investors on a YouTube channel to purchase shares of a company called Sadhna Broadcast. Warsi and his wife allegedly made illegal gains of Rs. 29.43 lakhs and Rs. 37.58 lakhs, respectively

Nevertheless, the Securities Appellate Tribunal, in an order dated March 27, 2023, partially reversed SEBI's decision by unfreezing the bank accounts of Warsi and his wife. The Securities Appellate Tribunal (SAT) said that the SEBI's order, issued by the Whole Time Member (WTM), lacked sufficient evidence against Warsi and his wife to justify such a severe and harsh decision. However, the SAT also directed Warsi and his wife not to trade in the shares of Sadhna Broadcast.

SEBI imposed a fine of Rs. 6.5 crore and debarred a prominent YouTuber and options trader PR Sundar for a year in May 2023 for violating the Securities and Exchange Board of India (Investment Advisers) Regulations. SEBI's investigation revealed that Sundar provided investment advice to investors regarding the purchase and sale of securities. Investors would then make payments to a bank account linked to a company where Sundar was a co-promoter.

Authors View

It's important to strike a balance between regulating financial influencers for the protection of investors and respecting their freedom of speech under Article 19 of the Constitution. Regulators like SEBI, IRDA, and PFRDA oversee individuals providing investment advice related to securities. However, unregulated Fin-Influencers on social media require a nuanced approach.

Indeed, it's crucial for regulators to strike a balanced approach when dealing with Fin-Influencers. While investor protection is a paramount objective, financial literacy and education are equally important initiatives by the regulator. Fin-Influencers often play a significant role in educating investors and the general public about finance, contributing to the growth in the number of investors in India, as seen in the rising number of demat accounts.

Regulators should aim to create a regulatory framework that safeguards investors' interests without stifling the valuable role that Fin-Influencers play in spreading financial knowledge and awareness.

One potential solution is for market regulators to establish a self-regulatory code, similar to the one for OTT platforms under IT Rules. This code could set standards and guidelines for Fin-Influencers to follow, ensuring they provide accurate and responsible financial advice without infringing on their freedom of speech.

At the same time, regulators should take strict action against Fin-Influencers who engage in unlawful practices, such as misleading investors for personal gain. This enforcement can act as a deterrent and maintain the integrity of the financial advice provided by influencers.