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The authors are Vaibhavi Pedhavi and Anushree, fourth year students at Gujarat National Law University, Gandhinagar.
Introduction
Market regulators across the globe are facing difficulties in regulating the activities of financial influencers or “finfluencers”, who have millions of followers on their social media platforms Financial Influencers or more popularly known by the term Finfluencer is the “person who influences the financial investment decisions of his/her followers by doling out advice or recommendations.” They commonly endorse affiliate links on their social media platforms to encourage the opening of trading accounts and whenever a user commences a trade through an account opened via these links, the corresponding stock broker extends a portion of the brokerage fee to the influencer who shared the link. These Financial Influencers provide financial advice, share investment strategies, and offer insights into the world of financing and investing. In the past few years, these Finfluencers are gaining popularity and have often violated the norms set out by the regulators. While identifying the risks involved by these participants, India’s market regulator SEBI has also raised concerns against one such Finfluencers who violated norms set out by the SEBI. SEBI’s Chairperson and Finance Minister both have highlighted this issue and discussed the methods adopted by regulators from across the world and the implementation of such regulatory measures in India to control the activities of Finfluencers. The present article explores SEBI’s role as the regulatory authority to control the activities of Finfluencers and how SEBI has emphasized the protection of the interests of the investors from time to time.
Risks posed by Finfluencers in Capital Markets
According to the experts, these arrangements of sharing affiliate links on social media platforms have the potential to incentivize Finfluencers to actively encourage their followers to engage in more frequent trading, as their earnings are directly linked to the volume of trades conducted which is impacting decisions of the investors. These Financial Influencers have revolutionized the way financial advice is disseminated and have surpassed the role of traditional investment advisers and Research Analysts.
Finfluencers wield significant influence within the financial industry, yet their activities remain unregulated in India. This regulatory void has allowed Finfluencers, who often lack the necessary qualifications, to disseminate false and misleading financial information, resulting in flawed decision-making by the public. The absence of regulatory oversight has created a situation where these influencers can operate with impunity, evading any liability for the consequences of their actions. SEBI has recognized the impact of social media influence on stock markets, price discovery, and the vulnerability of inexperienced investors who fall for “tips” or recommendations. The market regulator has also issued orders against entities providing financial advice through platforms like YouTube and Telegram, who subsequently engage in stock manipulation. Certain individuals, such as PR Sundar, have paid substantial penalties of around Rs 6.5 crore to settle with SEBI, while others, like Gunjan Verma, have received warnings.
In the case of "Re: Stock Recommendations using Social Media Channel (Telegram)" (SEBI), it was determined that the operators of the channel were not registered as Research Analysts or Investment Advisors and had charged unfair fees. The number of channel members and the number of tips/recommendations did temporarily impact trading activity in a specific stock, which also raised concerns under the Prevention of Unfair Trade Practices regulations. This decision by SEBI represents a significant step in addressing the influence of social media on Indian traders and stock markets while upholding market fairness against unregistered operators and unfair practices. Through this case SEBI sends a clear signal that unauthorized individuals cannot provide financial advice or recommendations without proper regulatory oversight which makes it harder for finfluencers to provide their services in an unregulated manner. However, it is crucial to promptly address the potential indirect harm caused to the new and inexperienced investor community by financial influencers. Notably, in the Telegram case, SEBI acknowledged how a large subscriber base can lead to stock price manipulation and that it has been actively taking measures, such as banning Telegram channels and issuing show-cause notices to offenders, to prevent practices that promote unhealthy and unfair trade practices.
SEBI’s proactive measures to regulate Finfluencers
The Securities and Exchange Board of India (hereinafter ‘SEBI’) has proactively taken several actions under its prohibition of “SEBI (Prohibition and Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003”, Settlement, and Investment Advisers’ Regulations to address the activities of social media influencers. As there is currently no dedicated regulatory framework specifically for social media influencers, SEBI has leveraged existing regulations to tackle potential fraudulent and unfair trade practices. SEBI implemented the “SEBI (Investment Advisers) Regulations, 2013” with the objective of establishing investment advisers as a distinct category of market intermediaries. These regulations were designed to promote the interest of the investors and prevent conflicts of interest that may arise from advisers simultaneously acting as distributors of financial products. Further, in July 2020, SEBI introduced substantial amendments to these regulations, aligning with the surge in Finfluencer activities during the COVID-19 lockdown period. These amendments encompassed revisions to the qualification, certification, and net worth requirements for investment advisers. Additionally, restrictions were imposed on their capacity to provide distribution services or charge for implementation services. SEBI also imposed a ceiling on the fees that investment advisers could levy, thus imposing constraints on the range of services they could offer and their potential earnings.
Recently in April 2023, SEBI promulgated the “Advertisement Code for Investment Advisers (IA) and Research Analysts (RA)”, which is specifically tailored for investment advisers and research analysts with the objective of bolstering their adherence to IA Regulations. This code establishes a mandate that any form of communication, encompassing audio-visual content, text messages, or messaging platforms, disseminated by or on behalf of an investment adviser and capable of influencing investment decisions necessitates prior approval from BASL. This step by the SEBI has been regarded as one of the first steps for regulating Finfluencers who are also registered Investment Advisors.
The majority of financial influencers, known as Finfluencers, operate outside the regulatory oversight of SEBI and often do not comply with its regulations. They exist in a grey area or beyond a fine line where the distinction as research analysts becomes important. These Finfluencers can be considered to fall within the definition of 'Research Analyst' according to Regulation 2(u) of “SEBI (Research Analysts) Regulation, 2014”. Consequently, they are accountable for their content in accordance with the relevant regulations. The definition provides that a person is regarded as a ‘Research Analyst’ if they prepare or publish research reports, provide research reports, offer opinions on public offerings, or provide price targets. These regulations also mandate that they possess technical qualifications and pass the National Institute of Securities Market (NISM) exams. This framework establishes a safety net for investors and serves the fundamental purpose of SEBI.
SEBI's Advertisement Code: Disrupting the Finfluencer Economy Instead of Regulating Growth?
SEBI's recent introduction of the advertisement code for investment advisers raises questions about its potential approach to finfluencers. However, the imposition of stringent compliance requirements for every communication is likely to disrupt the Finfluencer economy rather than effectively regulate its growth. Finfluencers rely on continuous content creation to maintain their following, and requiring prior approval for each communication is poised to undermine their entire business model. While it is acknowledged that the right to freedom of speech and expression under Article 19 of the Constitution of India is subject to reasonable restrictions, it is equally important for SEBI as a regulatory body, to foster an environment of free speech and expression without fear or intimidation. The code appears to create a conflict between SEBI's objective of promoting and regulating, as the onerous requirements hinder free expression.
The "Australian Securities and Investments Commission (ASIC)" has published a guide for financial influencers in Australia, which outlines the two main obligations for finfluencers in the country: firstly, licensing and good practices and secondly, disclosure. Additionally, DCA (Department of Consumer Affairs) of India as has also issued guidelines as a regulatory framework to create a more comprehensive and effective regulatory regime for fin-influencers in India. The DCA in India has introduced "Endorsement Know-Hows" guidelines aimed at promoting transparency in the financial relationship between fin-influencers and companies. According to these guidelines, fin-influencers are obligated to disclose any significant interests, such as gifts, equity, awards, or discounts, when endorsing products or services. Failure to comply with these disclosure requirements could lead to legal consequences, including the possibility of a ban on endorsements. The guidelines are designed to ensure that consumers have access to accurate and unbiased information when making financial decisions based on influencer endorsements. An ideal approach for SEBI would be to establish a self-compliance-based regime as adopted by ASIC in Australia and DCA’s guidelines that on licensing, good practices and disclosure obligations rather than regulating every single action of finfluencers. This approach would benefit both Finfluencers and SEBI, alleviating the burden of excessive regulatory oversight while still addressing any non-compliance issues that may arise.
Challenges and Considerations before SEBI
●Limited presence of registered Investment Advisers: The amendments in Investment Advisors Regulations have proven burdensome for investment advisers and have had unintended consequences on the securities market. As of January 31, 2020, SEBI had registered 1,277 investment advisers, but the number has only marginally increased to 1,319 over a span of more than three years. In contrast, during the period when the number of demat accounts in India surged from approximately 40 million in March 2020 to nearly 115 million in March 2023, the number of active investment advisers significantly declined. Currently, for every 1,30,000 demat accounts (Demat stands for "Dematerialized," meaning it converts physical securities into electronic form), there exists only one BASL-registered investment adviser. It is this disparity that Finfluencers have capitalized on, filling the gap left by the limited presence of registered investment advisers.
● Fostering freedom of speech and expression: It is crucial for SEBI, as the regulatory authority, to uphold an environment that fosters freedom of speech and expression without fear or intimidation. The objectives of promoting and regulating may seem conflicting in this context. A favourable approach for SEBI would involve implementing a self-compliance-based system that enforces strict penalties for violations, rather than regulating every single action. Such an approach would be advantageous for both financial influencers and SEBI, alleviating the burden of excessive regulatory oversight already in place.
● Prioritizing investor protection: In many cases, the target audience of these financial influencers is first-time investors who may not have a significant financial cushion. One negative experience with misinformation or manipulation can potentially shatter their confidence in the markets permanently. It is crucial to recognize that these individuals often have limited financial resources to fall back on.
Conclusion
In conclusion, the tussle between finfluencers and SEBI revolves around finding the right regulatory balance that allows financial influencers to thrive while safeguarding investor interests. SEBI's objective should be to foster an environment of complete freedom for financial influencers while ensuring that they are held accountable when their content influences significant trading decisions and they profit from it. Recognizing the role played by financial influencers in promoting financial literacy is also essential, but ensuring transparency and ethical practices is equally important. SEBI should consider leveraging existing regulations, such as the definitions of "Investment Adviser" and "Research Analyst," which may already cover financial influencers. This approach could be more effective than introducing new regulations specifically targeting finfluencers. Drawing from the Australian example and the DCA's guidelines, SEBI could consider incorporating similar principles into its regulatory framework.