[By Shyam Gandhi]
The author is a student of National Law University, Jodhpur.
Introduction
Recently, Securities and Exchange Board of India (“SEBI”), has stated that it will be framing rules and regulations regarding fin-influencers to protect the consumers. SEBI has emphasised on the potential dangers posed by influencers, particularly when individuals blindly adhere to their financial advice, promising substantial returns.
Fin-influencers are individuals who have public social media profiles and use these platforms to offer advice and share personal experiences with matters pertaining to finances and investments in stocks. A concern has been raised that these fin-influencers lack the requite license and qualifications and they may possibly provide completely flawed advice to earn profit from the promoter of specific products illicitly, which results in loss to the innocent consumers who rely on them.
Need For Regulations
The SEBI plays a pivotal role in the facilitation of investor protection and the advancement of market development within the Indian context. In recent years, there is an increase in the number of fin-influencer. The emergence of financial influencers was propelled by the significant growth of the cryptocurrency market in 2017 and the subsequent impact of the COVID-19 pandemic, leading to an extraordinary jump in the stock market and attracting a larger audience of inexperienced investors. However, on the other side of the pendulum, financial literacy in India is only 27%. It implies, most of the investors lack the requisite knowledge and thus depend upon these fin-influencers. Usually, investors take their advice for granted and they act as per the instructions of fin-influencers. A fallacious or biased advice can cause irreparable loss to the investors. Take for example, SEBI’s action in the Vauld case.
Further in case of Stock Recommendations using Social Media Channel (Telegram), it has been ascertained that the individuals responsible for managing the channel were found to be lacking registration as Research Analysts or Investment Advisors. Furthermore, it had come to light that these individuals had imposed fees on the innocent investors that were deemed to be unjust and inequitable. Thus, from the above the following can be culled out to be the reasons why such steps by SEBI were required:
- Unregulated Advice: Finfluencers, being private individuals or entities, are not necessarily subject to the same level of scrutiny as registered financial advisors or investment professionals. This lack of regulation can lead to a risk of misinformation or unverified advice, which could harm investors.
- Market Manipulation: In some cases, Finfluencers may have vested interests in certain stocks or financial products. They may use their influence to manipulate the market or promote certain assets without adequate disclosure, potentially harming investors who follow their advice without understanding the full picture. For example, Arshad Warsi through the fraudulent advice manipulated the share prices of Sadhna Broadcast and Sharpline Broadcast.
- Retail Investor Vulnerability: Retail investors, especially those new to investing, might be more susceptible to making decisions based on the recommendations of Finfluencers without conducting thorough due diligence. SEBI aims to protect these investors from potential risks arising from misleading or unverified information.
- Maintaining Market Integrity: A well-regulated market is crucial for its stability and long-term growth. By establishing rules and guidelines for Finfluencers, SEBI seeks to ensure that market participants, including influencers, adhere to ethical practices and maintain market integrity.
Does SEBI Have Jurisdiction To Make Rules And Regulations?
One of the key legal aspects is whether SEBI has the jurisdiction to make such rules and regulation. The SEBI Act, 1992 primarily empowers SEBI to regulate and oversee various entities and activities related to the securities market in India. These include stock exchanges, listed companies, brokers, portfolio managers, mutual funds, and other market intermediaries. Financial influencers, who provide financial advice and insights to their followers through various media channels, may not fall directly within the purview of entities typically regulated by SEBI.
I. SEBI Investment Advisers Regulations, 2013
As per the SEBI Investment Advisers Regulations, 2013, under the proviso to Regulation 2(l), state that “investment advice given through a newspaper, a magazine, or any electronic, broadcasting, or telecommunications medium that is widely available to the public shall not be considered investment advice for these regulations.”Thus, as per the above provision, if advice has been given through a electronic medium, which is widely accepted, then that advice will not be considered as Investment advice. As the fin-influencers utilize social media platforms as a means to distribute their expertise in the field of finance, leveraging the widespread accessibility of electronic media to reach a broad audience. Hence, it might be argued that the guidance provided by them does not meet the criteria of investment advice as outlined in the SEBI Investors Advisers Regulations. Therefore, it is not feasible to regulate fin-influencers within the scope of an ‘Investment Advisers’ regulations.
II. SEBI Research Analysts Regulations, 2014
According to Regulation 7 of the SEBI Research Analysts Regulations 2014, individuals registered as Research Analysts, as well as those employed as research analysts as and partners involved in preparing and publishing research reports or analyses, must meet specific minimum qualifications and certification requirements issued by the National Institute of Securities Markets.
However, even though fin-influencers may possess knowledge and have a substantial following, they may not have the necessary certification and training required to be registered as research analysts with SEBI. As a result, under the SEBI Research Analysts Regulations, 2014, they are not authorized to provide investment advice or research reports, and they may not be classified as research analysts.
III. Advertising Standards Council of India Guidelines, 2013
Although, Advertising Standards Council of India [“ASCI”] has released the guidelines in this regard. As per the guidelines, If there is a material connection between the advertiser and the influencer, it must be disclosed and disclosure needs to be clearly and prominently presented to ensure that it is not overlooked by customers. Material connections includes but not limited to monetary compensation, discounts, gifts, etc. However, the guidelines of ASCI are not mandatorily applicable on these influencers. These guidelines do not have any legal effect. Thus, there exists a complete vacuum regarding rules and regulations related to Fin-influencers.
IV. Consumer Protection Act. 2019
However, the ‘Endorsements Know-hows’ were recently announced by the Ministry of Consumer Affairs. These guidelines aim to ensure consumer protection by putting certain requirements on endorsers. These obligations include confirming the accuracy of the suggestions they make and completing thorough research on the products they support. The activities performed by fin-fluencers can be appropriately categorized as “service” according to Section 2(42) of the Consumer Protection Act. Consequently, they are subject to the jurisdiction of the Consumer Protection and Competition Authority. Further as per Section 21 of Consumer protection Act, Central Consumer Protection Authority is granted the authority to issue directives to endorsers, requiring them to cease an endorsement or modify it appropriately, if it is determined that the advertisement in question is false, misleading, and detrimental to the welfare of consumers, subsequent to a thorough investigation.
It has to be noted here that, Consumer protection Act, is a general legislation, which lays down rules and regulations for protection of consumer. Whereas SEBI is a specialised body, which has been tasked with safeguarding the interest of the investor and to promote, develop and regulate the market. Thus, it becomes a legal duty of the SEBI to enact rules and regulations for the protection of investors from Fin-influencers.
Revamping of Existing Framework: Future Path
Section 11 of SEBI Act, empowers the SEBI to make regulations in order to protect the “protect the interests of investors in securities and to promote the development of, and to regulate the securities”. Thus, by exercising this power, SEBI can categorize financial influencers as a distinct group within the definition of an intermediary, as specified in Regulation 2(g) of the SEBI (Intermediaries) Regulations, 2008. This classification would subject them to the regulatory oversight of SEBI.
SEBI can enhance the quality of financial advice provided to the public and safeguard investors’ interests by implementing a comprehensive set of guidelines. These guidelines would cover licensing, registration, minimum qualifications, ethical standards, disclosure requirements, and penalties for non-compliance. Through this approach, SEBI would ensure that only qualified and experienced individuals or entities are authorized to offer financial advice, thereby promoting the overall standard of advice in the market and providing protection to investors.
Conclusion: SEBI’s Strategic Move Towards Ensuring Stringent Regulatory Regime
The move of the SEBI to make rules and regulations regarding the Fin-influencers and to bring them within the ambit of SEBI is a strategic move towards the protection of interest of gullible investors. It is imperative for the SEBI to build a rigorous framework to monitor fin-influencers in order to guarantee a better regulatory environment for the protection of investors. The primary objective of SEBI should be to cultivate an atmosphere that promotes autonomy for financial influencers, while simultaneously upholding their responsibility to face consequences when their content impacts substantial trading decisions and results in personal gains. Acknowledging the significant impact exerted by financial influencers in fostering financial literacy is indeed crucial; however, it is equally imperative to prioritize transparency and uphold ethical practices. Regarding the framing of rules and regulations, SEBI can rely on Australian, German, and Dutch laws in this aspect, additionally it can include the guidelines of ASCI, as well as the guidelines of DCI enumerated in ‘Endorsements Know-hows’. Therefore, it is a welcome step.