Introduction
Financial influencers or Finfluencers are unregistered entities that provide financial information through social media platforms. This article makes an attempt to gauge the dichotomous position of SEBI’s proposed regulation (Consultation Paper on Association of SEBI Registered Intermediaries/Regulated Entities with Unregistered Entities (including Finfluencers)) on whether to include influencers under IA regulations. A few finfluencers are registered investment advisors but most of them providing information through social media connote this merely as a form of expression of their knowledge and expertise. They currently hold a bleak position and the SEBI Investment Advisors (IA) regulations along with Research Analysts (RA) Regulations require a certificate and attested qualifications to continue providing financial literacy. (End of the Party for Sin (Fin)Fluencers? SEBI’s Regulatory Crackdown on Finfluencers)
Who are Investment Advisors and Research Analysts?
Investment advisors are functioning groups or entities that provide recommendations for investments on securities and provide their service for an exchange of consideration. Investment advisors cater to their clients’ needs and do not provide extrapolated market information. Individuals in order to provide such service are required to clear exams such as NISM (National Institute of Securities Markets) and CFA (Chartered Financial Analyst), and official registration from SEBI. (https://cleartax.in/glossary/investment-advisor/) As per regulation 7 of the SEBI IA Regulations (SEBI IA Regulations) mention the need for certification and adequate qualification in order to become an Investment advisor.
Research Analysts is a professional who is involved in preparing reports on assets and securities for clientele purposes. Research Analysts perform under either of the two categories: “buy-side” and “sell-side” .Buy-side and sell-side research analysts A buy-side analyst recommends securities for investment and a sell-side analyst is responsible for the promotion and facilitation of certain securities viable for investment in the market. (https://corporatefinanceinstitute.com/resources/career/buy-side-vs-sell-side/). The qualifications of a RA are similar to that of IA, requiring a master’s degree in finance or accounting.
About the IA regulation from SEBI
The SEBI IA regulation 2013 was amended in the year 2020 to adhere to market changes and favor potential investment opportunities from growing areas of the market such as FinTech companies. The IA regulations came into effect from April 21, 2013 and specifies the conditions for registration, certification, adequate knowledge on markets and capital, record to be maintained, etc. FAQs on SEBI (IA) Regulations, 2013)). The IA regulation stipulates that no person shall act in the capacity of an investment advisor unless he or she has obtained a certificate of registration from SEBI (Regulation 7(3) ). The regulation also pertains to a bank or a NBFC which performs the role of an IA to get registered by first obtaining permission by the Reserve Bank of India (RBI).
Section 12A of the SEBI Act (SEBI Act, 1992) requires that no person shall directly or indirectly engage in any act, practice, course of business, which is fraudulent, misleading, or manipulative with respect to transactions on the stock exchange. (S. 12-A, Securities and Exchange Board of India Act, 1992.) Regulation 4 of the PFUTP Regulations (PFUTP Regulations) states that any statement which is knowingly false or misleading made to influence the investment decision of investors will amount to “manipulative fraudulent or an unfair trade practice”. (Regulation 4(2)(k). Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market)), 2003)
Whether the amended regulation applies to finfluencers?
Investment Advisors are governed by SEBI (Research Analyst) Regulations, 2014 (RA Regulations), however, an important take on how IAs and RAs receive consideration in exchange for the service they provide, divides the very purpose of a finfluencer from an investment advisor or a Research Analyst.
The major contention raised is with respect to whether finfluencers violate the existing regulations in place that essentially gauge how the market watchdog plays out.
While buttressing the point that there’s an inherent difference in the role of an IA or RA to that of a finfluencer, it’s crucial to understand that nexus between the concerns of SEBI and the blanket restriction of dissemination of information. Arguendo, many finfluencers have raised concerns on how these proposed regulations will not apply to the existing structure they work under which is hugely governed through IT laws.
Along with other concomitant factors such as the freedom of speech and expression, the usage of social media to provide general information of the market, and the fundamental differences between an influencer and a registered entity brings more clarity on why SEBI can come up with better ways to tackle the situation.
Why is SEBI trying to restrict the flow of information from various sources?
A straitjacket answer to this question reflects on the precedents; unauthorized and unregulated transactions that have taken place due to dissemination of false and misleading information. SEBI leans towards seeking accountability and tangible authorization of influencers in their capacity to provide information. In response to that, the present regulation only pertains to addressing unfair trade practices and does not particularly deal with unregulated finfluencers. There needs to be a re-engineering of how the system accustoms to changes, in a way that learning and exchange of information takes place innocuously.
SEBI’s suspicion on the dubiousness of influencers stems from valid reasoning to protect the larger interest of the others. In the matter of Stock recommendation using social media channel- Telegram, a Telegram channel was repeatedly used to disseminate information of stock prices which was later leveraged to make unlawful profits through the guidance of unregistered and unauthentic entities. (Order)
Further, the matter of Sadhna Broadcast Limited and Sharpline Broadcast limited, the interim order dated March 2, 2023 (Interim Order) stating that there have been instances of violation of the PFUTP provisions and have engaged in fraudulent transactions by manipulation of the share prices through YouTube. (SEBI confirms market ban against 22 entities in Sadhna Broadcast stock manipulation case)
It is still ambiguous on the part of the proposed regulations as to how they regulate the content published by influencers or unregistered identities and that they’re in violation of the said regulations. Ideally, matters pertaining to information through social media platforms are governed by the Information Technology Act, 2000 read with the Information Technology (intermediary Guidelines and Digital Media Ethics Code) Rules, 2021. There is an alleged conundrum for this approach that could possibly lead to a haphazard execution of the proposed regulations. Presently, the matters regarding social media information is under the ambit of the IT Act, however, the SEBI regulations governing only one portion of the issues that the IT Act envisages, proposes a framework through operating revised ASCI (Advertising Standards Council of India) guidelines wherein, influencers in the areas of banking, investment and financial services are required to obtain a registration along with requisite qualification in order to provide information or operate in the role of advisories through social media.
More importantly, it is contested as to whether the regulations for an IA and RA is applicable to funfluencer at all. Governing of different entities together with the present regulations can lead to further confusing stand points. An analysis of the 2016 consultation paper (Consultation paper on Amendments/Clarifications to the SEBI (Investment Advisers) Regulations, 2013) suggested bringing uniformity and a more cohesive standard along with laying a basic framework for independent advisors. The paper also makes an effort to expand the ambit of investment advice per se; the trajectory of the paper also engages with establishing subsidiaries within the entities that specifically deal with investment advisory while ensuring a palpable limit to how much the bank can involve in the matters of the subsidiary.
The overbearing regulatory approach was criticized for its failure to strike a balance between acting as a regulatory body and enabling more exposure through social media. SEBI’s skepticism however, stems from valid reasoning considering the plethora of possibilities to tamper with the market. A blanket ban however, cannot be conclusive for a long run. Blanket ban will only lead to more tampering of the regulations by people to penetrate the market.
What can be the plausible solution?
While it is agreed that unregulated and unverified investment advice can pose a potential threat to the public, SEBI and other regulatory bodies need to be mindful about how the regulations will really play out for the public holistically. The public would want financial information from people (finfluencers) who can compress the information in understandable and perceivable chunks. Thus, SEBI can bifurcate the regulations and borrow certain regulations from the IT Act to govern the regulations for finfluencers. Further, SEBI can also reduce the bar for qualifications for finfluencers and ensure a safe environment for finfluencers to promote their expertise/knowledge whilst keeping an eye on the possible threats. As per clause 2(b) under provision 11 of the SEBI Act, under its discretion, it can create a new category enabling influencers to become intermediaries to bring down ambiguities in terms of which regulation applies to the respective entity and make it amenable for both the parties to resolve any foreseeable conflicts that is to arise. SEBI or any other governing body can differentiate the threshold of regulation for finfluencers and Investment Advisors, enabling them to gauge whether all influencers provide specific financial advice.
Conclusion
An overall study of the regulations and its effect on various stakeholders suggests that SEBI’s effort to minimize the otherwise arduous process of regulating by curbing it at the very first stages is worth appreciating. However, it requires streamlining of laws and regulations that need to find balance between placing the regulations and continuing to function as a regulatory body and not a governing body. While the credibility of the information provided by social media is gravely concerning, restricting the flow of information cannot be the solution but rather counterproductive. Keeping in mind that innovation and new technology are booming in India, the solution is to see this from the global lens and understand the trends on how different nations adapt to nuances.
(This post has been authored by Sruthi Chandramohan, a Fourth year law student at National Law University, Delhi)
CITE AS: Sruthi Chandramohan, “Decoding the regulation on Finfluencers by the SEBI: Whether the restriction on Finfluencers by the SEBI goes against the spirit to disseminate information?” (The Contemporary Law Forum, 28 August 2024) <https://tclf.in/2024/08/28/decoding-the-regulation-on-finfluencers-by-the-sebi-whether-the-restriction-on-finfluencers-by-the-sebi-goes-against-the-spirit-to-disseminate-information/>date of access