Introduction
Social media platforms have become an essential communication tool in the post pandemic world. The advent of the COVID-19 pandemic led to a sustained rise of retail investors on the D-Street, in an eager attempt to profit from the great COVID bull run. Ever more, retail investors are looking at influencers on social media platforms for financial advice instead of approaching registered advisors (without evaluating the life alerting consequences it may have).
Financial influencers, who are neither licensed nor qualified to provide financial advice, or “finfluencers” have opened new gateways for financial literacy. Finfluencers create pithy content on all things finance and break down complex numbers in a way that is digestible for a lay person. This has resulted in consumers abandoning traditional sources of information from registered advisors and placing blind reliance on the advice and recommendations of finfluencers. This poses a tremendous risk to the financial stability of consumers, more so, in a country where the financial literacy rate is 6% below the global average rate.
Finfluencers are like a bull in a china shop. They have misled investors, put investors’ money at risk and have undermined the integrity of Indian financial markets by engaging in stock manipulation. Such finfluencers use wide ranging business models to achieve their ends – from endorsing products for non-cash benefits to advertising products for platforms or producers in return for compensation.
To curb the growing menace of such (sin) finfluencers, the Securities and Exchange Board of India (“SEBI”) has joined hands with the Advertising Standards Council of India (“ASCI”) and is striving to ensure that reliable and unbiased financial advice is available to all investors.
Existing Regulatory Framework in India
There is no specific law governing finfluencers. However, broadly finfluencers are required to adhere to general regulations like Section 12-A of the SEBI Act, 1992, and regulation 4 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (“PFUTP Regulations”). Section 12A of the SEBI Act 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[1] and regulation 4 of the PFUTP Regulations provides that any statement which is knowingly false, or misleading made to influence the investment decisions of investors will amount to “manipulative fraudulent or an unfair trade practice”.[2] This regulation also prohibits the dissemination of information or advice in a reckless or careless manner which is likely to influence the decision of investors dealing in securities.[3]
While investment advisers (“RIA”) in India are governed by the SEBI (Investment Advisors) Regulations, 2013 (“IA Regulations”), finfluencers do not fall within its purview. The term “investment adviser” is defined under the said IA Regulations as a person who “for consideration” provides investment advice to persons or group of persons.[4] Since, finfluencers usually do not charge their viewers and advice is publicly available for all, they fall outside the scope of “investment advisor”.
Similarly, Research Analysts (“RAs”) in India are governed by the SEBI (Research Analysts) Regulations, 2014 (“RA Regulations”). The said RA Regulations mandate a series of stringent compliance requirements for RAs, including qualification and certificate requirements and disclosure of conflict of interest.[5] However, unregistered finfluencers are not bound by the RA Regulations.
Even the “Advertisement code for Investment Advisers (IA) and Research Analysts (RA)”, released by the SEBI on April 5, 2023, mandating registered IAs and RA’s to seek prior permission from SEBI for disseminating any form of communication/ advertisement material, including on social media platforms or any other form over the internet, seeks to only regulate RIAs and RAs and not finfluencers.[6]
The RIAs and RAs as opposed to finfluencers possess professional qualification to give financial advice on securities or investment products and are subject to several regulatory compliances. More importantly, the RIAs and RAs are obligated to disclose any conflict of interest in any of the financial instruments falling within the scope of their advice.[7] In India, as on March 2023, there are only 1,328 IAs registered with the SEBI, out of which around 840 RIAs have individual license and around 488 RIAs have corporate license.[8] While SEBI has tightened the rollouts of IAs licencing due to a few unscrupulous agents who misused the licence, it has thus far, failed to regulate the activities of unregistered financial influencers.[9]
On several occasions, SEBI has resorted to the aforesaid provisions for cracking down on such finfluencers for engaging in ‘pump and dump schemes’ to defraud investors.
In the matter of Sadhna Broadcast Limited and Sharpline Broadcast Limited, the promoters of these companies, in collusion with YouTube creators, disseminated false and misleading content, leading to the creation of false interest in the scrip. The videos projected exponential growth and urged viewers to immediately acquire the shares of the company in question. Once the investors invested in the stock, the entities behind the videos offloaded their holding at an inflated price. SEBI, in its interim order, opined that such fraudulent conduct artificially increased the price of the scrip, which allowed large shareholders, and the promoters and some key personnel in booking significant profits.[10]
In a similar incident, a Telegram channel was regularly used to disseminate misleading information and manipulate the market to make unlawful profits. Their modus operandi was to first buy shares of a company and then induce subscribers of the Telegram channel to invest in the said company. Once the stock price inflated, the finfluencers offloaded their shares for a profit. Through its interim order, SEBI banned the companies involved from the securities market and imposed a fine of INR 5.68 crore.[11]
Recently, Mr. P.R. Sundar and his company – Mansun Consultancy Private Limited, also came under the SEBI scanner, for providing advisory services in exchange for advisory fees, without obtaining the requisite registration from SEBI. SEBI penalised Mr. PR Sundar and his company for acting in violation of IA Regulations.[12] SEBI eventually settled the matter for regulatory violations for a settlement amount of INR 46.80 lakh and a disgorgement amount of around INR 6.07 crore. In terms of the settlement order, Mr. PR Sundar and his company also agreed to refrain from buying, selling or dealing in securities for one year from the date of the order.
The existing regulatory framework only seeks to address fraudulent and unfair trade practices. It is not equipped to deal with the diverse challenges associated with unregistered/ unregulated finfluencers who are operating in a grey zone. There is a dire need to tailor the existing regulatory regime to protect investors from the harms and risks of finfluencing.
SEBI’s Proposed Framework to Regulate Finfluencers
In a move to increase accountability of finfluencers, the ASCI recently amended the ‘Guidelines for Influencer Advertising in Digital Media’ (“Guidelines”).[13]
In terms of the revised Guidelines, influencers in areas of banking, financial services and insurance (“BFSI”) are obligated to be registered with SEBI and possess the necessary qualification before offering investment-related advice.[14] They are also mandated to transparently communicate their certified expert status or practitioner credentials. This obligation arises whenever they provide advice and/ or promote and/ or comment on the merits of or demerits of the products or services.
A recent trend has emerged where finfluencers are taking SEBI Registration number on rent from RIAs to comply with the ASCI guidelines and escape SEBI’s watch.[15] To tackle these malpractices, SEBI on August 25, 2023, released a consultation paper (“2023 Consultation Paper”).[16] The said 2023 Consultation Paper provides that:
- unregistered entities (finfluencers) are not allowed to work with registered intermediaries or regulated entities, or their agents or representatives, to promote or advertise their services or products;
- finfluencers registered with SEBI or stock exchanges or Association of Mutual Funds in India (“AMFI”) in any capacity:
- must include their registration number, contact information, contact number, investor grievance redressal helpline, and a disclaimer on any posts;
- must make appropriate disclosure and disclaimer on any posts;
- must adhere to the code of conduct outlined in terms of their relevant registration as well as any advertisement guidelines issued by SEBI, stock exchanges, or other SEBI-recognised regulatory authorities;
- must not pay any trailing commissions based on the number of referrals as referral fees. However, stockbrokers shall be permitted to accept and pay referral fees for restricted referrals from retail clients;
- entities registered/ regulated by SEBI or stock exchanges or AMFI shall not share confidential client information with any unregistered entities.
Earlier in 2016, SEBI had released a Consultation Paper proposing amendments to the IA Regulations.[17] The most striking feature of the 2016 Consultation Paper was SEBI’s attempt to expand the scope of “investment advice” to include all mediums of communication. The paper recommended a complete ban on providing trading tips, stock recommendations to the public via SMS, email, WhatsApp, etc., by any person other than an RIA by amending the PFUTP Regulations. This approach was heavily criticised and termed as regulatory overreach. Considering the response, SEBI decided against the implementation of such a harsh provision.
Therefore, SEBI still has a long way to go in striking a balance between permitting free speech and ensuring that influencers provide accurate and unbiased information.
Cross Jurisdictional Analysis
Financial Regulators worldwide have been tackling finfluencers disrupting the markets. France is one of the first countries to make it illegal for influencers to promote financial products, including cryptocurrencies through paid content.[18] Influencers in violation of this could be sentenced to up to two years in prison and 300,000 Euros in fines.
In Australia, it is an offence to carry on an unlicensed financial services business,[19] with penalties, including up to five years’ imprisonment for an individual, and fines into millions of dollars for a corporation.[20] The Australian Securities and Investment Commission (“ASIC”) has introduced an objective threshold to determine whether a finfluencer’s advice would constitute as financial advice. If the finfluencer’s compensation or other benefits are dependent on the behaviour of its consumers, then there is likely conflict of interest and such advice would amount to financial product advice. Therefore, after thoroughly conducting a review of the finfluencer’s overall impression, the ASIC will decide if AFS license is necessary or not. The Information Sheet 269 (“INFO 269”) published by the ASIC also provides a code of conduct for finfluencers and recommends disclosure practices, comprehensive due diligence and encourages caution while giving advice.
The European Securities and Markets Authority (“ESMA”) has brought finfluencers within the ambit of unfair commercial practices. As per the Unfair Commercial Practises Directive (“UCPD”), hidden marketing is prohibited and finfluencers who fail to label sponsored content, will be subject to civil and administrative penalties.[21] Under the Market Abuse Regulations, any financial advice or investment suggestions must be unbiased with proper disclosure of any conflict.[22] Moreover, finfluencers must ensure that “facts are clearly distinguishable from interpretations, estimates, opinions and other types of non-factual information” to avoid sanctions.[23]
Therefore, authorities across jurisdictions have come up with robust mechanisms to regulate finfluencers. Issuance of warnings to consumers and introduction of advertising manuals particularly for finfluencers, has provided an added layer of protection through self-regulation.
The Way Ahead for India
SEBI’s efforts to demand accountability from finfluencers is still at the nascent stages and so, it must consider taking inspiration from the Australian model.
Since Indian law focusses heavily on registration, SEBI can create two categories. One targeting RIAs, who are subject to higher qualification requirements, and the other dealing with unregistered financial advisors, who shall only be subject to minimum disclosure and due diligence requirements. To implement this, the definition of “investment advisor” will have to be amended to include those providing advice without any consideration. Moreover, any person providing financial advice and receiving any compensation, which is dependent on consumer behavior should also fall under it. By virtue of Section 11 of the SEBI Act, SEBI is empowered to create a new category of finfluencers under the definition of intermediary.[24]
The 2023 Consultation paper discourages RIAs from any form of association with finfluencers. This blanket ban may turn out to be counterproductive by limiting the reach of investment advice to the common man. In Australia, AFS licensees can engage finfluencers, provided they monitor and audit the content of finfluencers and train them. Once engaged, finfluencers act as authorised representatives of AFS licensees and therefore, are subject to the same regulatory requirements.[25] Such an arrangement ensures that an opportunistic alliance can be maintained while protecting the interests of investors as AFS licensees are responsible for the conduct of finfluencers. SEBI must consider adopting a similar approach.
Several finfluencers focus solely on putting out educational videos related to the basics of finance rather than giving investment advice. Under the IA Regulations, the definition of “investment advice” fails to distinguish between investment advice intended to influence and mere educational content. SEBI must aim to adopt a more holistic definition to ensure that finfluencers can educate their audience about financial products without any fear of liability.
To ensure that quality advice reaches investors, SEBI can introduce basic qualification requirements. Finfluencers possess knowledge of the markets, but may not be qualified professionals like CA, CFA or MBA as is mandatory for RIAs. Therefore, finfluencers must only be required to meet a minimum qualification threshold.
In a complex market like India, coupled with advancements in technology and enhanced privacy features, it is almost impossible for SEBI to track the activity of finfluencers on digital platforms. Therefore, it is imperative for SEBI to collaborate with ASCI and provide guidelines on posting of finance related content. These guidelines could be modelled on the INFO 269 and the FTC Disclosures 101 for Social Media influencers. Use of examples and case studies would increase awareness among finfluencers and establish a self-check mechanism.
The dynamic landscape of digital media and the global nature of financial markets will continue to challenge SEBI and demand agility, vigilance, and collaboration, both domestically and internationally.
Conclusion
The proposed regulation of financial influencers by SEBI is a pivotal step in ensuring the integrity and transparency of financial markets. However, as financial influencers continue to play an increasingly significant role in shaping investment decisions and market trends, SEBI is likely to encounter several challenges in the future. Keeping up with emerging technologies and adapting regulations to cover online platforms effectively will be an ongoing challenge for SEBI. With the ease of cross-border communication and investments, SEBI may need to coordinate its efforts with international regulatory bodies to address influencers who have a global reach. Lastly, staying ahead of innovative marketing tactics and strategies employed by financial influencers to bypass regulations will be an ongoing battle. To conclude, SEBI’s commitment to these challenges will be crucial in ensuring the credibility and stability of India’s financial ecosystem in the years to come.
[1] S. 12-A, Securities and Exchange Board of India Act, 1992.
[2] Regulation 4(2)(k), Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 [July 17, 2003]. (“PFUTP Regulations”)
[3] Regulation 2(1)(c)(5) & Regulation 4(2), PFUTP Regulations.
[4] Regulation 2(1)(m), Securities and Exchange Board of India (Investment Advisers) Regulations, 2013 [ January 21, 2013]. (“IA Regulations”)
[5] Chapter III, IA Regulations.
[6] Securities and Exchange Board of India, Advertisement Code for Investment Advisers(IA) and Research Analysts (RA) [April 5, 2023].
[7] Chapter III, IA Regulations.
[8] List of Investment Adviser, Securities and Exchange Board of India. SEBI | Investment Adviser
[9] Shipra Singh, Where are India’s Missing Investment Advisers?, LiveMint [May 17, 2023].
[10] Interim Order in the Matter of Stock Recommendations using Youtube in the scrip of Sadhna Broadcast Limited, WTM/AN/ISD/ISD-SEC-1/24333/2022-23 [March 2, 2023].
[11] Final Order in the Matter of Stock Recommendations using Social Media Channel (Telegram), WTM/AN/ISD/ISD-SEC-3/25879/2023-24 [April 26, 2023].
[12] Settlement Order in the Matter of Mansun Consultancy Pvt. Ltd., SO/AA/EFD2/2023-24/7081 [May 25, 2023].
[13] Guidelines for Influencers Advertising in Digital Media, Advertising Standards Council of India [May 27, 2021].(“Advertising Guidelines”)
[14] Addendum II, Advertising Guidelines [August 17, 2023].
[15] Shivani Bazaz, Financial Influencers are “renting” licenses to escape SEBI watch, CNBC TV18 [June 6, 2023] Financial influencers are ‘renting’ licenses to escape SEBI watch (cnbctv18.com)
[16] Securities and Exchange Board of India, Consultation Paper on Association of SEBI Registered Intermediaries/Regulated Entities with Unregistered Entities (including Finfluencers) [August 25, 2023]. (“Consultation Paper”)
[17] Securities and Exchange Board of India, Consultation Paper on Amendments/Clarifications to the SEBI (Investment Advisers) Regulations, 2013 [October 7, 2016].
[18] https://www.legifrance.gouv.fr/jorf/id/JORFTEXT000047663185
[19] S.911A, Chapter 7.6, Corporations Act (2001) (Aus.).
[20] S.920C, Chapter 7.6, Corporations Act (2001) (Aus.).
[21] Article 11, Unfair Commercial Practices Directive, 2005/29/EC [May 11, 2005].
[22] Article 20, Market Abuse Regulations, (EU) No 596/2014 [April 16, 2014
[23] Article 3(1)(a), Commission Delegated Regulation, (EU) 2016/958 [March 9, 2016].
[24] S. 11, Securities and Exchange Board of India Act, 1992.
[25] Michael Chaaya, Arvind Dixit and Simon Johnson, Australia: The rise and regulation of financial influencers, Mondaq [October 26, 2022].
