Introduction
Securities and Exchange Board of India (SEBI) is a statutory body and a market regulator, controlling the securities market in India. The Preamble of the Securities and Exchange Board of India Act, 1992 defines the basic functions of the SEBI as “…to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto”.
A “financial influencer” or “Finfluencer” is a person who gives information and advice to investors on financial topics — usually on stock market trading, personal investments like mutual funds and insurance, primarily on various social media platforms.
With social media platforms serving as the primary source of financial advice for many young and inexperienced investors, the growth of financial influencers in India has been noteworthy in recent years. While these influencers have contributed to increase financial awareness and market participation, their growing impact on investment decisions has raised serious concerns regarding the quality and accountability of the advice they provide. This rapid growth, in conjunction with instances of erroneous information and possible conflicts of interest, has highlighted the importance of regulatory monitoring in protecting ordinary investors and ensuring the integrity of financial markets. This is because such unregistered finfluencers may lack the requisite qualifications and credentials.
SEBI has taken note of the prevalence of the “pump and dump” scheme. It is a sort of securities fraud in which perpetrators artificially inflate the price of a stock using false or misleading representations. They typically spread misinformation, generating artificial interest in specific stocks, causing stock prices to soar as naive investors buy up. Once the prices are sufficiently high, the scheme’s orchestrators sell their shares for a considerable profit. This abrupt sell-off causes stock prices to drop, leaving investors who purchased during price inflation with significant losses.
Such scams have a complex impact. They not only undermine market integrity but also cause financial harm to individual investors and weaken trust in the financial system. This and can have long-term negative consequences for the economy. Finance Minister Nirmala Sitharaman and SEBI Chairperson Madhabi Puri Buch, both, have acknowledged the need for regulatory action.
Proposed Regulations by SEBI
In June 2024, SEBI approved norms to regulate misinformation through finfluencers by restricting association of its regulated entities with any unregistered person.
On August 25, 2023, SEBI had released a Consultation Paper on Association of SEBI Registered Intermediaries/Regulated Entities with Unregistered Entities (including Finfluencers). In this paper, SEBI addressed the concern over financial influencers and their impact on the financial markets. SEBI noted that while some finfluencers may be genuine educators, many are effectively unregistered and unauthorized Investment Advisors (IAs) or Research Analysts (RAs).
The paper proposed to restrict the association of SEBI registered intermediaries and regulated entities with unregistered finfluencers to curb the flow of undisclosed compensation for promoting products, services, or securities. The finfluencers may induce clients to avail their products and services by giving them referral codes, non-cash benefits, etc. The compensation that finfluencers may get is the referral fee, compensation received directly from social media and profit sharing with the underlying product, platform or services.
SEBI proposed several measures to limit this association, including: “No SEBI registered intermediaries/regulated entities or their agents/representatives shall, directly or indirectly, have 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).” The paper also suggested that Finfluencers registered/regulated by SEBI or stock exchanges or AFMI shall not share any confidential information of their clients with any unregistered entities. They shall display their appropriate registration number, contact details, investor grievance redressal helpline, and make appropriate disclosure and disclaimer on any posts. They shall also fully adhere to the code of conduct under the terms of their relevant registration and adhere to a code of conduct.
SEBI aims to disrupt the revenue model for unregistered finfluencers and reduce perverse incentives in the ecosystem. The regulator sought public comments on these proposals to address the challenges posed by finfluencers in the financial markets.
Subsequently, SEBI released a paper analysing the public comments and after internal deliberations, proposed certain amendments to the SEBI (Intermediaries) Regulations 2008, Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018 and SEBI (Depositories and Participants) Regulations, 2018.
The proposal clarified that it doesn’t apply to those engaged in investor education, as long as they’re not providing specific advice or claims about securities. An exception is made for associations with digital platforms that have SEBI-approved mechanisms to prevent misuse for providing unauthorized advice or claims. The proposal seeks to implement these changes through amendments to various SEBI regulations, with the goal of protecting investor interests in the securities market.
In June 2024, SEBI approved the proposed Regulations and they have now become a norm.
Impact of the Proposed Regulations
The newly adopted regulations are anticipated to drive up the number of finfluencers seeking official registration with SEBI. This formalisation might give rise to a more professional and trustworthy financial advice sector.
More stringent standards will serve to strengthen the quality of financial content. The registration obligation for financial influencers will compel them to adhere to higher standards, for instance providing more accurate, thoroughly researched, and fair content. This could result in a substantial decline in erroneous or unduly speculative financial advice, protecting investors. However, it may also result in limiting dialogue about innovative, novel, or emergent financial strategies that can be brought in by contemporary finfluencers.
The restriction on concealed remuneration and referral payments will have a considerable impact on the revenue models of many finfluencers. This might lead to more transparent monetization strategies, such as subscription-based content. While this enhances transparency, this could also lead to reduced accessibility of genuine financial content to general public.
The norms are additionally expected to result in consolidation of the finfluencer market, with more experienced influencers better positioned to meet compliance requirements. This could impair the market’s competitiveness and diversity. On the flip side, this can serve as an opportunity for newcomers in the financial content creation who can distinguish themselves by high-quality, compliant content and services. One of the key objectives of these regulations is to strengthen investor protection. By mandating correct disclosures and limiting the impact of unregistered influencers, investors are more likely to obtain trustworthy and honest financial advice. This could lead to better-informed investment decisions and fewer cases of fraud or mis-selling.
To prevent misuse, the regulations allow exceptions for digital platforms that use SEBI-approved mechanisms. This is likely to spur innovation among fintech companies and social media platforms to develop robust content moderation and user verification systems. Also, it is anticipated that there might be a splurge in specially tailored platforms, catering to compliant financial content creation and dissemination, which might bring about changes in the pattern of consumption of financial informed online.
In essence, while the recently introduced regulations by SEBI aim at creating a more reliable and transparent environment for financial advice, they will undoubtedly bring substantial changes in how financial information is created, distributed and consumed in India.
Challenges and Concerns
One of the most significant challenges would be successfully implementing these norms across an extensive and evolving digital ecosystem. SEBI will need to devise robust mechanisms for identifying and monitoring unregistered finfluencers, particularly those who operate across numerous social media platforms. This task is complicated by the enormous amount of content published daily and the ease with which new accounts can be created. Ensuring compliance and taking prompt action against violators will require substantial resources and technological capacity.
There is a thin line between delivering basic financial education and offering particular investment advice. The regulations must explicitly specify these boundaries in order to avoid stifling genuine educational content while still curbing unauthorized. This distinction can be challenging in the context of social media, where casual comments or general observations can be interpreted as specific recommendations. SEBI will have to ensure that these regulations, in order to prevent misleading advice, shouldn’t hinder healthy financial dialogue on social media.
Though these regulations aim at the protection of investors, they might potentially limit the access of financial information, particularly to young and new investors, or for those who cannot afford paid financial advice. Many people rely on free, easily accessible content from finfluencers as their primary source of financial education. If these sources are significantly reduced or become paid services due to regulatory pressures, it could create a knowledge gap and hinder efforts to improve financial literacy across the broader population.
This new regulatory environment might pose challenges for content creators, and the financial services industry, in entirety as well. There is a possibility that this regulatory framework could stifle innovation in the dissemination of financial education on social media, as content creators might become overly cautious to avoid regulatory scrutiny. Balancing compliance, while maintaining engaging and dynamic financial content would be a task.
Conclusion
SEBI has taken a strong step by introducing these regulations on finfluencers. This will help build an ecosystem of financial advice that is more accountable and transparent. In order to prevent dissemination of false information and safeguard investors from possible fraud, SEBI has restricted the association between registered entities and unregistered influencers. By implementing these measures, the public will have access better-quality financial content, influencers will abide to higher standards of professionalism, and a more reliable environment for making financial decisions will be created.
However, the implementation of these regulations comes with notable challenges. Enforcing compliance across the vast digital landscape, clearly defining the boundaries between education and advice, and maintaining the accessibility of financial information are significant hurdles. A delicate balance needs to be maintained between necessary regulation and the preservation of an easily accessible financial education space that has flourished on social media platforms.
Ultimately, how efficiently SEBI enforces these regulations, while maintaining an environment of financial literacy and informed investment decisions through social media, will determine the success these regulations.
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