The rise of Finfluencers, or Financial Influencers, in the digital era has reshaped financial education. However, SEBI’s recent crackdown aims to regulate unregistered financial advisors, impacting both Finfluencers and investors. This article delves into the implications of SEBI’s consultation paper, analyzing its effects on financial literacy in India and proposing a balance between regulation and investor participation in equity markets.
Abstract
Nowadays with the increase of digital media, a new breed of influencers has come to forth in the finance domain to educate people about the nuances of investing, trading, buying, saving, budgeting, tax savings and so on. These influencers are known as “Finfluencers”, or Financial Influencers, who basically influence people through their social media platforms in making financial decisions. Along with it, a new breed of novice retail investors has jumped into the securities markets without gauging their risk appetite on the advice of these “Finfluencers”, while ending themselves in huge losses. Though some of these influencers are catering the needs of financial educations, which are not taught in the schools, by giving unsolicited opinions on investing, yet there are others who are just speculating. This unconventional method of financial advice has done away with conventional registered financial advisors with Security and Exchange Board of India to a great extent. Resultantly, it has become menace for the capital markets with many malpractices creeping in the market which have jeopardized the interest of investors, especially the novice one.
Last year in August, SEBI has released a consultation paper aiming to curb on these unregistered financial advisors which is going to impact the investors as well as the genuine “Finfluencer”. This paper would explore the impact of such consultation paper on these “Finfluencer” and the investors. Furthermore, it would analyze the consultation paper in the light of the need of financial literacy in India and how people can be educated about finances. Finally, it would conclude with possible suggestions, while striking the balance between financial literacy and investors’ interest so as to increase the participation of investors in the equity markets.
INTRODUCTION
With the advent of COVID-19 and penetration of technology, the digital media has flourished manifold and cheap 4G data networks further the ease in accessing the digital media. Along with it, the pandemic, coupled with the ensuing inflation, highlighted the importance of investment as to grapple with these odd events. As a result of such changes of events, some of the content creators have materialized on these aspects by creating free online content who came to be known as “Finfluencer” who catered the needs of financially illiterate people about the intricacies of finances and is making people aware of financial jargons so ease the investing for commoners. Acting on such contents, there have been leaps and bounds in the participation of retail investors in the equity markets directly and indirectly (i.e. investments through mutual funds). Entry of cheap and free trading apps, along with cheaper smart-phones and 4G networks made quite easier for the new investors to try their hands in equity markets. Post pandemic, the Indian bourses have touched new zenith. It is evidenced by the increase in the number of Demat Accounts totaling 13.93 crore in December 2023[1]. Along with it, investments through SIPs have increased to record high of 6.4 lakh crore in the market in last five year[2], which sounds good for the development of culture of investment in the country.
However, along with the rise of such financial influencers, many dubious financial content creators have duped young investors by giving false information with regard to the stocks. It is obvious for the country where the financial literacy rate is 6% which is less than the global average rate[3]. The new retail investors are in foray of making money through such lucrative way as they fear of missing out on such investments. They are least bothered about the veracity of such information and are totally relying on them instead of approaching to conventional registered financial advisors with SEBI. This has given rise to market manipulation undermining the integrity of Indian financial markets. Moreover, these financial influencers endorse financial products in lieu of consideration which does not sound good because it casts doubt upon the reliability of such financial products and it may lead to financial loss to the investors. Newly, boarded retail investors are prone to such business models which are not under the ambit any regulations.
The said consultation paper is going to impact, to a great extent, the “Finfluencers” and the financially illiterate people who make their investments based on such informative advice. On the other hand, it is going to save the capital markets from the vices of manipulations or the unethical practices hovering over the equity market arising out of the activity of such financial influencers. This paper is going to be divided into three parts. Firstly, it is going to deal with existing framework dealing with such financial influencers and to what extent it regulates the dubious financial influencers. Secondly, it will analyze the consultation paper, while factoring in the financial illiteracy in India and its impact on the concerned persons. Thirdly, it will conclude with the suggestions and challenges in regulating the said” Finfluencers” based on the analysis.
Existing Measures and Menace
Though the Finfluencers’ contents have boomed in the guise of imparting financial education, yet the line between the financial advice and financial education have faded leading to the rise of myriad of unethical malpractices in the financial market. SEBI has proactively strived to curb these menaces over the capital market. Last year in October, the SEBI has barred three entities from the financial market finding them providing investment advice without registration and ordered them to return 17.2 crore to investors who have paid them as service charge from the month of January 2023 to July 2023[4]. They were providing investment advice on their Youtube channel with 4.4 Lakh subscribers having no registration with SEBI. Usually, they hype about stocks leading to the rise in the price of stocks, while they sell off their invested equities in the hyped stocks at its peak price which is most used malpractice known as pump and dump scheme. In June 2023, SEBI had issued order-cum show-cause notice to 135 entities for manipulating the 5 small-cap scrips and based on the allegation that they indulged in bulk texting to investors to buy the said scrips[5]. In March 2023, SEBI cracked down Youtube channel creators for price manipulation and in its two separate orders barring 55 entities and actor Arshad Warsi and his wife Maria Goretti[6].
However, before the release of “Consultation Paper on Association of SEBI Registered Intermediaries/Regulated Entities with Unregistered Entities (including Finfluencers)”, there were some broad provisions in “SEBI Act 1992” and “Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003”. Section 12A of the former act prohibits any person directly or indirectly indulging themselves in any manipulative and deceptive activities, insider trading and substantial acquisition of securities or control[7]. Regulation 4(2) (k) of the later regulation prohibits the advertisement which is misleading or is being presented in distorted manner whereby the decisions of the investor is influenced[8]. As these only two provisions are not enough to distinguish between what constitute “financial education’” and “financial advice, the need to regulate this group of adviser is inevitable to protect the interest of investors. The current consultation paper has been released to seek views from the people so as to regulate the unregistered financial researchers/analysts and fill up the gap which existed previously so as to protect the investors.
Currently, only registered investment adviser can give advice with respect to the finances under “SEBI (Investment Advisers) Regulations, 2013 (Investment Adviser Regulations)”. Under rule 7[9] and 8[10] of the said regulation the person is required to have “professional qualification or post graduate degree or post graduate diploma in economics, finance, accountancy, business management, commerce, capital market, banking, insurance, or actuarial science”, or they shall possess minimum of 5 years of experience in managing fund, securities, fund, asset or financial product[11] and the person should not have net worth less than 25 lakh rupees.
On the other hand, the financial influencers are disseminating the financial advice through the social media in the garb of imparting financial education. It does not come under any regulation of the capital market’s watchdog because they are not the registered investment adviser under SEBI’s regulation. India where a large number of people are unemployed and grappling under the vicious cycle of poverty and rising inflation, there is no doubt that people won’t click to enticing thumbnails and name of the video which claims to make money through stock mark. With increasing number of the use of interne, the unsolicited opinions on financial investment freely doing round on the social media have menace on the capital market. Therefore, it is necessary to crackdown on those ‘Finfluencer’ so as to maintain the sanctity of capital market as well as the interest of investors.
Impact Analysis of the Consultation Paper
The current consultation paper has been brought about with the aim of reigning in the association of SEBI registered intermediary/regulated entities with the ‘Finfluencer’. The current regime lacks the clear definition of what constitute financial advice. The current definition of investment advice includes any advice with respect to securities transaction or financial products given orally, written, or by any other means of communication[12]. Further, in its proviso it excludes the advice given through newspaper, magazine, any electronic, or broadcasting, or telecommunication which is available in lager public domain shall not constitute investment advice[13]. It lacks to regulate the influential behavior which arises on the opinions of such investment advice.
The current consultation paper in its entirety strives to cut any kind of association of SEBI registered intermediaries/regulated entities with ‘Finfluencer’ which includes the prohibition of sharing of confidential information, possessed by Entities registered/regulated by SEBI or stock exchanges or AMFI, with the unregistered entities including ‘Finfluencer’. However, it cuts all the connections of a SEBI registered entities with the ‘Finfluencer’ by prohibiting such entities from paying any kind of commission, or consideration, whether monetary or non-monetary, in exchange of endorsement to their products. It makes it mandatory for the registered ‘Finfluencer’ to display their appropriate registration number, contact details, investor grievance redressal helpline, and appropriate disclosure and disclaimer. Moreover, the Advertising Standards Council of India (ASCI) last year made it compulsory for the financial and health influencer to disclose their qualifications and registration/certification details prominently in all type of promotional material[14]. Thereby, the ‘Finfluencers’ have come under the regulations from the concerned regulating authorities to protect the interest of consumers and investors from falling prey to the fraud and manipulations.
While free pass to the social media ‘Finfluencer’ brings discontent among the registered financial advisers and research analyst who are supposed to follow the rigor of the SEBI’s regulations thereby infringing the right to equality guaranteed under article 14 of the Indian Constitution. On the other hand, such regulations on the ‘Finfluencers’, which has become a sort of profession, infringes their right to carry out any profession/trade of their choice as guaranteed under article 19(1)(g) of the Indian Constitution. Moreover, it also infringes upon their right free speech and expression guaranteed under article 19(1) (a) of the Indian Constitution. While regulating the ‘Finfluencer’ SEBI has to secure the rights of the ‘Finfluencer and protect the interest of the investors from the fake advisors disseminating the stock buy recommendations and manipulated financial advice. However, the fundamental rights are not absolute, SEBI has apt room to regulate the same, while taking into account the doctrine of proportionality. Instead of total control over them, SEBI has to devise a regulatory mechanism to rein the general financial tips being circulated through the social media. Moreover, the current consultation paper left the anonymous telegram channels, circulating financial tips and from the every corners of the country, from its regulation. As the Consultation paper only emphasize on to regulate the connections between the registered and unregistered financial influencers leaving the room for the manipulation of market by unregulated and unregistered influencers through unethical means.
In Australia, a ‘Finfluencer’ has to obtain license for the Australian Securities and Investment Commission to give financial advice[15]. Moreover, Australian regulation defines financial product advice as any “a suggestion or opinion aimed at influencing, or reasonably seen as intended to influence, an individual making decision regarding financial products”[16]. Furthermore, it gauzes the probable consequences of such information and the benefits derived from such endorsements by the ‘Finfluencers’. However, the current consultation paper lacks in this aspects.
Conclusion
Therefore, it is the need of the hour to regulate the activities of the unregistered and unregulated ‘Finfluencers’. Though, though the current consultation paper tries to snap the connections of the registered entities with the unregistered social media influencers, yet it lacks in other aspects to entirely curb the menace of such ‘Finfluencer’ such as- what advice would constitute influential affecting the decision of the decision of an individual. Moreover, it pays little heed to the need of the financial literacy among people in the country. Furthermore, while snapping the revenue sharing model between the registered entities and unregistered financial influencers lessen the motivation among the genuine financial educator to preach the nuances of the finance. Moreover, the regulations of financial influencers bring forth the conflicts with the Constitution of India which have to be tackled with outmost caution.
While formulating regulations for the ‘Finfluencers’, SEBI has to strike the balance among all the concerned stakeholders- investors, registered financial advisors/research analysts, and financial influencers. It needs to make regulations to bring the conflict of interest of the financial influencers with the registered entities whose products it is endorsing. Further, it should bring awareness programs and advertisement to save people from falling prey to general tips provided by financial influencers. Bring a body and code of conduct for the regulations of the unregistered financial influencers would further bring transparency and ethical practices among the influencers, while making the financial influencers’ registration with SEBI mandatory. However, such process of such registration has to be formulated with a lot of caution so as to ease the environment investment in the country, while protecting the interest of registered financial advisors/research analyst registered under SEBI (Investment Advisers) Regulations, 2013 (Investment Adviser Regulations). Also, SEBI could give directives to the social media platforms to curb the manipulative advice as they have the larger discretion by virtue of being private actors.
[1] Rajesh Mascarenhas, “Equity Rush: Record 41.73 lakh demat accounts opened in Dec”, The Economics Times, 6 Jan. 2023, Available at https://economictimes.indiatimes.com/markets/stocks/news/equity-rush-record-41-73-lakh-demat-accounts-opened-in-dec/articleshow/106588970.cms?from=mdr (Last visited on 10 Jan. 2024)
[2] Ashutosh Shyam, “SIP Account Additions hit New High in December 2023”, The Economics Times, 12 Jan. 2024, Available at https://economictimes.indiatimes.com/markets/stocks/news/sip-account-additions-hit-new-high-in-december-2023/articleshow/106743114.cms?from=mdr (Last Visited on 13 Jan. 2024)
[3] Namita Shetty and Adya Garg, “End of the Party for Sin (Fin) Fluencers? SEBI’s Regulatory Crackdown on Finfluencers”, Cyril Amarchand Mangaldas, 13 Sept. 2023, Available at https://corporate.cyrilamarchandblogs.com/2023/09/end-of-the-party-for-sin-fin-fluencers-sebis-regulatory-crackdown-on-finfluencers/ ( Last visited on 11 Jan. 2024)
[4] “Sebi bans ‘finfluencer’, asks Rs 17 crore in fee refund”, The Times of India, 26 Oct. 2023, Available at http://timesofindia.indiatimes.com/articleshow/104711589.cms (Last visited on 16 Jan. 2024).
[5] “SEBI Restrains 135 Entities from Market Access Over Alleged Stock Manipulation”, Taxmann, 23 Jun. 2023, Available at https://www.taxmann.com/post/blog/sebi-restrains-135-entities-from-market-access-over-alleged-stock-manipulation/ (Last visited on 16 Jan. 2024).
[6] “Sebi cracks down on ‘pump & dump’ YouTube schemes”, The Economics Times, 03 Mar. 2023, Available at https://economictimes.indiatimes.com/markets/stocks/news/sebi-cracks-down-on-pump-dump-youtube-schemes/articleshow/98376304.cms (Last visited on 16 Jan. 2024).
[7] Securities and Exchange Board of India Act, 1992, §12A, No. 15, Act of Parliament, 1992 (India).
[8] Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, Reg. 4(k) (2).
[9] SEBI (Investment Advisers) Regulations, 2013, Reg. 7.
[10] SEBI (Investment Advisers) Regulations, 2013, Reg. 8.
[11] Gaargi Singh, “Power of Influence: Regulating the Financial Influencers in India”, SCC Online Blog, 30 Aug. 2023, Available at https://www.scconline.com/blog/post/2023/08/30/power-of-influence-regulating-the-financial-influencers-in-india/ , (Last visited on 16 Jan. 2024).
[12] SEBI (Investment Advisers) Regulations 201, Reg. 2(1)(l).
[13] Id.
[14] Press Release, “ASCI places additional responsibility on health and financial influencers, extends influencer guidelines”, The Advertising Standards Council of India (ASCI), 17 Aug. 2023, Available at https://www.ascionline.in/wp-content/uploads/2023/08/Health-and-Finance-Guidelines-Update-Press-Release.pdf (Last visited on 20 Jan. 2024).
[15] Shawn Lim, “Australia warns social media influencers they need a license to dish out financial advice”, The Drum, 22 Mar. 2022, Available at https://www.thedrum.com/news/2022/03/22/australia-warns-social-media-influencers-they-need-license-dish-out-financial-advice (Last visited on 20 Jan. 2024).
[16] Rituraj Singh Parmar and Devyani Mishra, “Finfluencer and the Mandate of Registration: The Way Forward”, Livelaw, 20 Jan. 2024, Available at https://livelaw-cnlu.refread.com/articles/finfluencers-and-the-mandate-of-registration-the-way-forward-247193?infinitescroll=1 (Last visited on 20 Jan. 2024)
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