Written by Anushka Panwar, The author is a law student pursuing BA.LLB (hons) from Jindal Global Law School.
Introduction:
If you ever open YouTube, Instagram or Twitter, the chances are you’ve already come across some or the other version of “open Demat account through this app for Rs. 1” or “earn Rs. 5000 daily from stocks”. A catchier version of these statements with graphic visuals, is enough to lure in people who are eager to learn the reins of the market. But this also raises concerns about the lack of regulations on these Finfluencers who often end-up giving “financial advice” in the guise of “financial education”, for which they might not possess certification from the Securities and Exchange Board of India (SEBI). Another issue is how the financial companies hire these Finfluencers to advertise their instruments. Cases have already arisen where the crypto company Vauld, supported by famous Finfluencers ended up bankrupt. While the SEBI is set to release a draft discussion paper to reel-in the Finfluencers, this article analyses the regulations imposed world-wide and the need for the same.
Brief History:
During the Covid-19 pandemic, while the economy was in shambles, the stock market remained interestingly untouched by it except for a slight dip in early March 2020. This gave rise to an already known conclusion of how stock markets remain unaffected by sinking global economy. To increase the liquidity in the market, the central banks of most countries dial down the interest rates or are likely to start buying bonds from the open market. This beckons people to invest in the market. The SBI report mentioned how nearly 142 lakh people became investors in the market. One of the many reasons is the inclination towards stock market trading due to lockdowns and having lost their main source of income, people turned to the market to earn some “quick money”. One problem arose, i.e., how to invest in the stock market? The Government guides prove to be of no help as they are hardly interactive and comprise of a big block of text which is hard for the common people to understand. As social media blossomed, with TikTok and YouTube amassing a huge viewership, the ‘influencers’ grew. Influencers are people having a huge following who tend to ‘influence’ people to do certain things or just create content that attract a lot of people. A niche in these influencers is that of financial influencers, also called ‘Finfluencers’. They are involved in giving financial education and sometimes financial advice to the people regarding the stock market, trading, investments etc.
Scams headlining ‘Finfluencers’:
a. Flouting SEBI’s Investment Advisors’ Regulations:
P. R. Sundar, a finfluencer, offered paid courses and packages to give financial advice to his viewers via his website. The gateways of payment led to the deposits in Mansun Consultancy Pvt. Ltd., his consultancy firm that engaged in advising on dealing in securities like purchasing and selling of shares. The SEBI (Investment Advisers) Regulation, 2013 mentions in Section 7 the qualification and certification requirement for an investment advisor. Additionally, it defines an investment advisor as a person who, for consideration, provides investment related advice. Sundar did not register with SEBI and gave out investment advice in lieu of fees. Thus, SEBI imposed a penalty of Rs. 6 crore and a settlement amount of Rs. 46.80 lakhs along with imposing a year long ban on trading due to the violation of investment advisers’ regulation. In June 2023, Kabir Financial Services Pvt. Ltd. and its directors Sayyed Shujauddin and Farhat Perween were penalised by SEBI. The issue being the same as in the P. R. Sundar case. This time Sayyed operated through private telegram channels where he charged huge membership fee and gave out misleading investment advice, causing huge loss to the people. They were not registered with SEBI as investment advisors and flouted the regulations. SEBI charged them with fraud under Regulation 2(1) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 along with impounding Rs. 12.84 Crore. These finfluencers can also attract penal provisions in giving advice on what shares to buy or sell and in strategizing in cases of building portfolios without registering with SEBI.
b. The Market and Investors bear the brunt:
The popular actor Arshad Warsi & his wife made headlines due to their involvement in manipulation of stock prices of two companies Sadhna Broadcast Ltd. and Sharpline Broadcast Ltd. They made YouTube videos on promising high returns on investing in the stocks of these two companies, by giving false information. Here, the false information was that the Adani group would eventually take over the company. Thus, people started trading in the shares of these 2 companies. People having more shares started selling them at high prices, thus earning profit. SEBI penalised Warsi and others involved in this pump and dump scheme. The Vauld case highlights how the victims of these finfluencers are gullible people who fail to carry out due diligence before acting on their advice. Vauld was a Singapore based crypto-lending platform that froze all transaction in July 2022 which made people unable to withdraw their deposits. Finfluencers like Ankur Warikoo termed it as “Crypto fixed deposit”. A lot of Indians deposited money acting on their advice and suffered. Interestingly, Warikoo received Rs. 4.47 lakhs in promoting Vauld. This shows how the finfluencers earn money through collaborations with companies. They also earn through affiliate links. Fintech like Zerodha offers money to finfluencers every time a person clicks on the link shared by them to open Demat account and on subsequent trading.
Regulations: A Reasonable Restriction on Free Speech?
The discussions of the scams that have happened over time involving Finfluencers point to a serious need to curb this unbridled dissemination of financial advice by finfluencers often without any qualifications. Most financial influencers cite Article 19 of the Indian Constitution to resist regulations as it safeguards freedom of speech. The current regulation by SEBI on investment advisors (IA) mentions in its definition clause that investment advice which is “widely available to the public shall not be considered as investment advice” given through electronic or print forms. Since finfluencers communicate through the social media platforms which are widely available to the public, they are not governed by the IA regulations. This points to how SEBI essentially criminalises the ‘free advice’ of these finfluencers only when it is fraudulent in nature. Madhabi Puri Buch, the SEBI Chairperson, mentioned that SEBI doesn’t have a problem with people “educating investors or potential investors”. The issue is with financial influencers offering unsolicited financial advice without even registering themselves with SEBI, resulting in manipulation in market and spreading fraudulent/ misleading information to the potential investors. The buck doesn’t stop here as these finfluencers end up earning a huge amount of money from these stock-price manipulation and collaboration with other companies. Thus, a need for regulation arises.
Global Regulations on Finfluencers
Many countries have come up with rather interesting solutions to tackle the issue at hand. New Zealand’s Financial Market Authority has issued a “Guide to Talking about Money Online” which targets consumers along with social media influencers on how to navigate between financial education and financial advice. It is eye-catching and informative as it includes examples of real-life scenarios to help people clearly understand the difference between giving financial advice and financial education. While the former revolves around a general description of a financial product or a financial instrument, the latter involves recommendations on whether a person should buy or sell a financial product among other things. Similarly, the European Securities and Markets Authority (ESMA) has issued a public statement on how to post investment recommendations and the consequences of the breach of the EU market abuse regulation. In Australia, social media influencers could even risk jail time for 5 years if they breach the laws on financial advice.
The Australian Securities & Investments Commission (ASIC) has issued an information sheet for both influencers and Australian Financial Services (AFS) licensees who hire influencers. The information sheet outlines the conduct of influencers based on case studies. It also informs the AFS licensees that they may be liable for misconduct by influencers hired by them. Thus, it stresses upon due diligence. China has proposed strict regulations highlighting that only those with “relevant industry qualifications” can talk about financial products and services online due to the blooming live-streaming industry. Moreover, crypto currency has already been banned in China. In Singapore, the Monetary Authority of Singapore (MAS) has made it compulsory for the finfluencers to comply with “disclosure rules” or else they would be placed on the investor alert list.
Recommendations in the Indian Sphere
India needs to come up with its own version of the code of conduct for the finfluencers, probably inspired by New Zealand and EU. SEBI could issue a handbook for outlining the legal obligations of the finfluencers and the firms that hire them, in case of fraudulent activities. Moreover, the handbook needs to address the distinction between financial advice and financial education. The same is however, tricky to navigate. This is because financial education turns to financial advice when specifications are thrown in, regarding investing. The same could be avoided by attaching proper disclaimers highlighting the volatility of the stock market. The Code of Conduct should also address the strategy of these finfluencers to attract the people by using statements like ‘earn quick money’. This is when the customer protection rule of ‘buyer beware’ comes in. Even though India is encountering growing number of investors, the financial literacy remains at 27% for adults and 16.7% for teenagers. This is an important factor as people turned to social media for financial literacy because of the ease of listening to the 30-90 seconds reel or a 15-minute video. The Advertising Standards Council of India (ASCI) survey observed 71 violations by finfluencers of the guidelines issued by them. It also highlighted the reliance of almost 79% of people on social media influencers. Although NSE has amended the advertisement regulations to include influencers, a discussion paper is going to be released soon.
Conclusion
When people turn to social media for financial advice and education, the ‘influencers’ become the new-age Gurus/ experts, having little to no regulations. However Nirmala Sitharaman, in her address on financial influencers, stressed on the importance of due diligence. The regulations will work to a certain extent as it is almost impossible to regulate every single finfluencer out there. Till the regulations roll out, people need to be cautioned about the Ponzi schemes and dual objectives that some finfluencers might possess. While they do provide financial education, people need to be equipped with enough knowledge to always exercise caution and not fall prey to the net of generating some quick money.
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