SEBI order penalising YouTube pump-and-dump scheme is a precursor to finfluencer regulations

The Securities Exchange Board of India’s (SEBI) March 2 order cracking down on a YouTube-run share pump-and-dump operation is a precursor to the regulations on financial influencers (finfluencer) that the watchdog is in the process of framing.

In November 2022, the market regulator indicated that it was framing rules to govern the growing base of financial influencers on social media, with the intention of strengthening the regulatory regime on tips by unregistered persons.

The steady rise of influencers in India doling out financial and investment advice, without being qualified to do so, has been detrimental at times, especially in the case of recent start-up listings.

SEBI and financial influencers

SEBI requires that a person/entity must be registered on its rolls to provide stock tips. However, most persons providing such tips on social media are not registered, thus directly violating the regulations.

In a January 2022 order penalising unregistered persons for sharing stock tips, SEBI observed that the modus operandi followed by such persons are to first buy shares of a company through trading accounts and circulate favourable messages about those scrips through social media among their thousands of subscribers, inducing them to purchase those shares, driving up the prices. The finfluencers then sell their pre-acquired shares, thereby pocketing large amounts of profits for themselves.

SEBI has not just been passing orders against financial influencers, but has also been cracking down on scammers who send fraudulent tips on social media to artificially increase the price and volume of shares. In March 2022, SEBI conducted search and seizure operations at multiple premises in Ahmedabad and Bhavnagar in Gujarat, Neemuch in Madhya Pradesh, Delhi and Mumbai in its efforts to unearth market misconduct.

In the absence of finfluencer regulations, SEBI has penalised the unregistered financial influences for violating the Prohibition of Fraudulent and Unfair Trade Practices regulations.

Social media intermediaries such as YouTube, WhatsApp and Telegram are regulated by the Information Technology Act and its rules; however, the market regulator frequently puts out warnings to investors not to act on the advice of unregistered social media channels.

SEBI’s order from March 2 on the YouTube pump-and-dump scheme is an indication that it is keeping a close watch on all spaces including social media to spot violations of trading practices. The order might be a signal that the market regulator is keen on strengthening the regulatory mechanism to protect retail investors from risks posed by stock tips on social media.

‘SEBI order in right direction’

Sandeep Bajaj, managing partner at PSL Advocates and Solicitors, said, “Social media handles provide an unregulated platform which may be used by misleading message disseminators and volume creators to influence retail investors at large in an attempt to drive up or drive down the prices of a particular stock and profit from it. This causes loss to retail investors.”

He underlined that the SEBI order will act as a deterrent to social media actors and influencers and curtail the menace of unfair trade practices and insider trading using social media platforms to influence retail investors. “SEBI’s order is a much-required step in the right direction,” he added.

Rohit Jain, managing partner at Delhi-based law firm Singhania and Co, notes that pump-and-dump has been a recognised form of stock market fraud in the US for more than three decades and cites the instance of Hollywood celebrity Kim Kardashian, who was fined upwards of $1 million for such a scheme.

According to Jain, “In India also, with the rise of social media and retail investors, the order by SEBI is in the right direction. Under Indian law, investment advisers need to be registered with SEBI. Influencers/celebrities giving investment advice without being SEBI-registered advisors—we are treading a thin line there.”

Anushkaa Arora, principal and founder of ABA Law Office, said that the subject of the YouTube videos was misleading and they peddled false and misleading news to recommend that investors should buy a particular stock for extraordinary profits.

She said, “These elaborate orders would hopefully instil some fear amongst unauthorised tipsters and people offering unauthorised portfolio management services.”