Financial influencers turn into a risk in lack of regulatory norms from Sebi, RBI

Unregistered financial influencers can be booked for violating the Prohibition of Fraudulent and Unfair Trade Practices regulations.

With no regulation in place yet from Sebi and the Reserve Bank, financial influencers have turned into a risk for investors as they give investment advice without being qualified to do so, induce stock price movements, and appear detrimental to recent listings.

Financial influencers are those who give layman investors information on stocks and advise them on investments in equity and other financial markets.

Sebi requires that a person or an entity must be registered on its rolls to provide stock tips. However, most persons providing such tips on social media are not registered, which directly violates the norm.

The modus operandi followed by such persons is 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 financial influencers then sell their pre-acquired shares, thereby pocketing large amounts of profits for themselves.

Finance Minister Nirmala Sitharaman recently talked about regulations for social and financial influencers. "I'm not having any proposal before me for regulating them at this stage," she said as the ministry still awaits a proposal either from the markets watchdog or from the central bank.

Asserting that investors should be cautious of influencers, she said that if there are three or four people giving us very objective good advice, there could be seven others out of 10 who are probably driven by some other considerations.

Sebi has released an advertisement code to put a full stop to misleading advertising by investment advisors and research analysts. Will this bring down the bane of unqualified financial influencers trying to manipulate the market with ulterior motives?

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.

Unregistered financial influencers can be booked 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.

“Regulating the unregulated is essential when they threaten the country's economic framework. Financial influencers have risen in popularity in recent years, using easily accessible technology platforms like YouTube, Instagram, Facebook, WhatsApp, and Telegram to share their knowledge about personal finance, investing, and other financial topics. Many of these channels operate under the radar with the ulterior motive of defrauding retail investors and pushing them to a corner,” Rajat Mohan, Senior Partner, AMRG and Associates, told Moneycontrol.

India, as of now, does not regulate influencers' communities, including financial influencers. However, few developed nations like the United States, United Kingdom, Canada, Australia and the European Union have established a framework of laws for the community.

“These laws generally require financial influencers who promote securities to disclose their relationships with companies and potential conflicts of interest. Literacy ratio is relatively high in these developed nations, and thereby mere disclosure is sufficient, the same may not work in India,” Mohan said.