Lessons from SEBI’s action against Baap of Chart and other finfluencers

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Shatarupa Dasgupta and Rohan Banerjee

A century ago, influencing an audience with one’s opinions and expertise on any topic was tough. You would need to find a spot in a public park, stand on a soapbox, and shout long and hard to get the attention you craved. Now, the internet and social network platforms have made life much simpler for aspiring influencers, but there is a catch. Social media runs on the currency of attention. It is only through innovative and eye-grabbing content that influencers can hope to halt the swipe of the thumb and lay claim to a few seconds of their audience’s time. In these fraught circumstances, there is an understandable tendency to resort to hyperbole in promotional materials to drive home the value proposition being offered to the public. However, when such promotional hyperbole relates to regulated activities – as is the case for financial influencers (finfluencers) – things get a lot trickier.

Action Against Finfluencers

Over the past few days, an interim order issued by the Securities and Exchange Board of India (SEBI) against Mohammad Nasiruddin Ansari/Baap of Chart, has garnered significant media attention. In the interim order, SEBI observed that Ansari was “promoting himself as a stock market expert on various social media platforms” and offering “educational courses” to his followers.

This is not the first instance of SEBI taking action against a finfluencer. Earlier in the year SEBI had issued a settlement order involving the YouTuber P R Sundar and others in a similar scenario. In that instance, it was alleged that Sundar was involved in carrying out investment advisory activities without obtaining registration with SEBI. Ultimately, Sundar and his associates agreed to settlement terms to end the proceedings without any determination of guilt (or innocence).

In contrast, what sets the latest SEBI interim order apart, is that it contains a prima facie presumption of guilt on two key aspects: (i) that providing specific recommendations and unregistered investment advisory services was a breach of SEBI regulations, and (ii) that luring/inducing of investors with false/misleading claims amounted to a fraudulent activity under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations).

The first issue has been a problem for the regulator long before the advent of finfluencers. SEBI has historically cracked down on individuals and entities who engaged in regulated activities, without obtaining the requisite licences. Finfluencers are merely the newest class of such potential miscreants and it is the regulator’s prerogative to ensure they play by the same rules as other licensed intermediaries, when conducting licensed activities. Towards this, the Advertising Standards Council of India also issued a press release in August, clarifying that finfluencers can ‘offer investment-related advice only after being registered’ with SEBI and would also need to adhere to the disclosure requirements stipulated by the market regulator.

Fraud or Not?

It is the latter issue – the grave charge of fraud – discussed in the interim order in connection with the ‘education content’ offered by Ansari, that merits more careful consideration.

The term ‘fraud’ is defined in the PFUTP Regulations in quite expansive terms. Moreover, the PFUTP regulations are framed in a manner that presumes certain actions to be fraudulent. For instance, the dissemination of any false or misleading information which is likely to influence the trading decision of investors is presumed to be fraudulent conduct. The burden of proof then shifts on the person accused of such fraud, to present contrary evidence that establishes their innocence. The SEBI interim order uses this legal leverage to contend that by luring investors with misleading claims of near-certain (and astronomical) profits and inducing them to trade, Ansari and his associates had committed fraud under the PFUTP Regulations. Simply stated, it was the manner in which the ‘educational content’ was advertised and false guarantees of returns made, that the regulator adjudged to be equivalent to fraud.

It must be acknowledged that the SEBI interim order is not the last word on this matter. The quasi-judicial process set into motion by it will now take its course and likely culminate in a final order once Ansari and his associates have mounted their defence. It is also possible that the final order, or appellate bodies, arrive at different conclusions on some of these issues.

Nevertheless, an important learning has emerged in the ongoing discourse around the regulatory oversight on finfluencers, and in particular, the manner in which they promote their content. SEBI’s latest action makes it clear that any social or marketing hyperbole could easily run into the risk of regulatory censure. Going forward, finfluencers must not only be wary of the type of services they offer to the public but also exercise caution in how they advertise them.

Shatarupa Dasgupta and Rohan Banerjee are respectively Director and Senior Consultant in the Legal Learning & Research Team at Cyril Amarchand Mangaldas. Views are personal, and do not represent the stand of this publication.