SEBI's dubious crackdown on finfluencers and digital platform regulations

SEBI runs the risk of placing compliance requirements that may overlap or even conflict with existing frameworks on social media intermediaries and finfluencers.

By Natasha Aggarwal 

The Securities and Exchange Board of India (SEBI) has steadily increased its surveillance in the digital ecosystem, earlier seeking powers to intercept and decrypt data and recently flagging 9,000 social media posts as unlawful or misleading. Last month, SEBI issued a consultation paper with a draft circular that reflected its concerns regarding ‘finfluencers’ and its intention to indirectly regulate policies and mechanisms of digital platforms. Additionally, the SEBI is trying to expand the jurisdiction of its quasi-judicial powers (which only Parliament can do, by amending the SEBI Act).

This raises questions on the scope of SEBI’s powers and its creation of legal frameworks through circulars, instead of regulations. The creation of “law” needs to go through a much more rigorous process involving Parliamentary approval.

SEBI’s proposal on finfluencers

The current idea seems to have been in the works for some time: in June 2024, SEBI expressed concerns that ‘finfluencers’ are “enticing their followers/investors/prospective investors to purchase financial products, services, or securities in return for undisclosed compensation from producers or platforms.” The primary concern here seems to be investor protection. In August, SEBI amended three sets of regulations, essentially restricting any association between SEBI registered entities and “finfluencers”, unless this association is through a “specified digital platform” (SDP).

On October 22, the SEBI issued a consultation paper with a draft circular that proposes several compliance measures for digital platforms, such as implementation of policies on action against users, which may include blacklisting users or entities, and a complaints mechanism that will allow SEBI officials to flag unlawful content. A digital platform will not receive recognition as an SDP if it does not implement such compliance measures to SEBI’s satisfaction and, as a result, entities that are registered with SEBI will not be able to associate with such digital platforms.

However, such a move by a securities regulator is not unprecedented; for example, the Financial Conduct Authority in the United Kingdom has also placed an indirect obligation on social media platforms to have appropriate monitoring mechanisms. Nonetheless, SEBI’s proposal raises questions on the scope of its powers and the manner in which these powers can be exercised.

Is the SEBI proposal within its mandate?

SEBI has cited Section 11(1) of the SEBI Act to propose this framework for SDPs. Section 11(1) gives SEBI wide and discretionary power to regulate the securities market by such measures as it thinks fit. This may include measures towards the regulation of intermediaries or depositories, promotion of investor education, and prohibition of fraudulent and unfair trade practices. Section 11 has been used to issue guidelines (such as the Disclosure and Investor Protection Guidelines in 2000, eventually replaced by the ICDR Regulations in 2009) and several circulars.

Arguably, the proposal to regulate associations between SEBI registered entities and digital platforms is within the scope of SEBI’s powers. However, SEBI runs the risk of placing compliance requirements that may overlap or even conflict with existing frameworks on social media intermediaries and ‘finfluencers’ by the Ministry of Electronics & Information Technology and the Ministry of Information and Broadcasting. This proposed circular walks a fine line between regulating entities within and outside SEBI’s jurisdiction.

Are circulars the appropriate instrument?

Notably, the manner in which SEBI proposes to regulate SDPs is problematic. The Supreme Court has held that regulatory authorities should only use circulars to provide administrative direction or guidance, and not to create law. The SEBI Act provides a mechanism by which SEBI can exercise its quasi-legislative powers. The issuance of a circular, instead of regulations, may be justified on the ground that it merely clarifies the amendments made in August 2024, but the circular proposes entirely new compliance requirements for digital platforms. Therefore, any attempt by the SEBI to regulate digital platforms should have been undertaken through Section 30 of the SEBI Act, which would mean that the SEBI would issue regulations instead of a circular. This would also mean that the draft regulations would have to be laid before Parliament, a procedure that SEBI has entirely bypassed by issuing a circular instead.

Moreover, the draft circular attempts to widen the jurisdiction of the SEBI: in case of a dispute between a platform and a SEBI registered entity, either can approach SEBI, whose view of the matter will be final. Notably, there’s nothing in the SEBI Act that permits it to adjudicate such disputes. Similarly, there is an attempt to expand the jurisdiction of the Securities Appellate Tribunal (SAT): in case of a dispute between SEBI and a platform, the platform can directly approach the SAT. Here as well, there is nothing in the SEBI Act that permits the SAT to adjudicate over such disputes, as its jurisdiction is restricted to appeals from the SEBI, the IRDA or the PFRDA.

Evidently, SEBI has attempted to create an entirely new legal framework through disguised legislation. Regulatory authorities, like SEBI, occupy a unique position in the context of the separation of powers - SEBI has quasi-legislative powers, executive powers, and quasi-judicial powers. This means that SEBI can issue regulations, conduct investigations, and adjudicate on allegations made in its own enforcement actions. Such wide powers also mean that regulatory authorities must be transparent and accountable, and follow the rule of law.

(Natasha Aggarwal is a Senior Research Fellow at TrustBridge Rule of Law Foundation.)

Views are personal, and do not represent the stance of this publication.