FinFluencers — From the Lens of SEBI

Finfluencer is a portmanteau, derived from finance or financial and influencers. Today, almost everybody's decisions, whether holidays, fashion, electronic gadgets, cars, etc. are all based on reviews of some influencer. Financial decisions too are not bereft of such influence by financial influencers or Finfluencer.

Observer Research Foundation¹ in one of its articles has explained a “financial influencer” or “Finfluencer ”, as a person who gives information and advice to investors on financial topics — usually on stock market trading, personal investments like mutual funds and insurance, primarily on various social media platforms.

The steady rise of influencers in India doling out financial and investment advice has been serving as a double-edged sword.

In recent times, financial influencers have played a pivotal role in spreading financial awareness and literacy, bridging the gap of financial illiteracy, which, as per a study by the National Centre for Financial Education², is at a shockingly low, with only 27% of the population being financially literate. The use of simple language by Finfluencer , understandable and decipherable by laymen, has served as a bane in addressing financial illiteracy. Having said that, substantial reliance and unabated confidence placed on Finfluencer portioned with unbridled, free reign to such content creators creates an elixir for quacks to dupe unsuspecting and innocent people.

In recent times, India's securities market regulator, the Securities and Exchange Board of India (SEBI) has cracked down on cases wherein these so-called Finfluencer first buy shares of a company and thereafter, circulate favourable messages about the same scrip through social media (via bulk SMS, YouTube, Instagram, Telegram Channel, etc.) among their thousands of subscribers, thereby inducing them to purchase those shares, artificially driving up the volume and prices of the said scrip. These financial influencers then sell their pre-acquired shares, thereby pocketing large amounts of profits for themselves.

In a recent “pump and dump” scheme³ involving a Bollywood actor, SEBI, India's capital market regulator clamped down on the modus adopted by certain promoters of Sharpline Broadcast Ltd. and Sadhna Broadcast Ltd. who in collusion with YouTube Creators, were disseminating false and misleading content. This content leads to creating false interest in the scrip, thereby inducing the investors to invest in the said scrips, creating artificial volume and price rise. Subsequent to the price rise, the promoters and profit creators sold their stake in the company at an inflated price, thereby booking massive profits. This mass “dumping” in turn deflates the price of the scrip, thereby leaving the gullible investors who purchased at the inflated price, in the “pump” phase, with huge losses.

In another SEBI streak against market entities/influencers, the market regulator, on 19th June, passed an interim order-cum show-cause⁴ notice to 135 market entities over stock manipulation via bulk texting about scrips.

SEBI has directed these entities to disgorge the alleged amount with interest, restraining them from accessing and associating themselves with the securities market and from trading in, buying or selling securities. Fines for penalties under the Securities and Exchange Board of India Act, 1992 (the SEBI Act) are to be imposed. However, these entities are permitted to submit replies in their defence and an opportunity of personal hearings in the matter.

Presently, there are no specific laws or regulations governing Finfluencer, though SEBI has indicated that it is working⁵ on a draft regulation for those providing financial advice on social media platforms.

However, there is a decade-old regulation which governs investment advisors, viz. the Securities and Exchange Board of India (Investment Advisers) Regulations, 2013 (the IA Regulations⁶). Pursuant to the IA Regulations, SEBI permits only authorised research analysts and investment advisers to provide financial advice. IAs are mandated to be registered with SEBI and are also governed by them.

As per Regulation 2(1)(m), “investment adviser” means any person, who for consideration, is engaged in the business of providing investment advice to clients or other persons or groups of persons and includes any person who holds out himself as an investment adviser, by whatever name called.

The phrase “…who for consideration…” mentioned in the definition is an important aspect to be considered, whilst differentiating an investment adviser from a Finfluencer. Finfluencer's advice is usually free for all and available to the public at large and hence, it can be argued that they do not fall within the definition of “investment adviser ”.

As per Regulation 2(1)(l) of the IA Regulations, “investment advice” means advice relating to investing in, purchasing, selling, or otherwise dealing in securities or investment products, and advice on investment portfolio containing securities or investment products, whether written, oral or through any other means of communication for the benefit of the client and shall include financial planning.

The proviso to this definition clarifies “Provided that investment advice given through newspaper, magazines, any electronic or broadcasting or telecommunications medium, which is widely available to the public, shall not be considered as investment advice for the purpose of these Regulations.”

So, in some sense, the regulation itself, and more particularly the proviso to Regulation 2(1)(l) excludes the Finfluencer from the definition of “investment advice”.

A further case in point, precluding Finfluencer from the orbit of an investment adviser, is Regulation 3 of the IA Regulations, which lays down an exception to “no person is permitted to act as an investment adviser or hold itself out as an investment adviser unless he has obtained a certificate of registration from the Board”.

Regulation 4 inter alia states, “Any person who gives general comments in good faith in regard to trends in the financial or securities market or the economic situation where such comments do not specify any particular securities or investment product” is not governed by the IA Regulations.

Whilst presently there are no specific regulations in place for Finfluencer, however, it is not a situation that they are presently devoid of any control or governance.

Section 12-A of the SEBI Act⁷ prohibits any of the following:

(a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognised stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder;

(b) employ any device, scheme, or artifice to defraud in connection with the issue or dealing in securities which are listed or proposed to be listed on a recognised stock exchange;

(c) engage in any act, practice, or course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder;

Further, the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (the PFUTP Regulations⁸) defines the act of “fraud” to inter alia include “a false statement made without reasonable ground for believing it to be true” and “a suggestion as to a fact which is not true by one who does not believe it to be true”.

Furthermore, Regulation 4 of the PFUTP Regulations was modified on 25-1-2022, bringing “disseminating information or advice through any media, whether physical or digital, which the disseminator knows to be false or misleading in a reckless or careless manner and which is designed to, or likely to influence the decision of investors dealing in securities”, within the ambit of “manipulative fraudulent or an unfair trade practice”.

Thus, Finfluencers have to be mindful of these provisions.

The regulators globally too, are waking up to this tsunami and are taking note of the situation. The Financial Markets Authority (FMA), which regulates New Zealand's financial markets, issued a Guide to Talking About Money Online⁹ in January 2021, to provide tips for both consumers and social media influencers engaging in related activities to better manage the risks.

In another instance, the United States Securities and Exchange Commission in December 2022 charged eight social media influencers USD 100 million, in the case of the Stock Manipulation Scheme promoted on Discord and Twitter. The Securities and Exchange Commission in its press release¹⁰ said:

According to the SEC … seven of the defendants promoted themselves as successful traders and cultivated hundreds of thousands of followers on Twitter and in stock trading chatrooms on Discord. These seven defendants allegedly purchased certain stocks and then encouraged their substantial social media following to buy those selected stocks by posting price targets or indicating they were buying, holding, or adding to their stock positions. However, as the complaint alleges, when share prices and/or trading volumes rose in the promoted securities, the individuals regularly sold their shares without ever having disclosed their plans to dump the securities while they were promoting them.

The Pioneer¹¹ in one of its articles very well sums up the dilemma of Finfluencer as follows:

“Knowledge dissemination and informational symmetry: The new age freelancer-influencer generation believes in providing simplified, concise, and conclusive information. Simultaneously, the new-age class of retail investors also want quick money without having to do hours of market research. Oversimplification is the new complexity and those who capitalise on this ability controls the narrative.”

While there is a dearth of an assimilated code governing the finfluencers, the Advertising Standards Council of India (ASCI) issued “Guidelines for Influencer Advertising in Digital Media¹²”, wherein it states:

With lines between content and advertisements becoming blurry, it is critical that consumers must be able to distinguish when something is being promoted with an intention to influence their opinion or behaviour for an immediate or eventual commercial gain.

ASCI has laid down guidelines to be followed by influencers, especially in the context of advertising versus the dissemination of personal views, thoughts, perspectives, and opinions.

The Department of Consumer Affairs, too, has issued Endorsement Knowhows¹³ for influencers to make their audience known of any interest in the content being shared and obliges them to disclose any such relation by way of words/ tags i.e. #AD, paid content, etc., to dutifully guide their audience and ensure the protection of consumer rights.

With the profound percolating impact of social media in simplifying the lifestyles of everyday man, it has become crucial that there is a set of rules to abide by. The influencers be mandated to adhere to a code or face the music of the failure thereof.

As restricting as it sounds, such rules would filter out charlatans and create a conducive and safe environment for everyone — the creator and the audience. It would encourage well-researched and more reliable content to be published on social media platforms and bolster such confidence in the creators/influencers.

We remain hopeful and await SEBI's response to the growing need for regulations for Finfluencers amidst talks of such codification by the Finance Minister.