Taxmann's Analysis | SEBI Cracks Down on Unregistered Finfluencers – New Rules to Protect Investors

1. Introduction

As of August 26, 2024, a pivotal change has occurred within India’s financial landscape aimed at protecting the interests of everyday investors. The Securities and Exchange Board of India (SEBI) has introduced stringent regulations to oversee unregistered financial influencers, commonly referred to as ‘finfluencers’. These individuals offer financial advice on various digital platforms and have gained considerable influence. However, their lack of regulation has sparked concerns about the reliability and neutrality of their advice. In response, SEBI has issued three notifications that prohibit regulated entities from collaborating with these unregistered advisors, effective immediately, to foster a safer investment environment.

2. Background and Rationale

On June 27, 2024, during its 206th meeting, SEBI unveiled a series of regulatory reforms to enhance transparency, protect investors, and improve efficiency across financial sectors. A significant resolution from this meeting was the restriction imposed on SEBI-regulated entities against engaging with unregistered investment or financial advisors, namely finfluencers. This decision addresses the increasing concerns regarding the potential risks these influencers pose to investors, highlighting a proactive approach to ensuring a more secure financial marketplace.

3. Who are

Finfluencers?

The Advertising Standards Council of India (ASCI) defines an ‘influencer’ as an individual who can impact their audience’s purchasing decisions or opinions about a product, service, brand, or experience through authority, knowledge, position, or relationship with their followers. These individuals leverage their digital media presence to endorse or promote various products or services. Specifically, influencers who use social and digital media platforms such as Instagram, Facebook, YouTube, and Twitter to disseminate financial advice or information on securities investment, personal finance, banking products, and insurance are categorized as ‘finfluencers’. These sectors are often under the purview of regulatory bodies such as SEBI, RBI, and IRDAI, among others. Finfluencers typically create and share content, including videos, reels, and stories about offerings from regulated entities. However, many of them are not registered with the respective regulatory authorities, which raises questions about their qualifications to provide financial advice.

4. Key Concerns Surrounding

Unregulated Finfluencers

The rise of unregulated finfluencers brings several critical concerns to the forefront:

(a) Misleading information – There’s a risk that finfluencers may share biased or incorrect information to attract followers or promote specific investments, potentially leading investors to make decisions based on unreliable or deceptive data.

(b) Unrealistic Promises – Some finfluencers might entice their audience with assurances of guaranteed returns or high profits, setting unrealistic and often unachievable expectations.

(c) Lack of Transparency – Often, unregulated finfluencers do not disclose their qualifications, experiences, or potential conflicts of interest, which can mislead their audience about the credibility of the information they provide.

5. Regulation of Finfluencers by SEBI

SEBI has revised its regulations to mitigate the risks associated with unregistered financial influencers or finfluencers. These amendments affect the SEBI (Depositories and Participants) Regulations, 2018, the SEBI (Intermediaries) Regulations, 2008, and the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018.

5.1 Restricting Association with Unregistered Security Advisors or Finfluencers

A new chapter has been added to these regulations, limiting SEBI-regulated entities from associating with unregistered security advisors. This stipulates that any person or agent regulated by SEBI must avoid any direct or indirect involvement with individuals who:

(a) Offer advice or recommendations concerning securities, unless registered or authorized by SEBI to do so or

(b) Claim any specific returns or performance related to securities unless authorized by SEBI to make such claims.

Furthermore, it is mandatory for persons regulated by SEBI to ensure that their associates or agents do not partake in these activities without the requisite permissions.

5.2 Exceptions for Associations Focused on Investor Education and Digital Platforms

However, these restrictions do not apply to associations that focus exclusively on investor education, provided they do not offer specific investment advice, recommendations, or claims about returns or performance without SEBI’s authorization. Additionally, SEBIregulated entities and their agents can work with finfluencers through designated digital platforms1

1 The expression ‘specified digital platform’ refers to a digital platform as specified by the Board, which has a mechanism in place to take preventive as well as curative action, to the satisfaction of the Board, to ensure that such a platform is not used for indulging in any activity i.e. providing advice or making any claim.

5.2.1 Definition of ‘Association’

The term ‘association’ encompasses:

(a) Monetary transactions or exchanges of monetary value.

(b) Referrals of clients.

(c) Interactions between information technology systems.

(d) Other similar or related forms of interaction.

5.2.2 Definition of ‘Person Regulated by the Board’

The term ‘person regulated by the Board’ includes:

(a) Any entity registered with SEBI under section 12 of the SEBI Act.

(b) Asset management companies of mutual funds registered with SEBI.

(c) Investment managers of alternative investment funds or infrastructure investment trusts registered with SEBI.

(d) Managers of real estate investment trusts are also registered with SEBI.

6. Increased Accountability for Finfluencers Under New SEBI Regulations

With the implementation of SEBI’s latest regulations, finfluencers are now subject to increased accountability and responsibility for the financial advice they dispense. The newly enforced restrictions on collaborations between SEBI-regulated entities and unregistered finfluencers aim to reduce the dissemination of misleading or biased financial information drastically. This is a significant move towards protecting investors from potential risks and enhancing the transparency of the financial ecosystem.

Consequently, investors will be better equipped to make informed decisions with the assurance that they receive advice from registered and regulated sources, adhering to strict industry standards. This regulatory update is a pivotal step in safeguarding the interests of investors within India’s dynamic digital finance arena. By ensuring that only competent and accountable individuals provide financial guidance, SEBI’s regulations are poised to build trust and confidence in the financial market, ultimately fostering a more stable and prosperous economic environment.

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