Sebi clarifies rules barring finfluencers giving investment advice | Stock Market News

The Securities and Exchange Board of India (Sebi) on Friday issued a draft circular providing clarifications regarding its recent regulations prohibiting regulated entities, such as stock exchanges, depositories and clearing corporations, from associating with unregistered content creators who offer advice, recommendations or performance claims about any security.

The capital market regulator had ordered regulated entities on 22 October to terminate existing contracts with unregistered financial advisers by January 2025. Following this, Mint reported on October 25 that some financial influencers found the new Sebi rules ambiguously worded and open to wide interpretation. On Friday, Sebi issued the clarificatory draft circular, inviting public comments by 31 December.

What are the restrictions on entities regulated by the board?

Sebi has barred regulated entities from associating with unregistered content creators offering advice, recommendations or performance claims about any security.

The regulator clarified that the rules apply to all entities regulated by it, including asset management companies (AMCs), investment managers of alternative investment funds (AIFs), infrastructure investment trusts (InvITs), real estate investment trusts (REITs), recognized stock exchanges, clearing corporations and registered depositories.

Sebi also emphasized that entities cannot engage in prohibited activities directly or indirectly, including through associations with individuals or organizations involved in such actions.

What constitutes an association with another person?

An association involves transactions of money or its equivalent, client referrals, IT system interactions, or other similar connections, regardless of terminology.

Regulated entities are prohibited from making or receiving payments, referring clients, or sharing client information with individuals engaged in prohibited activities. Sebi clarified that such actions qualify as “association” and are not allowed.

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Regulated entities must ensure that anyone they associate with, directly or indirectly, does not engage in prohibited activities such as offering unregistered financial advice or making unauthorized performance claims.

Ketan Mukhija, senior partner at Burgeon Law, said Sebi’s draft circular did clarify to some extent the obligations on regulated entities in avoiding direct or indirect associations with unregistered entities. “The circular defines ‘association’ broadly, covering financial transactions, referrals and IT interactions, while allowing investor education within specific limits. Definition of association is illustrative but not exhaustive”, he said.

What is permissible and what is not?

Sebi’s draft circular clarified that regulated entities and their agents can collaborate with partners for branding or marketing, provided these partners are not engaged in prohibited activities, either directly or indirectly. This includes promoting products outside Sebi’s jurisdiction, such as insurance or banking services.

The draft also specifies that using a marketing agency for advertising, branding, or lead generation would constitute a violation if the agency is involved in prohibited activities.

Regarding digital platforms, Sebi clarified that a violation occurs if the regulated entity has control over ad placement and indirectly associates with a prohibited entity. However, no violation is deemed to occur if the entity has no control over the ad placement.

What distinguishes education from advice or recommendations?

Sebi clarified that regulated entities could associate with someone for investor education as long as they do not engage in prohibited activities.

It clarified that education focused on providing general information and did not involve giving advice or making recommendations about securities. To ensure this distinction, Sebi’s draft circular said, educators should avoid using recent market price data (from the past three months) or mentioning specific securities in a way that suggests advice or opinions. If market data is used for educational purposes, it must be at least three months old.

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Pranjal Kamra, influencer and founder of fintech startup Finology Ventures, appreciated that Sebi clarified what would be advice and what would be education. “By saying that ‘even for education, you can’t use price data of the last 3 months’, would help in reducing trading recommendations which were made in disguise of education. Very good definition in my opinion”.

However, he apprehended that allowing unregulated ‘finfluencers’ to talk about things like fixed deposits, savings, credit cards, Unit Linked Insurance Plan (ULIPs), insurance, loan products etc, which have life changing impact on investors because it is out of Sebi’s mandate, could lead to unregulated ‘finfluencers’ peddling these products.

What are the consequences of violation of these regulations for persons regulated by the board and their agents?

Sebi said that violating these regulations would lead to actions such as inquiries, adjudications, penalties, suspension or cancellation of registration, or debarment.

These regulations have come into force with effect from August 29, 2024. Regulated persons have been advised on 22 October to terminate their existing contracts and associations within three months, which is by 21 January 2025.

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Experts overall lauded Sebi’s move to clarify the regulations, calling it both timely and necessary. “With the growing influence of social media on investment decisions, the risk of misinformation and half-baked advice has increased significantly. By setting these boundaries, Sebi aims to protect retail investors from being misled by individuals who may not have the required expertise or accountability”, Nirbhay Vassa, Group CFO at financial service provider Abans Holdings Ltd said

He also emphasized the importance of striking a balance between curbing misinformation and ensuring credible voices share valuable financial insights are not unfairly restricted. “This step reiterates the importance of investors relying on registered advisors and doing their due diligence before making financial decisions”, he said