'Sebi's circular essentially means end of...': Zerodha's Nithin Kamath on Sebi's new rules on real-time price data

Zerodha co-founder Nithin Kamath on Saturday highlighted the Securities and Exchange Board of India's (SEBI) new rules on disseminating real-time share price information to third parties, including different online platforms. 

In its latest circular issued on May 24, the capital markets regulator said: "It has been observed that certain online gaming platforms, apps, websites, etc. (hereafter referred to as "platforms") are providing virtual trading services or fantasy games which are based on the movement of real-time share prices (price data) of listed companies. Some platforms are even offering monetary incentives based on the performance of the virtual stock portfolio."

Noting the new guidelines, Kamath said that the Sebi's notifications means that it ends all platforms offering trading competition, demo trading, CFDs. CFDs stand for contract for differences (CFD) that are financial agreements settling the price difference between opening and closing trades. CFDs enable investors to speculate on securities' short-term direction, commonly used in FX and commodities trading. 

"Sebi's circular essentially means that it ends all platforms offering trading competition, demo trading, CFDs, and more," Kamath said.

Sebi in its circular noted: "Stock exchanges,  clearing  corporations  and  depositories  (collectively  referred  as Market  Infrastructure  Institutions  (MIIs))  and  registered  market  intermediaries  shall ensure  that  no  real  time price data  is  shared  with  any  third party including various platforms, except where sharing of such information is required for orderly functioning of the securities market or for fulfilling regulatory requirements." 

The Market Infrastructure Institutions (MIIs) — comprising stock exchanges, clearing companies, depositories, and regulated market intermediaries—have received specific directives from SEBI aimed at addressing these concerns. As per SEBI's guidelines, MIIs and market intermediaries must ensure that real-time pricing data is not disclosed to external parties unless such disclosure is necessary for regulatory compliance or the proper functioning of the securities market. 

Additionally, SEBI mandates that any organisation intending to share real-time pricing data must enter into formal agreements detailing the purposes for which the data will be used. Furthermore, it requires the boards of MIIs or intermediaries to conduct an annual review of entities and activities related to this practice. 

Kamath, in one of his earlier articles written in 2022, mentioned about CFDs, where he wrote about social or copy trading.  

He wrote: "Social or “copy” trading is where someone with a profitable track record, publishes his or her trades live on the platform. These trades are generally accompanied with the rationale for taking the trade, and/or a feature for subscribers to copy all such trades. The influencer gets a revenue share from the platform for the trades generated or gets to collect a fee directly from followers. Platforms like Etoro, Zulu, etc. have made this concept popular in the CFD (Contract for difference) world. CFDs work in jurisdictions where regulations aren’t tough. They are banned in most countries, including India."

He further wrote: "The reason such a platform can’t be built in India is again because of regulations. While you see a lot of people sharing trading ideas on Twitter, even that is grey. But it is still okay because there is no monetary consideration when you share an idea on social media. As soon as the person sharing the idea is collecting fees in some form, the Registered Investment Advisor (RIA) or Research Analyst (RA) requirements kick in."

To share an idea with a specific person, you need an RIA license. For broader trading ideas to an audience, an RA license is necessary. Creating a platform where all traders are either RIA or RA is challenging due to the stringent regulatory demands for both licenses.

Kamath noted: "A recent circular from SEBI also bans RIAs or RAs from providing free trials, so even if there were RIAs or RAs, you can’t offer trials to first time users to try out the product. SEBI has also banned automated trading for retail, which means that the platform can’t allow a follower to automatically execute trades every time the influencer trades — which is the main attraction of the copy trading platforms, hence “copy” trading."

Sebi on Registered Investment Adviser and Finfluencers

For long there has been a debate on finfluencers and Sebi-registered investment advisor. Some influences were prohibited, and some faced regulatory action. This crackdown has strengthened the position of SEBI-registered investment advisors.

SEBI-registered advisors are certified by the capital markets regulator Sebi to share their advice with investors for a fee with regards to making investments in securities markets. The rules relating to investment advisors are defined in the SEBI Regulations, 2013.

Under the rules, members of ICSI, ICAI, and ICWAI can give advice to clients as part of their professional services without needing registration under IA Regulations. For example, a CA advising a client on tax planning and suggesting investments like ELSS is considered incidental to their role as a tax consultant.

Last month, Sebi announced the framework for administration and supervision of research analysts (RAs) and registered investment advisers (RIAs) by the proposed new supervisory bodies.

On April 26, Sebi notified that a recognised stock exchange may undertake the activities of administration and supervision over specified intermediaries. Accordingly, stock exchanges can now be recognised as Research Analyst Administration and Supervisory Body (RAASB) and Investment Adviser Administration and Supervisory Body (IAASB) for administration and supervision of RAs and IAs, respectively.

Sebi noted:

1. For recognition of as RAASB and IAASB, an entity must have minimum 15 years of existence as a recognised stock exchange. 

2. Further, the stock exchange must have a Minimum net worth of Rs 200 crore and have nation-wide terminals.

3. The stock exchange need to have a capacity for investor service management gauged through reach of at least Investor Service Centers (ISCs) in at least 20 cities.