Sebi crackdown: What new rules on regulated entities dealing with finfluencers mean

The Securities and Exchange Board of India (Sebi) has taken a bold step by banning regulated entities from associating with unregistered influencers. This crackdown targets anyone who provides financial advice or makes claims about securities without Sebi's registration.

Sebi's move addresses the troubling alliance between market intermediaries and shady influencers. 'Finfluencers' have been linked to discount brokers, driving up trading activity and often misleading investors with false profit claims on platforms like YouTube and Telegram.

Sidharth S Kumar, Senior Associate at BTG Advaya said Sebi's proposal to restrict the interactions between registered intermediaries and finfluencers will limit the pool of social media influencers for financial products.

Now, the intermediaries will have to work with influencers registered with Sebi as investment advisors or have a professional finance background to promote the products, Kumar said.

"This narrows the distribution channel for the intermediaries. The proposal will not significantly impact the advertisement or distribution cost of the intermediaries as the commission rates are already regulated under the law. However, SEBI’s move will increase the intermediaries' compliance risk. SEBI has imposed responsibility on the intermediaries regarding narratives on returns and the safety of the products made by the influencers they fund," he said.

KC Jacob from Economic Laws Practice highlighted that investors have faced numerous issues due to finfluencers' recommendations. These unlicensed advisors have been actively promoting broker and mutual fund products on social media. Despite a February 2023 circular from NSE requiring brokers to get prior approval before paying influencers, finfluencers continued their operations unabated.

Jacob noted that Sebi's new restrictions on market intermediaries dealing with unregistered finfluencers aim to curb these practices. However, the effectiveness of this framework remains to be seen.

While top finfluencers and leading brokers may operate transparently, there are cases where influencers fail to disclose kickbacks from brokerages, misleading investors. Anshul Arzare, MD and CEO of YES Securities, emphasized the fiduciary duty of financial intermediaries to remain neutral and unbiased, warning that ties with unregistered influencers undermine this trust and pose significant risks.

Shiju PV, Senior Partner at IndiaLaw LLP, questioned the practicality of a complete ban on advertising through such platforms, cautioning against infringing on free speech. He suggested that Sebi should enforce advertising standards on regulated entities and penalize any breaches.