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Overview:
A recent Circular dated 29 January 2025 issued by the Securities and Exchange Board of India (‘SEBI’) provides imperative clarifications regarding the association of persons regulated by SEBI, market infrastructure institutions (MIIs), and their agents with individuals or entities engaged in prohibited activities.
This circular serves as a follow-up to the earlier circular dated 22 October 2024 (‘October Circular’). Essentially, the present circular marks a significant regulatory shift aimed at curbing the activities of unregistered financial influencers, commonly referred to as “finfluencers”. This directive prohibits the influencers from using live stock prices in their educational content, requiring them in the alternative, to refer to stock prices that are at least three months old. This change is expected to have profound implications for the finfluencer industry.
Key highlights of the Circular:
- Regulatory Background:
The circular references amendments to various regulations, including the Securities and Exchange Board of India (Intermediaries) Regulations, 2008, and others, which were published on August 29, 2024. These amendments restrict associations with individuals or entities that provide unregistered advice or make unpermitted claims regarding securities.
- Prohibited Activities:
The regulations prohibit any direct or indirect association with persons who: a) Provide advice or recommendations related to securities without SEBI registration; b) Make claims regarding returns or performance related to securities without SEBI permission.
III. Clarifications Provided:
The circular includes an annexure containing certain frequently asked questions that clarify the following;
- a) Definitions of ‘persons regulated by the Board’ and ‘agents’
- b) Responsibilities of regulated entities to ensure that associated individuals do not engage in prohibited activities
- c) The distinction between investor education and prohibited advisory roles.
- Compliance Requirements:
Regulated entities must ensure compliance with these provisions and are advised to terminate existing contracts with individuals engaged in prohibited activities within three months from the October 2024 circular’s issuance. This compliance is crucial for maintaining regulatory standards and protecting investor interests.
- Investor Education allowed with certain restrictions:
While genuine investor education is still permitted, it must strictly adhere to the new guidelines. This includes avoiding any performance claims or investment recommendations unless the educator is a SEBI-registered entity.
- Consequences for violations:
The circular outlines potential actions SEBI may take against violations, including penalties, suspension, or cancellation of registrations. It emphasizes the importance of adhering to these regulations to avoid severe repercussions.
Expected Outcomes:
- Reduction in misleading practices:
By closing this loophole, SEBI aims to reduce misleading investment claims that have proliferated in the finfluencers space, thereby enhancing investor protection and market integrity.
- Challenges for Social Media Influencers:
Many influencers who relied on live market data for their content may find their business models unsustainable. The shift could lead to a significant restructuring within this sector as they adapt to the new regulations or face potential subscriber losses.
III. Stringent Enforcement:
SEBI’s recent action is part of a larger initiative to strengthen compliance within the financial system. This could result in tougher measures against deceptive stock market content and promote the idea that investors should consult only registered professionals for advice.
MHCO Comment:
This circular ensures that finfluencers are restricted from selling stock tips on various social media platforms. This regulatory change represents a critical step in addressing the challenges posed by unregulated financial advice in India, aiming for a more transparent and safer investment environment for retail investors.
Authored By: Mr Bhushan Shah, Partner, Ms. Shreya Dalal, Associate Partner and Mr Gaurav Edekar, Associate.
This article was released on 3 February 2025.
The views expressed in this update are personal and should not be construed as any legal advice. Please contact us for any assistance.