The Finfluencer Effect: Unravelling Market Manipulation
Introduction
Recently, the Indian stock market regulator, Securities and Exchange Board of India (“SEBI”) published a discussion paper addressing the growing concern pertaining to financial influencers, or finfluencers, providing financial advice. These influencers often lack the requisite qualifications and accountability for their recommendations. However, retail investors, lacking proper financial education, repeatedly turn to these finfluencers for market insights. In doing so, these unregulated influencers exploit their reach and authority to manipulate the stock market for personal gain. One such instance of market manipulation is ‘pump and dump’ activity.
Pump-and-Dump
A pump and dump scheme involves artificially inflating the price of a stock through false and misleading information, only to sell the stock at the inflated price and upon the impending fall, leave the retail investors to pick up the significant losses. [1] However, SEBI’s proposed guidelines fail to address this concern in particular.
Finfluencers, in exchange for certain consideration, utilise this mechanism to personally trade stocks or to promote the interest of the promoter of a company or other SEBI registered intermediaries. [2]
One such case was the ‘Sadhna Scam’. The scam was executed through YouTube videos uploaded on two channels namely ‘The Advisor’ and ’Moneywise’. These two channels with lakhs of subscribers misled the public by recommending the Sadhna stock. This was backed by false and misleading claims as to the stock being bought by big mutual funds and the imminent takeover of the company by the Adani Group. The release of these YouTube videos saw a steep rise in price and trading volume of the said stock, predominantly contributed by retail investors. In the meantime, promoters and other persons with more than 1% holding in the stock took advantage of the given situation and increasingly offloaded their shares. The owner of these YouTube channels also sold their shares in Sadhna during the period in question, thereby contradicting their own recommendations in order to capitalise on the inflated price. [3]
Addressing Regulatory Gaps:
The discussion paper highlights that the activities of finfluencers (including such cases of pump and dump) go unregulated primarily due to the lack of any formal registration requirements. It proposes to define finfluencers as “persons who provide information and/or advice on various financial topics such as investing in securities, personal finance, banking products, insurance, real estate investment, etc. through social/digital media platforms/channels, and have the ability to influence the financial decisions of their followers.” [4] However, this seems to be in contradiction with the existing SEBI framework governing investment advisors. As per Securities and Exchange Board of India (Investment Advisers) Regulations, 2013 (“SEBI IA Regulations”), the term “investment advice” does not, for the purposes of the said regulations, cover any “investment advice given through newspaper, magazines, any electronic or broadcasting or telecommunications medium, which is widely available to the public…” [5]
As we can see, although the discussion paper aims to recognise finfluencers as persons providing financial advice, the specific medium through which such advice is transmitted (electronic means) is not yet covered by the proposed definition of “investment advice” Therefore, the definition of investment advice has to be amended to include the activities of finfluencers on various social media platforms. Only then can the registration of finfluencers be made mandatory.
There are two other notable shortcomings in the recommendations made under the paper. Firstly, there is no regard given to disclosure of the actual portfolio holding of such finfluencers. In such circumstances, it becomes difficult to discern whether the recommendations are personal opinions or paid promotions. The discussion paper seeks to impose restrictions on SEBI-registered intermediaries from associating themselves with unregistered finfluencers but fails to provide a significant framework to regulate and oversee the activities of finfluencers. However, in the absence of any disclosure requirements, it will be challenging for the regulatory authorities to determine whether these influencers are acting to benefit third parties or to further their own personal interests.
Second, as per Regulation 15 (6) of SEBI IA Regulations “An investment adviser shall not enter into transactions on its own account which is contrary to its advice given to clients for a period of fifteen days from the day of such advice.” [6] However, the failure to consider a similar requirement for finfluencers is of grave concern. This will not address the pump-and-dump strategies that finfluencers continue to employ.
Conclusion
While the registration of Financial influencers is essential to control fraudulent activities and enforce disclosure requirements, it remains unclear as to (a) how the discussion paper aims to regulate the finfluencers and their inclusion and (b) how these new requirements will align with existing laws. Considering the complexities of the Indian market, it will be interesting to see if SEBI navigates these challenges through appropriate regulations prioritising investor protection or if it will be reduced to a toothless watchdog.
References:
[1] Business Standard, Explained: What Is Pump and Dump Scheme in Stock Market and How to Be Safe, (2024), https://www.business-standard.com/markets/news/explained-what-is-pump-and-dump-
scheme-in-stock-market-and-how-to-be-safe-124060500381_1.html
[2] Suhana Islam Murshedd Karia Namasvi, Cutting the Cord: Analysing SEBI’s Move to Disrupt
Unregistered Finfluencers’ Business Model, Bar and Bench - Indian Legal news (2023),
https://www.barandbench.com/law-firms/view-point/cutting-the-cord-sebi-move-disrupt-unregistered-
finfluencers-business-model
[3] Explained: What the pump and dump Sadhna scam is about & what role does Arshad Warsi have
to play, The Times of India, Mar. 3, 2023, https://timesofindia.indiatimes.com/business/india-
business/explained-what-the-pump-and-dump-sadhna-scam-is-about-what-role-does-arshad-warsi-
have-to-play/articleshow/98395061.cms
[4] SEBI | Consultation Paper on Association of SEBI Registered Intermediaries/Regulated Entities
with Unregistered Entities (including Finfluencers), https://www.sebi.gov.in/reports-and-
statistics/reports/aug-2023/consultation-paper-on-association-of-sebi-registered-intermediaries-
regulated-entities-with-unregistered-entities-including-finfluencers-_75932.html
[5] SEBI | Securities and Exchange Board of India (Investment Advisers) Regulations, 2013 [Last
amended on February 07, 2023], https://www.sebi.gov.in/legal/regulations/feb-2023/securities-and-
exchange-board-of-india-investment-advisers-regulations-2013-last-amended-on-february-07-2023-
_69215.html
[6] Supra, note 3