“SEBI’s job is to remove ignorance from markets and not stupidity.” Read what Sandeep Parekh, Nithin Kamath say
Sep 7, 2023
A consultation paper on regulating influencers was published by SEBI in response to worries about fraud and bad financial advice. On a podcast, Nithin, Abid, and Sandeep Parekh talk about the problem of finfluencers, SEBI's consultation paper, and the difficulties in regulating them.
Finfluencers, also known as financial influencers, have soared in popularity during the past four to five years. While many incredible individuals instruct others in trading and investing, there are also many who spread greed and misguided notions. Recently, capital market regulator Securities Exchange Board of India (SEBI)published a consultation paper on regulating finfluencers.
The SEBI published a consultation paper in August on the affiliation of registered intermediaries with "finfluencers," or digital and social media influencers who primarily operate in the fields of business and financial literacy. The decision was made in response to the finfluencers' recent rise in popularity and media attention, as well as a subsequent increase in fraud cases and the spread of incorrect financial advice on digital platforms like YouTube, Instagram, and X (previously Twitter).
The challenges of regulating finfluencers were discussed today by Nithin Kamath (Founder & CEO) of Zerodha, Abid (Co-founder & CEO of Sensibull), and Sandeep Parekh (Managing Partner of Finsec Law) on a Podcast. Let's look into what they have to say broadly.
According to Abid, the regulator hinted that they are worried about the financial influencers who are now playing a significant role in the business but are not subject to regulation. The regulator has stated in the paper that they are concerned about the fact that finfluencers are receiving incentives to sell goods, services, or securities and that they want to stop this. The meta of the paper states that they attempt to stop this by disrupting the revenue model of the finfluencers, which translates to the paper saying that registered entities like brokers, RAs, RIAs, etc. cannot give influencers any kind of incentives at all.
Sandeep Parekh, said that the capital market regulator has issued a consultation document as a result of the criticism SEBI has received over the past year, which claims that they are not actually taking charge of the securities market and financial markets.
In addition, Parekh pointed out that the enforcement angle would be demonstrated by the fact that, if you look at the SEBI website almost every week, they are passing some order against one person or another for violating the regulations governing investment advisors, research analysts, and unregistered investment advisers. That serves as this paper's context, in his opinion.
Parekh went on to note that SEBI is actually saying that as long as you are registered, it is alright for you to associate with others who work in our industry, such as brokers, financial advisors, etc. These people can utilise influencers to promote their services as long as the disclosure is provided. Additionally, if you are not registered, you may essentially do whatever you want because we have no authority over you. It’s freedom of speech.
"I don’t know how SEBI is going to actually deal with it if it gets to something worse than today because they’re getting a badge of honor from SEBI itself that okay, you are a registered SEBI finfluencer.
Based on what I have seen on Twitter, etc., it’s kind of atrocious quality, really, most of it doesn’t even qualify for education, but it’s a byproduct of the free money we have seen over the past two-two and a half years, and I think the biggest teaching is gonna be people burning their money.
Beyond a point, if somebody wants to throw their money in the ocean you can’t stop them so that seems to be SEBI’s stance. But broadly, I think SEBI’s mantra, which I also put in my book, is that SEBI sees this role as somebody who removes ignorance from the market and not stupidity, " added Parekh.
According to Nithin Kamath the consultation document seeks to eliminate some of these potentially conflicting motives. Should a finfluencer earn commissions from the products or services he or she promotes? Perhaps not. As Munger famously put it, "Show me the incentive, and I'll show the outcome." In order for something to exist in a manner that we all believe will work in the long term, perhaps taking away that motivation is not necessarily something bad. We do, however, require finfluencers—individuals who speak publicly about markets, teach others, and so forth.
Furthermore, Kamath added that it is a concern if someone manipulates their profit & loss (P&L) and shows it. There is no way around it: altering a P&L constitutes fraud. If someone posts a screenshot of a P&L, we would prefer to have a Verified P&L rather than a screenshot because at least then someone can't be manipulating the P&L itself by using photoshop, etc. to edit the screenshot.
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