Daybreak - Regulating 'finfluencers' is a slippery slope

Episode Date: April 10, 2023

According to a survey by S&P, more than 75 per cent of Indian adults do not understand basic financial concepts. The gap is more when it comes to women. 80%.   So the rise of financial influencers who simplify complex financial jargon and provide investment advice is not really surprising. But often, they underplay risks  and overplay returns, and try to ride the market waves.In fact, SEBI, the market capital regulator, has been receiving many complaints and is working on creating a framework of strict guidelines to bring them under its control.But reining these 'finfluencers' in is a bit of a catch-22 situation.Tune in.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production.

Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get alert, as soon as we release our first video. episode, please follow intermission on Spotify and Apple Podcast or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. According to a survey by SNP last year, more than 75% of Indian adults do not understand basic financial concepts. The gap is even more when it comes to women, 80%. But in the last two years or so, there has been a dramatic increase in retail participation in the Indian stock market.

And one of the reasons for this is, of course, the pandemic when a lot of people lost their regular jobs. But still, it is safe to say that a large section of our country's population is financially illiterate. Now, taking this into account, if you wonder why you keep seeing those ads on YouTube and other social media platforms saying, invest your money on this share or that share and grow your money two times or four times, it's not really surprising, right? There is a dire need for demystifying the world of investments and finances. And here is where Finfluences come in. As ridiculous as that name sounds,

these financial influencers break down the mind-numbing financial jargon that usually leaves most of us scratching our heads. Their videos are simple and they speak in a mix of different regional languages and English. One could even argue that we need more folks like them. But there is a flip side to the whole thing. Many, many of these so-called Finfluencers operate in a grey area. They are not registered with Sebi, the capital markets regulator, and they depend on advertisements and sponsorships to make money. Sumit Doseja, the co-founder of True Mind Capital and RIA, or registered investment advisor, spoke to the Ken writers, Anand Kalyanaraman and Jaspid Kalra.

And here is what he told them, and I'm quoting, the advice that many Finfluences give is generic, underplaying risks and overplaying returns and trying to hide the market waves. End quote. Sebi has been receiving complaints about these financial influencers for quite some time now. So last week, Seby issued advertisement guidelines for investment advisors or IAs and research analysts or RAs. It said that the advertisements should include

all forms of communications issued by or on behalf of IAs and RAs, which can influence investment decisions of any investor or prospective investor. Now, while the demand for regulating for influencers is getting louder and louder, outlining rules for them is easier said than done. Welcome to Daybreak, a business podcast from the Ken. I'm your host, Nick Das Sharma, and I Don't Chase the News Cycle. Instead, thrice a week on Mondays, Wednesdays and Fridays, I will come to you with one business story that is worth understanding and worth your time.

Today is Monday, the 10th of April. Ankur Wariqu, Pranjal Kamra, Sharon Hegrey, Rachan Rana Day and Akshattra. Do any of these ring a bell? These are some of the top financial influencers in the country. Together, they have a follow account of nearly 13 million people. Now, in a country with limited financial literacy and retail participation in the state, stock markets, that is quite a big number. Camra runs a fintech startup called Phenology, which helps people with financial planning and investment decisions. He is a registered investment

advisor or RIA, but he is an exception. Most of these influencers do not bother with it. Wariko, for example, told again that he's not registered. Being registered as an RIA or research analyst with the Seby brings with it rules and regulations. These work as a sort of a guardrail for those who take the influencers' advice. Under the current system, RIAs are expected to risk profile their client and proactively disclose any conflicts of interest. So the Ken decided to check how solid their advice is. We ran the numbers on 20 recommendations on stocks and IPOs, both implicit and explicit, made by

big financial influencers between January 2021 to July 2022. The list included names like Zomato, India Mart, Ptm, Ptm, Apollo hospitals, Manali Petrochemicals, TCS and LIC. And what did we find? It was a mixed performance. Around 11 of these 20 recommendations underperformed on the Bombay Stock Exchange Sensex in the same period. Now, according to various news reports, Sebi has been working.

on creating guidelines for these influencers. But the last we heard of Seby coming up with these guidelines was in November last year. It is April now. Clearly, the Sebi is struggling. And for good reason, creating guidelines for these financial influencers is tricky business. And why is that? Stay tuned to find out. Many argue that even regulation cannot guarantee that what is passed down is correct information.

For example, Variku says that unless the advisee directly pays an advisor for recommendations, it'll be inappropriate to require a mandatory registration process. Meaning, if it is just free advice, why should it be regulated? It would also be hard to enforce. He says, and I'm quoting, once you get certified, are you free to talk shit? Because if there is no control thereafter, then this is just a policy administrator feeling great about the salary they were on. End quote. The creation of something like a Scores platform for influencers could rescue some of the problems that Varicle flagged. Scores is a Sebi portal for registering complaints against

Sebi regulated entities. But regulating online influencers is a tall order. To begin with, how do you even decide who to regulate? Should it be influences above a certain following or anyone who recommends and investment. Technically though, influencers can be unregistered. There are enough escape hatches in Sebi's current rules for influencers to keep doing what they do without going through the complicated registration process. For instance, Sebi regulations say that any investment advice given through media that is widely available to the public won't be considered as an investment advice. Nevertheless, influencers still have to comply with certain regulations that are to do with disclosures of conflicts of interest, compensation and trading. And that is where most of them

trip up. Sumit Agarwal, the founder and partner at Red Street Law Advisors, told the Ken, and I'm quoting again, many financial influencers indeed use the exemptions of RA regulations along with relaxation provided to advise made in the media IA regulations to avoid regulatory scrutiny. Last year, in a very telling example of what can go wrong when the fences are missing, Sharon Hegrey, a financial influencer, issued a confession of sorts in July. In a LinkedIn post, he wrote about how he ended up promoting Hedanova, a seemingly shady investment entity set up by Anurag Bhattia, has been barred by Seby.

So it may seem like Seby has given escape routes to these influencers under the current regulations. But the disclosure requirements also indicate that the body has the means to tighten the regulatory rope if it chooses to. But that may not be enough anymore, considering the kind of sway that these influencers have. So what can Sebi do then? Coming up next. Rimal Ade, a registered Sebi research analysts, says that currently the regulations most needed are guidelines on paid promotions, paid partnerships and advertisements. Now, last week, Seby did issue a set of guidelines for advertisements for investment advisors and research analysts.

But at a fundamental level, regulations, if too tight, might just infringe upon the freedom of expression in the country. At least this is what Dipesh Raghav and RIA says, because it might lead to a chilling effect with people becoming reluctant to share their thoughts. He does have a point. After all, let us not forget that financial influencers, whether registered or not, are still helping improve the country's almost dismal state of financial literacy. And also another important point to consider is this. Let's say hypothetically, all influencers register with the SEB.

But does Zebby have the bandwidth to regulate all of them? Will it be able to enforce all these guidelines? It is a slippery slope, as you can tell. Until then, maybe take their advice with a pinch of sort. Daybreak is produced from the Newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories,

newsletters, subscriber-only apps and podcast extras. Head to the ken.com and click on the red subscribe button on the top of the website. I am Snigda Sharma, your host, and today's episode was edited by my colleague Rajiv Sien.