Intermediaries pause finfluencers' dealings as Sebi mulls new norms

Some stock market intermediaries, such as brokers and mutual fund (MF) houses, have paused their associations with finfluencers ahead of the proposed regulatory tightening.

Industry sources said leading brokerages and fund houses have discontinued some of their arrangements with popular social media personalities amid a lack of regulatory clarity.

Intermediaries have started reviewing their existing contracts with any such financial influencer and increasing their surveillance on any entity using their names.

Last week, the Securities and Exchange Board of India (Sebi) floated two consultation papers to restrain intermediaries from associating with any unregistered entities, including finfluencers, who are typically used to promote products or services.

The regulator has also considered a new payment system to clip the wings of those spreading misinformation.

Based on public feedback, the regulator is expected to finalise the framework over the next few months.

Post pandemic, the rising popularity of social media platforms prompted many players in the market ecosystem to tie up with finfluencers to push their products or to educate investors.

However, the downside of this was that entities indulged in mis-selling products to gullible investors or carried out other serious offences such as front-running or initiating ‘pump and dump’ schemes.

Nithin Kamath, chief executive officer of the country's largest broking firm, Zerodha, too welcomed the regulations, saying they will 'potentially put an end to anyone mis-selling that it is easy to make money trading the markets'.

“If someone acts like an advisor or analyst (RIA, RA) without being registered with Sebi and is earning indirectly, try finding ways to plug that payout so no registered intermediaries can have any financial dealings. Without these explicit regulations, any broker creating their own rules around this has a large risk of backfiring, given the power of all the finfluencers today,” he said while answering queries from users on his social platform.

He added that although this will impact thousands of people who act as sub-brokers and partners for introducing customers, the dependency on such associations has declined.

However, finfluencers are not happy.

PR Sundar, who has recently settled a matter with Sebi while agreeing not to deal in the securities market for one year, says a blanket ban on people sharing knowledge is not right.

"Marketing affiliates or making money through some other sources like training is nothing wrong. Even movie stars and cricket players make a lot of money by advertising and promoting products and services," said Sundar, adding that people take positions on trading strategies at their own risk.

Another finfluencer with over 2 million subscribers on YouTube said that he would limit his associations to only fintech players, which do not fall under the regulatory purview of Sebi.

Another form of association under review by registered entities is the participation of their experts on podcasts and shows off finfluencers, and whether such individual appearances would also be a breach of the proposed guidelines.

“The tripling of demat accounts from 40 million in 2020 to 120 million in 2023, with 2 million being added every month, has created an unprecedented opportunity for finfluencers to exploit these newbies who are flocking the market. The new investors need to be properly educated and handheld. Instead, many finfluencers are luring them into dangerous areas like derivatives,” said VK Vijayakumar, chief investment strategist at Geojit Financial Services.