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Sebi loopholes, bull run gave financial influencers wings…

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… but a bear market might just bring them to their knees with tighter regulations

Pranjal Kamra’s YouTube videos are expertly produced, be they 20-minute videos, dotted with pop up graphics, or 20-30 second ‘Shorts’ with view counts going up to five million. However, unlike your beauty or lifestyle—segments generally known for their influencers—Kamra operates in a very niche area: finance. Every three or four days, the 29-year-old dispenses knowledge and advice on everything finance to his subscriber base of 4.3 million. This includes stock market tips, personal budgeting, and lessons on economics concepts like shrinkflation.

Kamra, along with others such as Ankur Warikoo, Sharan Hegde, Rachana Ranade, and Akshat Shrivastava, are part of a growing community of influencers who’ve gained prominence. Their videos are simple, they speak in a mix of regional languages and English. Most importantly, though, they break down the mind-numbing financial jargon that leaves lay people scratching their heads.

Together, the names mentioned above have a follower count of 12.9 million people. That’s a significant number in a country with limited financial literacy and retail participation in financial markets. As of March 2022, India had a total of 41 million unique investors in mutual funds and 89 million demat accounts.

Kamra runs a fintech startup called Finology, which helps people with financial planning and investment decisions. “My YouTube definitely works as a prominent marketing channel for our products,” said Kamra. Finology is registered by the Indian markets regulator—the Securities and Exchange Board of India (Sebi)—as a registered investment advisor (RIA).

This is something most influencers don’t bother with. Being registered as an RIA or a research analyst (RA) brings with it rules and regulations that offer a guardrail of sorts for those who take the influencers’ advice. Under the current system, RIAs are expected to risk-profile their clients and proactively disclose any conflicts of interest.

A typical financial influencer operates in much more of a grey area, depending on advertisements and sponsorships to make their dough. But because they’re actively dispensing financial advice, they need a level of accountability that should be baked into regulations, argue those in the industry. “The advice that many finfluencers give is generic, underplaying risks and overplaying returns, and trying to ride the market waves,” Sumit Duseja, co-founder of TrueMind Capital, an RIA, tells The Ken.

The Ken ran the numbers on 20 recommendations on stocks and initial public offerings (IPOs)—implicit or explicit—made by big finfluencers over the past 18 months. The list includes names like Zomato, Indiamart, Paytm, Apollo Hospitals, Manali Petrochemicals, TCS and LIC. It’s a mixed performance. Around 11 of the 20 recommendations underperformed the bellwether market index BSE Sensex from the time of recommendation until now.

While Sebi recently called for barring celebrities from endorsing investments in crypto-assets, the regulator is yet to outline its approach or thinking about regulating online influencers. Sebi did not respond to a list of questions emailed by The Ken.

Even regulation cannot guarantee that what’s passed down is correct information, argue others. Unless the advisee directly pays an advisor for recommendations, it’ll be inappropriate to require a mandatory registration process, said Warikoo. It would also be hard to enforce. “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’ve earned,” he added.

The creation of something like a SCORES platform for influencers could rescue some of the problems that Warikoo 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 influencers above a certain following or anyone who recommends an investment?

These questions are likely to linger as the bull run-induced euphoria of ‘everything goes up’ settles down in a broader bearish turn.

Regulatory vacuum

Many investors come into the market due to wrong expectations set by some finfluencers, and that’s problematic, said Nithin Kamath, chief executive (CEO) of leading stock broker Zerodha. “When influencers are educating, it’s okay. But when they are actively advising, be it stocks or any other financial product or nudging people to buy or sell, then some regulation or some kind of licence requirement makes sense,” Kamath told The Ken.

While Shrivastava and Ranade did not respond to a detailed questionnaire, Warikoo told The Ken that he was not registered.

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 investment advice.

However, influencers still have to comply with certain regulations pertaining to disclosures of conflicts of interest, compensation, and trading. And that’s where most of them trip up. “Many financial influencers indeed use the exemptions of RA regulations along with relaxation provided to advice made in media under IA regulations to avoid regulatory scrutiny,” Sumit Agrawal, founder and partner at Regstreet Law Advisors told The Ken.

In a telling example of what can go wrong when the fences are missing, Sharan Hegde, a finfluencer, issued a confession of sorts last week. In a Linkedin post, he wrote about how he ended up promoting Hedonova, a seemingly shady investment entity set up by Anurag Bhatia who has been barred by Sebi.

Hegde’s original post has since been edited to remove the parts where he claimed that every single person who had invested through him in Hedonova had got their money back. Hegde did not respond to the questions sent by The Ken.

So while it seems that Sebi has given escape hatches to finfluencers under the current regulations, 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 the influencers now have.

Regulators have already begun the crackdown in other countries. In March, the Australian Securities and Investment Commission warned that influencers in the country could face up to five years in jail if they break laws on financial advice. An information sheet laid out handy examples of what constitutes financial advice and needs a licence to dispense. In China, influencers giving financial advice and discussing investments now need to have certification and licences.

Finfluencers in India often take cover under a shield that the content they put out is for ‘educational purpose’ and is not ‘advice’. But this argument may not cut much ice. Many comments of finfluencers qualify as financial advice, says the information sheet of the Australian regulator. It’s unlikely to be much different in India.

For instance, “I’m going to share with you five long-term stocks that will do well and which you should buy and hold” is likely to be financial product advice, says the Australian regulator’s information sheet. Many Indian finfluencers make similar statements.

Up, up, and away

A prime example of this would be the cryptocurrency market. In the last couple of months in 2021, it was hard to turn anywhere and not see an ad for crypto platforms. Celebs advertising these platforms got a lot of attention and social media influencers were keen to cash in.

And crypto companies were ready to pay a premium—between 2X and 5X a regular fintech, according to an executive at an influencer marketing firm. That flood of money has since turned into a trickle as crypto platforms deal with a slump in prices and a tightening regulatory environment, the executive added. The executive and others in the industry The Ken spoke to requested anonymity as they weren’t authorised to speak to the media.

The flipside of influencer marketing was stark in the case of Vauld, a prominent crypto lender that suddenly halted customer withdrawals. Even though it was marketed as a “fixed deposit” by influencers online, Vauld crumbled under the pressure of redemptions from customers. The platform currently owes users $402 million, with 90% of that money belonging to retail investors, according to a report from The Block.

“Unfortunately, what Vauld ran into is a classic bank run where the withdrawals were greater than the deposits,” said Warikoo. A bank run, though, is a charitable reading of what happened at Vauld, which now has a $70 million hole in its balance sheet. Among its many troubles was also the firm’s investment of $28 million into Terra, a algorithmic stablecoin project that was often criticised as an open ponzi scheme and blew up in May this year.

While crypto platforms typically pay influencers upfront to advertise their services, Vauld added a spin of its own. The platform would share between 20% to 40% of its brokerage fees with the influencer, according to two individuals familiar with the deals. “Since there is no up-front sponsorship payment, influencers also felt they didn’t need to disclose that the material is sponsored,” said the influencer marketing executive. Vauld did not respond to an email seeking comment.

Shrivastava and Warikoo were among the influencers that marketed Vauld’s platforms. When asked, Warikoo said he did his due diligence on the platform before recommending it and has put in his own money into Vauld’s offering as well. Warikoo added that he received an upfront payment of Rs 4.47 lakh ($5,600) for promoting Vauld but nothing beyond that.

While crypto is among the riskiest of assets—and has faced multiple clarion calls from the country’s central bank to ban it—financial influencers have also had quite a fascination with IPOs.

A company looking to go public hires influencers to ‘review’ its prospectus and drum up interest among retail investors, explained the influencer marketing executive. They added that those such as e-commerce firm Snapdeal and sportswear brand Campus Activewear were particularly active about hiring influencers to shore up interest in their offerings.

Campus opened for subscription in April this year. Snapdeal has filed an offering document with Sebi but is yet to go forward with its IPO. Given that such reviews happen outside of the Sebi’s RIA/RA norms, finfluencer activity on IPOs can also open up possibilities for murky business that happens in the absence of disclosures. In the context of IPO analyses and recommendations, a prominent finfluencer name that often came up in The Ken’s discussions with many market experts was that of Rachana Ranade.

Slippery slope

According to Agrawal, Sebi has been receiving complaints about finfluencers for some time now. In April 2022, it issued a cease-and-desist order to YouTube channel Profit Guruji. Earlier in January, it banned six people from accessing the securities market and ordered them to return all the money earned after complaints about their recommendations through a channel on encrypted messaging app Telegram.

“Given the wide use of social media and its impact on market behaviour… Sebi will bring in necessary changes in its regulations to widen its ambit and regulate activities of financial influencers,” said Agrawal.

Currently, the regulations most needed are guidelines on paid promotions, paid partnership and advertisements, said Parimal Ade, co-founder of InvestYadnya.in. InvestYadnya is registered with Sebi as a research analyst (RA) and runs an online investment planning platform. Ade also creates videos on YouTube and has a subscriber base of 465,000 on the platform.

While the Advertising Standards Council of India has issued guidelines for influencer advertising, Sebi stepping in seems imperative given the goings-on over the past year, think market experts. The recent slip-ups in the financial influencer world may have bolstered the voices calling for rules, but the trouble is, that’s easier said than done.

At a fundamental level, regulations, if too tight, might just infringe upon the freedom of expression in the country, says Deepesh Raghaw, an RIA and founder of PersonalFinancePlan.in. This might lead to a ‘chilling effect’ with people becoming reluctant to express their thoughts, thinks Raghaw.

Besides, unlike the limited numbers of RIAs (about 1,300) and RAs (about 900) in India, the number of finfluencers in the country is possibly much higher. There is no standard definition of a finfluencer—in theory, anyone with a social media account can become one, says Niraj Dugar, Partner, Holistic Prime Wealth, a financial products advisory and distribution firm.

“Telling everyone to get an RA or RIA licence will be too hard. So, maybe, there’s a need for a new regulation that takes these complexities into account,” said Zerodha’s Kamath.

Then, there is the question of regulatory bandwidth. Sebi already has its hands full, say many market experts The Ken spoke to. Bringing in a new regulation or many more people into the regulatory fold will only add to the burden without much to show on the enforcement front.

It’s a slippery slope, for sure. Some in the finfluencer community like Kamra would rather that they self-regulate than the Sebi throwing the rulebook at them. But the events of the past few months mean that the ship has sailed. In the meantime, those looking for investment advice from unregistered experts on public forums will have to take the advice with a pinch of salt. There are no free lunches.