SEBI recently published a proposal to regulate digital platforms such as YouTube and WhatsApp that allow the dissemination of securities-related information. SEBI-regulated financial intermediaries may then “associate” only with “finfluencers” who share information on such platforms. Digital platforms seeking SEBI’s recognition must implement measures such as taking down, blocking and preventing the sharing of securities-related content posted on these platforms, blacklisting entities identified by SEBI and regular reporting requirements to SEBI.
As provocative as media reports of finfluencers misleading investors may be, the impulse to regulate speech must meet a high threshold. Free speech is a fundamental right, and the power of the state, especially unelected regulators, to impose “reasonable restrictions” on it must not be exercised lightly.
SEBI’s proposal warrants reconsideration for three main reasons. First, the regulation of speech can undermine the virtuous process of price discovery facilitated by the securities market. Second, it entails a disproportionate expansion of SEBI’s powers, without demonstrating that its existing powers are insufficient to deal with mis-selling. Third, the proposal warrants parliamentary oversight.
A key public good that a securities market produces is a price discovery process. The price discovered through trading in the public markets benefits everyone, whether or not they participate in the trading process. This price signal is a product of all kinds of views in the market — optimistic, pessimistic and even neutral. Controlling information dissemination undermines this price discovery process.
For example, when Hindenberg published a report about Adani group firms’ securities being overvalued, the Adani promoters published their reasons for why the report was misleading, and analysts (many among them, finfluencers) came up with their own opinions of what was true. Using this information, many people chose to sell, their counterparties chose to buy and others chose to hold the securities of Adani firms. Importantly, people made their own decisions based on the views they believed to be accurate. If their decisions prove to be wrong, they will correct their biases, and if they prove correct, this will increase their trust in the source of their information. Imagine a situation where the regulator restricted any side, the short-sellers, the Adani promoters or the analysts, from disseminating their views, apprehensive that they might be misleading. If this restricted information did turn out to be accurate, only a few people would benefit from it.
Not all speech in this marketplace will fit in the black-and-white zone of true and false. The veracity of every statement may not be known at the time of making it, and may or may not be discovered over time. In the cacophony of this marketplace, each speculator’s credibility is then built on her previous guesses. Pre-empting public speculation will deprive people of the benefit of the “good” speculators and the opportunity to form an opinion. The existence of many views is key to an efficient price discovery process.
That said, speech in the securities market is already regulated. Fraudulent, manipulative or deceptive speech in connection with securities is prohibited under the SEBI Act, with the possibility of criminal prosecution.
In 2003, SEBI enacted regulations that define some conduct as fraudulent, unfair or misleading. In particular, disseminating misleading or false “information or advice” through digital media, which is likely to influence investor decisions, is deemed to be a manipulative, fraudulent or unfair trade practice. Over the years, the list of such content deemed manipulative, fraudulent and unfair practices has expanded, and the standard of proof has lowered from “knowingly” to “carelessly” indulging in such speech. As a result, in many cases, neither knowledge, intention nor the level of care matter for a speech to qualify as fraudulent, manipulative, deceptive or unfair. Most importantly, these regulations apply to anybody, not just SEBI-regulated entities.
From the mid-2000s, SEBI further tightened the controls on securities market-related speech by mandating that those who wish to advise or opine on securities be registered as investment advisors or research analysts with SEBI. All client-facing persons associated with investment advisors and research analysts must pass qualifying exams and meet other eligibility criteria. Given their wide applicability, these regulations would squarely require finfluencers to register themselves with SEBI. Violation of these regulations entails civil and criminal consequences and non-monetary sanctions by SEBI. It recently used these powers to penalise unregistered finfluencers, and even settled some of these cases with hefty amounts.
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Given SEBI’s existing powers to punish unregistered finfluencers, the motivation to also regulate digital platforms on which finfluencers share information is unclear. Finally, SEBI proposes to issue a “circular” to regulate finfluencers’ speech on digital platforms. There are several problems with this unilateral expansion of jurisdiction.
The SEBI Act empowers SEBI to regulate securities market intermediaries, such as brokers, mutual funds, investment advisors, stock exchanges, and so on. The primary regulator for digital platforms is MeitY under the Information Technology Act, which specifically regulates including misinformation on these platforms. An expansion of SEBI’s jurisdiction to an entity that is not a securities market intermediary ought to be approved by Parliament. SEBI cannot give itself new powers except through parliamentary law. It is important to avoid potential jurisdictional conflicts with MeitY. Finally, from a principal-agent perspective, the expansion of an unelected regulatory agency’s powers must be subject to legislative oversight. Circulars do not undergo such oversight.
Given that the regulator published its proposal as a consultation paper, it seems to continue to believe in the virtues of the marketplace of ideas. This is a silver lining in an otherwise potential jurisdictional overreach.
The writer is an independent researcher
