Every bull run is different from the previous one, not just in the type of stocks and sectors that lead it, but in the social changes it unleashes. The bull run that started in mid-2020 set off two major changes: one, an explosion of new account openings and second, a massive proliferation of social media handles and channels that dispense stock tips. In combination, they have become so large and influential that they mock at the three regulations of the Securities and Exchange Board of India (SEBI) that govern activities in these areas—investment advice, investment research and portfolio management. SEBI is now planning separate rules for financial influencers or fininfluencers, who give unsolicited financial advice on social media to ordinary investors on stocks, personal finance, mutual funds, etc. Will SEBI’s plan work?
Unfortunately, the genie is already out of the bottle and cannot be put back. The size, activity and influence of these people have become so large that SEBI’s onerous regulations for registered advisers look hopelessly ineffective and, those who follow them, feel like losers. The problem, SEBI must understand, is much bigger.
Financial consumers either want buy/sell recommendations or want their money managed. Buy/sell recommendations are governed by SEBI’s Research Analysts Regulations and Investment Advisory Regulations. Research analysts (RAs) issue research reports that provide financial and operational details about a stock, price history, recommendation, target price, etc. They are not supposed to know anything about the users of their reports. SEBI’s rules are framed with broker research in mind; there is hardly any effort to encourage independent RAs.
Investment advisers (IAs) go beyond this and advice on financial planning, construct a long-term portfolio, track the portfolio, suggest rebalancing, etc. Their advice is supposed to be customised and personalised. SEBI regulations for them are too tough. They cannot accept fees through credit cards, have to sign a 26-clause investor agreement, have to maintain records of every bit of advice given with the rationale for it, maintain telephone recording, emails, SMS messages and other legally verifiable record for five years. This is so impractical and tedious that the IA business has remained stunted. The explosion of demat accounts has hardly led to any growth in the advisory business.
However, this has not provoked any discussions within SEBI. The regulator’s job ends with rule making; it is not accountable for the outcome of the rules or their impact on the growth of the business. On the other hand, due to these rules, illegal advisory services are thriving.
Neither RAs nor IAs can accept clients’ money and manage it. For this, there is a third regulation covering portfolio management services. It is illegal for you do any of these three businesses (research, advice and managing money) without SEBI registration or following the regulations. But too many people seem to be violating it. Now, to understand how difficult SEBI’s task is, take a look at how many different ways these three regulations are violated.
YouTube: The social media of choice for illegal advice is YouTube, where fininfluencers post videos, mostly in Hindi or a regional language or even ‘Hinglish’ (a mix of Hindi and English), to attract newly-minted, non-English speaking investors from small towns. These videos have titles like “How to buy your first share”, “Get regular income from gold”, or “Earn 2.5 crores in 20 years! How?” When cryptocurrency was booming, they pushed cryptos and people lost millions. The moment they actually recommend a share, they are doing something illegal. They can only confine themselves to 'educational' videos but I doubt there would be any market for that.
Telegram/ Cosmofeed: While YouTube videos are needed for chart analysis and other visual displays of investment ideas and a bit of ‘show-and-tell’, Telegram is the most popular channel for hardcore stock tips. There are also new 'creator apps' which do the same job of one-to-many messaging like Telegram, such as Cosmofeed and Rigi. They also allow the creator to accept payments. You can pay in Rigi and get connected to Telegram and WhatsApp groups for the messaging (tips) part. I can see hundreds of such channels messaging stock tips daily. A tipster usually has a few thousand subscribers, when SEBI-registered advisers are struggling to get to hundreds.
Managing Money: Managing money without a PMS (portfolio management service) license has proliferated less than the first two categories but is still quite common. A recent spat on social media over a stock trader having given Rs1 crore to an options trader to manage was eye-opening. Within a few months, the options trader had lost 72%, put in his own money to compensate for the loss temporarily and then came out with 40% return. This has caused a lot of comment on both sides but few noticed that this activity was illegal.
I can see an exponential rise in the number of unregistered financial advisers. How big is this illegal market ? To get a sense of this, take a look at SEBI's sporadic orders on illegal advisers. One such order, issued a few days ago, reveals that this unknown service had managed to garner fees worth Rs6 crore. The promoter is absconding.
I sense about 200-300 people are making a few crores a year, some in double digits. I am not even talking of algo trading which is another huge illegal advisory and PMS market, that has grown to a monstrous size. In short, the massive size of this illegal business and the huge spread of finfluencers, across platforms such as Telegram, Instagram, WhatsApp, Facebook, and YouTube, makes me feel that SEBI has already lost the battle to control them. This only makes a monkey out of those who are registered and following the rules; but who cares?
(This article first appeared in Business Standard newspaper)