Is SEBI’s Move To Rein in Fake Gurus Designed To Ring Fence Itself and Referral-driven Brokers?
After losses inflicted by fraud and mis-selling due to the Finfluencers-Trainer-Referral model have led to a furore on social media, the market regulator has stirred into action – much like the police in Hindi movies of the 1980s. Meanwhile, their victims have begun to demand a refund of training fees, sending the fake market gurus rushing to seek legal advice anticipating regulatory action. Will this really happen?
 
Over the past two weeks, I have written (Read: Trainers Who Lure Gullible Investors with Fake Trading Profits Need To Be Made Accountable) about the massive fraud being perpetrated by finfluencers. They have been providing fake evidence of hefty trading profits to lure investors to subscribe to training programmes and to open brokerage accounts; they have shown their willingness to peddle any product, service or opinion for a price, and they have been raking in the moolah through multiple channels: Fees to peddle opinions, earnings from YouTube videos, subscription fees from the training programme, and fat referral fees, commissions or even profit-sharing from brokerage firms. The size of a finfluencer’s income depends on the ability to attract subscribers/followers by churning out catchy content with tall claims about their trading prowess. Many resorted to doctoring ‘verified’ profit and loss (P&L) statements as proof of how their trading expertise translates to quick wealth.
 
The Securities and Exchange Board of India (SEBI) has responded to investors’ anger over such fakery with three short consultation papers issued between 25th August and 29th August. The question is: Will new regulation put an end to this fraud?
 
Earlier this week, Debashis Basu wrote (Read: SEBI’s Barks against Finfluencers. But it Needs To Bite) that SEBI is now clear that finfluencers are dishing out investment advice without being registered with SEBI as highly-regulated investment advisers (IAs) or research analysts (RAs). 
 
SEBI proposes to ‘disrupt the revenue model for such influencers’ by turning the screws on registered entities by preventing them from having any monetary or non-monetary relationship with unregistered agents, entities or individuals. Such ‘registered’ influencers would have to follow a code of conduct, display mandatory facts about themselves and have a grievance redress mechanism to address complaints. Fees paid to registered finfluencers will be through a centralised portal offering a fee-payment mechanism, thereby cutting out hidden payments. Mr Basu points out that the larger intermediaries with a reputation to lose may indeed comply, but SEBI has a poor record of stopping bad behaviour. (Read the SEBI paper here.)
 
Remember, SEBI is only at the stage of ‘consultation’ on the issue after the Advertising Standards Council of India (ASCI) has already tightened existing rules (Read: ASCI Places Additional Responsibility on Financial And Health Influencers, Extends Influencer Guidelines) on 18th August to declare that finfluencers must be regulated with at least one of the many financial regulators in India. The Union ministry of consumer affairs (MCoA) has also issued guidelines on influencers, but SEBI is still discussing the problem.
 
All SEBI has done so far is to make an example of a singular influencer, PR Sunder, who flaunted an expensive lifestyle that, he claimed, was earned through his trading expertise. Here, too, he entered into a settlement without admitting or denying wrongdoing, so SEBI has yet to prove its ability to successfully prosecute such wrongdoing.
 
Gaming the Referral Game 
A key reason for fraud and fakery becoming rampant is the referral fees paid by the largest broker firms to finfluencers who churn out hundreds of videos exhorting people to open accounts with select brokers, with the promise of mega-riches from trading. Large online brokers are paying referral fees of 10% and their commissions go as high as 60% for those who generate brokerage income above Rs2 lakh, say insiders.
 
As recently as April 2023, Nithin Kamath of Zerodha, India’s biggest brokerage firm, tweeted, “A key reason behind the success of @zerodhaonline is that we were able to grow thanks to referrals from our users. Over 10 lakh customers have referred their friends and family…”
 
This tweet does not mention the role of finfluencers and their financial arrangements, which have, perhaps, made a bigger contribution to its growth.
 
In response to a query, Mr Kamath tells me: “We have had a referral program right from day 1 of the business. The idea was to give another reason for our customers to talk about us. This was important as we didn't want to spend on marketing and advertising, bear an upfront cost, and then be forced to figure out ways to generate revenue to cover the costs. Upfront CAC (customer acquisition costs) is one of the core reasons for businesses to missell.” 
 
He further says the referral programme is similar to remisier/sub-brokerage payments and is limited to a 10% commission. Zerodha has a separate partnership programme which offers “up to 40% based on the number of customers and revenue generated.”
 
He also insists that “revenue sharing for life with the introducer is a standard structure in the capital markets, even in mutual funds and insurance.”
 
All this is, indeed, true and the secret behind the phenomenal growth of Zerodha and other discount brokerage firms. As for the finfluencer menace, Mr Kamath says, “I don't think anyone, including us, had anticipated this new type of entity, a finfluencer, to emerge. I think they got lucky to be at the right place and time post-COVID, and they ended up being categorised into traditional associated persons (APs), sub-brokers, or referral/ partner programs. They ended up becoming bigger and more quickly.” 
 
As someone who SEBI seems to consult on every market issue, Mr Kamath strongly believes that the quick fix offered by the three consulting papers will solve the problem and allow brokers to initiate action against finfluencers who operate outside the regulatory framework. (The rules also require brokers to file police complaints against wrongdoers, which is most unlikely to happen). 
 
I have a different view. I believe the new rules do not aim to curb wrongdoing at all since that is a very difficult proposition. The primary aim is to ring-fence SEBI and some of the big intermediaries from the complaints of those who lost money to snake oil salesmen and expect the regulator to investigate and get it back for them. 
 
Had there been no public exposure of the fake gurus and the consequent outrage on social media, neither SEBI nor the big brokerages, stock exchanges, or intermediaries would have felt any need to frame rules. After all, everybody—from the government to SEBI to exchanges to brokers benefits from the enormous frothy volumes generated by misguided traders.
 
After all, broker incomes have soared; SEBI’s fee income has shot up; stock exchanges and all market infrastructure institutions (MIIs) have become obscenely profitable because of transaction fees and charges, and the government’s earnings from securities transaction tax (STT) has rocketed; certification and training courses that support this gold-rush are also booming. The only losers are retail traders. Now consider some facts. 
 
First, the fraud and manipulation of finfluencers or even algo writers were not exposed by tech-savvy Zerodha or other intermediaries who had a ring-side view to their payments. It came from young, individual market participants who exposed the fraud on social media and pressed for regulation after having watched millions of investors lose money due to false promises. 
 
Second, a direct impact of regulation that will cut out fraud and hype and subject finfluencers to discipline and compliance will be on online brokerage firms and all the others I have named above. Nobody really wants a reduction in the new investors flocking to the market in the hope of mastering trading techniques that will make them multi-millionaires by age 30! If that happens, everybody stands to lose income or a slow down in their growth numbers. 
 
Thirdly, finfluencers, with millions of followers, are a useful tool for corporate India, public relations firms for reputation manipulation and those involved in market manipulation and pump-and-dump operations. They have been used to talking up dubious stocks (remember Brightcom, Café Coffee Day) and willingly attack or slander those of us who expose corporate frauds and market manipulation. The income earned from such disreputable behaviour will be untouched by SEBI’s effort to channel income through a designated portal. 
 
Clearly, there are too many vested interests who will want them to survive. Whether finfluencers continue to remain influential would depend on whether people who have lost money become smarter or the number of potential new fools entering the market declines. 
 
The million-dollar question is: What is the solution? What can SEBI do to curb false trading? My answer will not please the millions of traders who expect the regulator to protect them from their follies. 
 
The new regulations serve only one purpose—to offer some protection to those who enter the market with a calm head and are prudent enough to trade through registered intermediaries. In addition, SEBI will provide a broad-based performance validation agency that will obviate the concept of ‘verified P&L’ statements and, hopefully, provide investors with information that cannot easily be doctored. 
 
Beyond this, you are on your own. There will be no hotline to report your ‘suspicion’, triggering an instant investigation. If you fall for the pitch of snake oil salesmen, SEBI is not going to protect you from your folly. Worse, if you inform the regulator about specific fakes operating without registration, it will merely act as a post-office and forward your complaint to the police or simply ignore you. But that is a story for another column.
 
 
Comments
suketu
5 months ago
problem is 80% of the "bhangar cap"(in Vijay Kedia's words) stocks who no one wants to buy.they give brokers big commission to fool their clients.
adityag
6 months ago
At this point, SEBI is a joke. I'm sorry, but as a longstanding SEBI RIA that's how I feel. They love playing endless whack-a-mole. And in the end, they'll lose sight of the whole purpose -- which is to make our jobs easier and safe, which translates to better consumer experience.

The best system is one without any rules and let the market and consumers decide. If consumers have a problem, let them use SCORES or the justice system or even a good old tactic called "shaming" -- just make a viral post about said influencer and shame him/her to oblivion.

Endless rules, regulations only make things even worse, not better. It's like scoring a self-goal.
kpushkar
6 months ago
Best jobs in India without any accontability . All perks only!! Sebi, Rbi and perhaps SC !!
adityag
Replied to kpushkar comment 6 months ago
Exactly
pgodbole
6 months ago
Sorry to have to comment like this but if SEBI does nothing, then it is lax in regulation. If it does, then it is only ring fencing itself. In other words, damned if you do and damned if you don't.
rameshjrdhr5
6 months ago
No regulator can protect the gullible investors unless they sans to become gullible and educate themselves well on market literature.
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