When aiming to protect investors by eliminating fraudsters, what approach should one take? Should the focus be on pursuing the crooks, or imposing additional regulations and tracking requirements on legal, registered intermediaries attempting to run a clean business?
The Securities & Exchange Board of India (SEBI) thinks it is better to pursue the latter course. On 31st January, it released a consultation paper for public comment. It proposes a seemingly simple and efficient way to safeguard investors but may only result in adding another layer of needless compliance on registered and already compliant intermediaries.
It plans to create a special Unified Payment Interface (UPI)-based system to help investors identify registered market intermediaries and make payments safely. The idea is that unregistered companies won't have this special UPI address, making them easier to avoid.
The idea assumes that those who invest at the exhortation of friends, neighbours or members of their social media groups are invariably misled by unregistered and fraudulent entities. Hence, by creating a special UPI for registered entities, with a distinct UPI suffix for brokerages, mutual funds and banks—@payrightbankname or abc.brk or xyz.mf—with a green thumbs up to visually confirm payments to registered and verified entities, it will keep investors safe.
By analysing transaction data, SEBI believes that the UPI transaction limit from Rs2 lakh per day would take care of most investors and it may, at best, be hiked to Rs5 lakh per day.
The consultation paper also specifies roles and responsibilities for SEBI-registered intermediaries including the disruption of re-registering and switching from existing payment systems to the new one.
There is no mention in the paper of making UPI mandatory for payments; but it is clear that intermediaries cannot opt out of registration or offering the special UPI as a payment option. At the same time, investment in systematic investment plans (SIPs) of mutual funds and other recurring payments are usually direct debits based on standing instructions which already limits the benefit of an elaborate new UPI system.
At a first glance, a few registered intermediaries may even welcome a green thumbs-up symbol to indicate they are legitimate intermediaries; but will it truly protect investors, or create yet another bit of red-tape with its own compliance requirements?
If SEBI’s intention is to offer the special UPI as an optional safety measure, there’s no issue. That will make it like Twitter’s blue tick before it became X and started charging for it. On the other hand, if SEBI makes this mandatory for registered intermediaries, as suggested by the consultation paper’s tone, it becomes a different matter altogether.
Saving the Savers
For starters, it misses the entire psychographics of why investors go to unregistered entities. Barring the few who fall for cloned websites created by cyber-criminals, the vast majority who have invested with fake intermediaries do so for two reasons—greed and the fear of missing out (FOMO) on high returns that their social group claims to have earned through fraudsters. Otherwise, they are too lazy to do basic home work.
A combination of the above factors with mindless risk-taking also plays a role. I know of a Mumbai-based surgeon, who is such a keen investor that he had completed several levels of certification from the National Institute of Securities Management (NISM) and is fully familiar with SEBI’s registration requirements. Yet, he knowingly invested with an unregistered, Gujarat-based firm offering a portfolio management service (PMS) and lost money.
Secondly, thousands investors who lost money in the 32 failed brokerage firms on the National Stock Exchange immediately after the COVID pandemic were all offered high and unsustainable returns by ‘registered’ intermediaries. These investors lost several thousand crore rupees to registered intermediaries. The biggest of them, Karvy Stock Broking simply cheated its long term customers. So, mere registration and a special UPI offers no protection.
Thirdly, the long list of SEBI investigations, penalties and settlements covering front-running and cheating by registered entities is evidence enough that a green thumbs-up is only symbolic and not a major investor protection initiative.
Apart from imposing another layer of compliance and procedural burden on registered intermediaries, SEBI wants them to “conduct investor awareness programs through modes like SMS and e-mail communications, social media posts, audio-visual communications, prominent display on websites, etc, in order to empower investors with the detailed information about the presence of a unique UPI handle for payments to SEBI registered intermediaries.” This imposes another additional cost.
Investor awareness campaigns ought to be the regulator’s responsibility, funded through investor protection funds available to it. Yet, regulators routinely transfer these costs and responsibilities to registered intermediaries.
Isn’t it ironical that, while SEBI intends to impose additional costs and compliance on registered intermediaries, dodgy actors and fraudsters continue to operate with impunity (as evident from its recent action against Ketan Parekh, who was involved in the 1992 scam, central figure of the 2000 scam and had dodged SEBI’s 14-year ban from markets).
Meanwhile, foolish or greedy investors will still invest with unregistered entities. One segment that prefers unregistered intermediaries and the thriving ‘dabba’ / cash are those seeking to deploy black money from tax evasion, corruption and political funds. We also hear of well-known fund managers—all registered and legitimate—using dabba trades for front-running to make money after talking up stocks on television channels. SEBI itself has elaborated their modus operandi in its order against Ketan Parekh. Do why is there no serious effort to crack down on this completely illegal but thriving market?
In mid-2024, SEBI’s new rules for registered investment advisers dealt a huge blow to the community, followed by similar rules for research analysts (RAs) in late-2024 and early-2025 by prescribing onerous audits and compliances completely out of line with their revenue. Worse, it further hit their income by prescribing that fees can only be collected on a quarterly basis. The consequence: some of the best RAs announced that they are shutting shop, while many others are re-evaluating the feasibility of continuing. Top SEBI officials informally said that the regulator is reconsidering the rules but has done nothing so far.
If SEBI were to engage with investors, it would learn that most of them would prefer access to good advisers, who are being driven out of business, rather than gimmicks, like a special UPI, when multiple payment options already exist.
Ease of Doing Business
While it may be well-intentioned, SEBI’s action of burdening registered entities, already subject to enormous compliance requirements, is the exact opposite of decisive deregulation advocated by The Economic Survey 2024-25. The Survey suggests sweeping regulatory reforms and warns that excessive compliance burdens are hindering formalisation of business, stifling job creation and slowing down growth.
The Survey specifically exhorts the government to ‘get out of the way’ and allow businesses to focus on their core mission. It wants regulators to change the operating principle of regulations from ‘guilty until proven innocent’ to ‘innocent until proven guilty’. “Adding layers of operational conditions to policies to prevent abuse makes them incomprehensible and regulations needlessly complicated, taking them further from their original purposes and intents,” says the Survey. Ironically, SEBI’s proposal is completely out of sync with this suggestion.
SEBI’s propensity to dream up new layers of compliance for regulated entities has already reached a breaking point. Securities lawyer and former SEBI executive director, Sandeep Parekh’s recent article seeking a revamp of SEBI’s laws went viral for spelling out the vast verbiage (24,000 words) of regulations on insider trading and fraudulent practices. The author says, they only end up “cause harm to innocent people, and let the guilty free.” I have written several columns on how SEBI has prosecuted and hounded people over multiple levels of appeal, based on such ill-conceived regulations.
If the Economic Survey has to be more than an inconsequential pre-Budget formality, the finance ministry must ensure that its ideas are implemented on the ground—starting with SEBI.
Comments
jaishirali
14 hours ago
In my opinion, SEBI wastes time and effort on useless matters, but has no time to devote to major issues. SEBI loves to micro manage on issues like RIA fees, a business transaction that does not concern them. Leave aside the green thumbs, which anyway not a great idea, because some investors always believe they are too smart and end up being greedy till they lose money. Take the percentage of traded companies which is small compared to the listed companies, it's so easy for promoters to stop being compliant, get suspended from trading and make a monkey of their investors, what is SEBI doing about that ? Or the relatively large buy sell spreads in the retail debt market that may be dissuading investors ? Such issues and SEBI's dismal record on major legal cases matter more than green thumbs.
Ms Dalal, it appears from your article that you want SEBI to take the responsibility for alerting investors about the bonafides of the entities in which they want to invest.
Why should SEBI take this responsibility? A fool and his/her money are soon parted. Why should anyone bother to protect these foolish and greedy investors with their shady money?
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Why should SEBI take this responsibility? A fool and his/her money are soon parted. Why should anyone bother to protect these foolish and greedy investors with their shady money?