Regulating The Unregulated - Do Telegram Investment Advisers Fall Under SEBI's Ambit
Author: LawSphereX
Category: Corporate & Insolvency
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REGULATING THE UNREGULATED: DO TELEGRAM
INVESTMENT ADVISERS FALL UNDER SEBI'S AMBIT?
Dipesh Nassa, Narsee Monjee Institute of Management Studies
ABSTRACT
To be an investment adviser, registration under SEBI regulations is mandatory. Within these regulations, there exists a loophole by use of which many Telegram channels are offering seemingly free investment advice and thereby soliciting paid consultations. The research aims to find out such practices and analyse, in different ways, the exception to the definition of “investment advice” with the help of legal cases (SAT & SEBI orders) and legal principal ejusdem generis. The research emphasizes the need for clarification by official bodies to address the ambiguity that exists by reason of the loophole in the definition of “investment advice”.
INTRODUCTION
The Securities and Exchange Board of India (‘SEBI’) is the statutory body which is responsible for regulation of Indian securities market and runs with the objective of investor’s protection. SEBI is empowered to make regulations for these purposes. One of the active regulation published by SEBI is the Investment Advisers Regulations (‘IA Regulations’) of 2013. The purpose of IA Regulations is to prevent investors with little or no experience from investing based on advice taken by unexperienced investment advisers. Introducing IA Regulations also becomes significant because established companies with a strong brand reputation in other areas (products, services, etc. ) could leverage their existing client base to offer investment advice despite lacking relevant qualifications.
The established brand name could lead to a high number of clients trusting and potentially losing money on such advice. Similarly, social media influencers who have gained fame through unrelated activities might start promoting investment-related services like groups, educational courses, YouTube channels, or Telegram channels. The IA Regulations serve to protect investors from these self-proclaimed advisers by ensuring that only qualified and registered individuals can provide investment advice in the securities market. Investment adviser, as defined under clause (m) of regulation (2) of IA Regulations means “any person, who for consideration, is engaged in the business of providing investment advice to clients or other persons or group of persons and includes any person who holds out himself as an investment adviser, by whatever name called”.
Alternatively, investment advice, as defined under clause (l) of regulation (2) of IA Regulations means “advice relating to investing in, purchasing, selling or otherwise dealing in securities or investment products, and advice on investment portfolio containing securities or investment products, whether written, oral or through any other means of communication for the benefit of the client and shall include financial planning”. However, there is an exception to the definition of investment advice stated in the same clause as “Provided that investment advice given through newspaper, magazines, any electronic or broadcasting or telecommunications medium, which is widely available to the public shall not be considered as investment advice for the purpose of these regulations”.
The exception, which states that, “any electronic or broadcasting or telecommunication medium, which is widely available to the public shall not be considered as investment advice” presents several challenges. A key issue is the ambiguity surrounding the specific activities excluded from the definition. This ambiguity is exploited by certain Telegram channels. They pre-emptively declare they are not SEBI-registered and offer "free" investment advice within their publicly accessible groups. However, these channels often include messages directing interested clients to contact them for "further investment advice" (presumably paid). The research paper seeks to determine whether such veiled practices fall within the regulation's exemption for widely available public advice.
LITERATURE REVIEW
1. Gurtej Walia (2024)1
This research paper focuses on the challenges of regulating FinFluencers in the Indian stock market. The paper contends that SEBI has to re-write its current framework to reflect the massive sway social media wields over investors’ choices. Although SEBI has established regulatory bodies, more stringent regulations are regarded as necessary. In this regard, the writer puts forward tighter disclosure requirements and more stringent penalties like those implemented in Australia and USA as potential models for India. Furthermore, public campaigns are also suggested in this study while advanced monitoring technologies can be adopted to enhance regulatory compliance efforts.
Also, further opportunities for research abound if one opts to delve into ongoing discussions about classification of FinFluencer advice while at the same time not ruling out possibility of self-regulation within this rapidly growing online community.
2. Kirthana Singh Khurana (2023)2
It inquires into the conversation about regulation of influencers who give financial advice on social media as Finfluencers in India. The author says that lack of regulations exposes investors to unqualified or biased advise. But things may not be taken lightly because freedom of speech comes at a heavy price, since stricter disclosure requirements and possible penalties could help promote better risk management practices. This paper examines regulation in Australia, New Zealand and Singapore stressing licensing and clear disclaimers as important aspects. It is 1 Gurtej Walia ‘The Role of SEBI in Regulating Social Media Influencers in the Indian Securities Market’ (2024)
2 Kirthana Singh Khurana ‘FINFLUENCERS AS INVESTMENT ADVISORS—TIME TO REIN THEM IN?’
(2023) imperative that there’s cooperation between SEBI, ASCI, and the Consumer Affairs Ministry for successful control. The author concludes that it is necessary to regulate financial advice while at the same time promoting financial literacy so as to protect investors and ensure market stability.
3. Puja Tiwari (2021)3
The present paper explores how different media advisories impact upon an investor and stock prices. The author claims that the mass media have a profound effect on the actions of investors, for the most part, through emotional manipulation and taking advantage of psychological biases like herding and authority bias. This prompts the uninformed investors to rely more on media, thereby leading to brief upsurges in volume traded as well as stock prices. For instance, it uses a news anchor’s stock recommendations as the example. To conclude with our thoughts about this article, educating investors about these heuristics is essential if they wish to make informed choices based on firm fundamentals rather than emotions from media induced hype.
4. Prashant Gupta and Sammith S (2019)4
Elon Musk’s tweets and WhatsApp rumors in India are some of the examples from this research paper that demonstrate how stock prices are significantly affected by social media posts. The author suggests that such uncontrolled flow of information is a problem for securities regulators and thus advocates for stricter corporate disclosure requirements. It is important to emphasize the centrality of enhanced dissemination policies as well as regulatory collaboration so as to prevent any negative consequences associated with information asymmetry or market instability that would be caused by social media.
RESEARCH
FINDINGS
National Stock Exchange (‘NSE’) - Press Releases Press releases in the NSE, under “Corporate Communications” department have been consistent with investor warnings that they issue. These warnings are usually titled “Caution for Investors” and are published on the official NSE website. Some examples include the following: among others, releases that were dated July 1, 2024; July 3, 2024; and July 5, 2024.
3 Puja Tiwari ‘Effect of Media on the Behaviour of Investors and Stocks’ (2021)
4 Prashant Gupta & Sammith S ‘Impact of Social Media on the Securities Market’ (2019)
Furthermore, press releases mention the financial advisor’s name and reference number. Besides this information, they also give other details such as links to websites where one can get advice regarding investment or titles of YouTube channels as well as names of Telegram groups through which these advisors operate. The releases explicitly warn investors to steer clear of these advisers' recommendations and not to use them for investment decisions in any way. Furthermore, the releases highlight that investors who choose to engage with these unregistered advisers will not be eligible for the NSE's investor protection benefits, including dispute resolution and grievance redressal mechanisms. SAT & SEBI Orders Order In the matter of Finassure Financial Services PVT. LTD In the given matter, the accused Company was engaged in selling of a software.
As per the company, the software in question was only engaged in giving indications based on the technical and financial parameters opted by the customer and there was no advice or interference from the appellants. The case was brought before an appellate tribunal for review, i. e. , Securities Appellate Tribunal which stated that to sustain a charge of providing unregistered investment advisory services, it has to be shown that the software would be recommending the names of specific scrips based on which clients would make their trading decisions. The allegation was solely based on the available evidence, which consisted of issued show cause notices including the website of the Company. However, after examining the evidence, no conclusive proof of investment advisory services being offered by the Company was found.
Consequently, the legal action against the Company and its director was dismissed. Final Order in the matter of Stock Recommendations using Social Media Channel Telegram SEBI's investigation revealed that the accused engaged in manipulative practices that artificially inflated stock prices. The investigation determined that the accused bought specific shares and then disseminated buy recommendations for those same stocks within their Telegram channel. However, they failed to disclose their own holdings and their intention to sell the stocks at a profit. Subsequently, the accused sold these shares at an inflated price, contradicting their own buy recommendations.
The accused contended that their Telegram channel contained a disclaimer for subscribers, stating that all investment recommendations were for study purposes only and that viewers should consult a financial adviser before making investment decisions. However, SEBI countered that the presence of a disclaimer advising viewers to consult a financial adviser did not absolve the accused. SEBI argued that the substantial unlawful profits gained through artificial stock price manipulation constituted fraudulent activity. Consequently, the final order imposed penalties on the accused. Interim Order in the matter of unregistered investment advisory activities by Kabir Financial Services Pvt. Ltd.
/ Sayyed Shujauddin A complaint was filed with SEBI alleging that the accused operated private Telegram channels offering misleading and fraudulent investment advice, potentially defrauding a significant number of Indian citizens. SEBI's subsequent investigation confirmed these allegations. The Telegram channels only amended their disclaimers to explicitly state their lack of SEBI registration after being contacted by SEBI. This action confirmed SEBI's suspicions that the channels were previously portraying themselves as SEBI-registered advisers. Consequently, SEBI classified them as unregistered investment advisers who had engaged in misrepresentation and issued an interim order against them.
Interim Order cum SCN in the matter of unregistered investment advisory activities of Mohammad Nasiruddin Ansari/ Baap of Chart In the given matter, the investigation revealed that the accused persons, while operating as an unregistered investment adviser, misrepresented themselves as a social media expert on their social media channel. They used this deception to lure investors into purchasing educational courses. These courses, however, contained false information presented under the false pretence of providing educational training. The investigation determined that over a period of approximately 2. 5 years, the defendants accumulated an estimated Rs. 17. 20 (approx. ) crore through fraudulent means. Consequently, an order was issued against them, declaring them to be uncertified investment advisers in violation of the IA Regulations.
Telegram Groups A review of several Telegram channels revealed a concerning practice. Majority of the telegram channels disclose within their description, disclaimers such as a lack of SEBI registration, being for educational purposes only, or advising consultation with a financial advisor before investment decisions, and continue to disseminate unpaid investment recommendations concerning securities. This unsolicited guidance is uploaded periodically, and often accompanied by the channels' personal contact details for the purpose of soliciting paid recommendations.
RESEARCH
ANALYSIS
The principle of ejusdem generis suggests that the general phrase "electronic or broadcasting or telecommunications medium" should be interpreted in light of the specific examples preceding it: "newspaper" and "magazines. " Following this principle, the general phrase would likely be limited to mediums similar to newspapers and magazines. These mediums typically offer one-way communication and lack the ability to personalize investment advice for specific individuals. Therefore, under ejusdem generis, the following types of investment advice delivered electronically, through broadcasting, or telecommunications might not be covered by the exemption: o Advice tailored to an individual's financial situation and goals. o Platforms where users can directly interact with the adviser for personalized recommendations. o Advice delivered through live streams or chat applications.
• SEBI and stock exchanges have issued periodic advisories and press releases cautioning investors against seeking financial advice from unregistered advisers. These advisories emphasize the importance of conducting due diligence to verify an investment adviser's registration status. SEBI also provides various methods for investors to confirm an adviser's registration. • In the order against Finassure Financial Services Pvt. Ltd. , the SAT offered a significant interpretation of "investment advice" as defined in Clause (l) of Regulation (2) of the IA Regulations. The SAT's ruling clarifies that a recommendation for a specific security is a necessary element for an act to be considered investment advice.
Another SEBI Order (In the matter of Stock Recommendations using Social Media Channel Telegram) order addressed the legality of investment advice disclaimed as "for study purposes only" with a recommendation to consult a financial adviser. While the order deemed the advice in question a violation due to its association with manipulating stock prices, it left the broader question of unregistered advisers offering disclaimed advice unanswered. The ruling's focus was on the unlawful motive behind the advice, not solely on the disclaimer itself. • In the interim order against Kabir Financial Services Pvt. Ltd. , SEBI passed an order against unregistered investment advisers stating that the alleged parties were involved in providing investment advices on telegram by charging subscription fee.
Notably, in this interim order, one of the SEBI’s justification was that the alleged parties had not stated anywhere on their telegram channel that they are not registered with SEBI as investment advisers. So this leaves a scope of question that whether, for unregistered advisers, is it legal to give investment advice (paid) by clarifying beforehand that we are not investment advisers? While the legality of pre-informed, paid or unpaid advice remains somewhat ambiguous, research suggests that punishment is only triggered when such advice involves illegal activities like fraud or price manipulation. • Even in the interim order against Mohammad Nassirudin, the alleged party was found to be promoting himself as stock market expert on various social media platforms to lure investors for enrolling in his “educational courses” which induced them to invest in market.
The interim order deemed the revenue generated from these educational courses to be unlawful due to the underlying illegal activity of price manipulation, which served as the basis for the punishment. • By analysing these orders, it can be confidently stated that a person, on a social media platform, can claim expertise in the stock market and offer investment advice without compensation as long as the person explicitly disclaim about non-registration as a financial adviser.
RESEARCH
METHODOLOGY
This research methodology centred exclusively on the utilization of primary source materials. These primary sources were obtained directly from the official websites of the NSE and SEBI.
CONCLUSION
SEBI is entrusted with protecting investors and upholding ethical practices within the securities market. However, a potential loophole exists within the exemption clause of Regulation 2(l)(2) of the IA Regulations. This ambiguity, as detailed in the paper, is being exploited by many, particularly on social media platforms, leaving investors vulnerable. While the principle of ejusdem generis offers a valuable interpretive lens for the regulation, it should not be the sole basis for determining the scope of the exemption. Other crucial factors include the overall purpose of the regulation, the potential for investor harm, and the specific circumstances of each case. However, the official bodies such as SEBI and NSE have periodically warned investors to refrain from investing based on investment advice by unregistered or suspended investment advisers and research analysts.
A critical question remains unanswered: can individuals, who are not registered with SEBI, legally offer paid investment advice, even if they explicitly disclose their unregistered status? Official clarification, be it through regulations, judicial orders, or established legal precedents, would significantly reduce this ambiguity.