Introduction
Securities and Exchange Board of India (SEBI), ensures transparency, fairness, and efficiency in the functioning of the Indian securities market. It regulates a diverse range of entities dealing with securities, including stock exchanges, brokers, depositories, and mutual funds; safeguards the interests of investors; promotes the development of the stock exchange, while also overseeing[i] the registration and regulation of investment advisers and other market intermediaries. In order to ensure transparency and investor protection in asset management and financial advisory sector, the SEBI (Investment Advisers) Regulations, 2013 (Regulations) were brought into effect.
The Regulations apply to individuals, corporations, limited liability partnerships, and firms offering investment advice. "Investment advice"[ii] under the Regulations encompasses recommendations on securities, investment products, and financial planning, delivered through various means except widely accessible public platforms like newspapers and electronic media. Compliance for investment advisors necessitates a valid SEBI registration certificate. Notably, social media financial influencers, who disseminate insights and opinions on financial matters, operated outside the purview of these Regulations. Unfortunately, instances of market manipulation through social media have emerged, involving the dissemination of false information, pump-and-dump schemes, and other deceptive tactics, distorting market sentiments and prices.
Regulatory bodies and law enforcement agencies have bolstered their vigilance, closely monitoring social media platforms for such manipulative practices. SEBI, for instance, took action against six individuals using social media to manipulate stock prices in January 2022[iii]. In May 2023[iv], SEBI settled an investigation against a finfluencer named PR Sundar, barring him, his company Mansun Consulting, and its co-promoter from the securities market for a year. The settlement included a payment of INR 60 million, which comprised of unlawful profits from unregistered advisory services provided on YouTube and Telegram, as well as interest on such unlawful profits. These instances underscore the imperative of regulating social media financial influencers to safeguard market integrity and protect investors. While existing regulations may not explicitly cover these activities, authorities are actively exploring measures to address these challenges and prevent market abuses.
In the present article, we discuss a recent case of Arshad Hussain Warsi & Others v. SEBI where the Securities Appellate Tribunal (SAT) addressed a YouTube driven pump-and-dump operation.
Facts of the case
SEBI had received information on price manipulation and offloading of shares by certain entities in the scrip of Sadhna Broadcast Limited (Sadhna). Apparently, misleading YouTube videos with false content were being published to entice unsuspecting investors to trade in the scrip of Sadhna. The videos were financed by Manish Mishra, the creator of the YouTube channels as a part of a marketing campaign. Once investors invested in the scrip, the said entities would offload their holdings at an inflated price, which is also known as a ‘pump and dump’ scheme. Mr. Arshad Warsi (Mr. Warsi), one of the parties in this instant case, was introduced to the creator of these YouTube channels through a professional assignment and was persuaded to trade in the shares of Sadhna. Subsequently, Mr. Warsi along with his wife, his brother, and talent manager (collectively Appellants) bought and sold shares of Sadhna.
Through an ex-parte ad interim order, SEBI classified the 31 parties involved in the case into three distinct groups. The first group consisted of individuals such as Manish Mishra, who are responsible for spreading misleading messages through YouTube channels. The second group comprised of individuals who were net sellers/promoters of Sadhna and made profits. These individuals held Sadhna shares at the beginning of the examination period either as promoters or shareholders and engaged in trading activities resulting in net selling of shares.
The third category included volume creators who were individuals outside the net sellers group. These individuals actively bought and sold shares of Sadhna during the examination period, contributing to increased trading volumes and generating interest in the scrip. The Appellants were classified as both volume creators and profit makers and were held responsible for contributing to a rise in trading volumes and interest in the scrip of Sadhna and running a ‘pump and dump’ scheme.
SEBI ordered the confiscation and retention of the profits gained by the Appellants and also imposed a ban on their future access to the securities markets. The Appellants were also instructed to deposit the impounded amount in a scheduled bank within 15 days, and a lien in favor of SEBI was to be created on these funds. Additionally, they were directed "not to dispose of or transfer any assets, whether movable or immovable, or create any interest or charge on such assets held in their name."
Aggrieved by these directions, the Appellants challenged SEBI’s order before SAT.
SAT’s order
SAT observed that the only allegation against the Appellants was that they were volume creators who had made significant profits and were connected to Manish Mishra. SAT noted that this connection was for other unrelated professional assignments. Also, there was no connection of the Appellants with the other accused, and they were neither involved in the making/distribution of the videos on the YouTube channels, nor did they feature in such videos. Therefore, SAT held that there was no finding by SEBI that the Appellants were connected to Sadhna or its shareholders, or key managerial personnel, nor was there any finding that the Appellants had induced unsuspecting investors to buy the scrip in question. With regards to the alleged profits made by the Appellants, SAT was of the opinion that “a person dabbles in the stock exchange to make profits and there is no harm if a person buys and sells the shares to make profits.”
Additionally, SAT reiterated that an ad-interim order can be passed only in case of urgency or if the party is about to dispose of the property. This power must be exercised with extreme caution and should be resorted to only “if it is necessary to do so in order to protect the interest of the government revenue”. In the present case, SAT was of the view that SEBI’s order was harsh and unwarranted and passed in haste without considering essential facts and was therefore unsustainable.
It should be noted that SAT has not decided the matter on merits and was only deciding the limited issue of whether SEBI’s order imposing ex-parte ad-interim order was justified. SAT has clarified that investigations are still ongoing, and the possibility of the Appellants being involved in the manipulative scheme cannot be ruled out. However, at this stage, SEBI’s order cannot be allowed to stand as it is bereft of any evidence against the Appellants. Thus, SAT granted the Appellants relief by partly setting aside the directions issued by SEBI against them. They were restrained from trading in the scrip of Sadhna during the pendency of the investigation, as against the original blanket ban on trading on the stock exchange. Moreover, they were directed to deposit 50% of their alleged unlawful gains in an escrow account, as against the earlier 100%.
Our thoughts
The recent order by SAT attempts to make ‘evidence’ and ‘reasonableness’ the foundations on which SEBI should base its findings. Though in this case SEBI acted promptly to protect the gullible small retail investor, however, in trying to do so, it may scare away genuine finfluencers. In April 2023, SEBI introduced an 'Advertisement Code for Investment Advisers and Research Analysts[v],' requiring prior approval from a SEBI-recognized supervisory body for any communication that could influence investment decisions. However, it seems that finfluencers often evade registration under these regulations, bypassing the intended protection for clients' best interests. In 2021, the Advertising Standard Council of India released ‘Guidelines For Influencer Advertising In Digital Media[vi]’ specifying disclosure requirements for brand collaborations, advertisements, and paid partnerships on all platforms. Despite these provisions, the problem of market manipulation using technology platforms continues.
It should be noted that other countries have introduced reforms to regulate finfluencers. For instance, France recently passed a law[vii] making it unlawful for influencers to create paid content promoting financial products including cryptocurrencies. Influencers and companies caught violating the law could face up to two years in prison and Euro 300,000 in fines. On 17 July 2023, the United Kingdom published a consultation paper titled ‘Financial promotions on social media’[viii]. It recorded a substantial increase in finfluencers promoting financial products and held that a breach of the provisions of its securities law by finfluencers is punishable up to two years imprisonment, unlimited fine, or both. Countries like New Zealand[ix] and Australia[x] have also introduced specific provisions wherein an unregistered finfluencer doling out investment advice can be held liable for a hefty penalty.
However, it is crucial to acknowledge especially from the experience of Indian markets that regulations alone may not entirely resolve the issue of unscrupulous finfluencers, especially given the rapidly evolving technology that extends their reach. Relying solely on licensing or registration requirements for regulations may not be sufficient to address the complexities of this matter effectively. Alliance between registered investment advisors and finfluencers can prove to be opportunistic for both parties while also raising investor awareness and protecting them from any untoward risks. It is submitted that SEBI may focus on creating an enabling regulatory regime where finfluencers may continue to work based on voluntary online disclosures accessible to SEBI or a monitoring agency appointed by SEBI on real time basis of all their recommendations. The disclosure may be backed by undertakings, given using technology platforms, that the finfluencer has no conflict of interest in giving the said advice or recommendations. Any misrepresentations in such disclosures or undertakings should lead to severe financial consequences, which should not be limited to only unlawful gains by the finfluencers and their co-conspirators but also losses suffered by retail shareholders. Efficient enforcement procedures backed by technology-based evidence gathering rather than enunciation of mere rules may be the way forward to limit the menace caused by few to the detriment of the genuine technology savvy financial advisors.
Authors: Souvik Ganguly, Altamash Qureshi and Janhavi Sawant
The information contained in this document is not legal advice or legal opinion. The contents recorded in the said document are for informational purposes only and should not be used for commercial purposes. Acuity Law LLP disclaims all liability to any person for any loss or damage caused by errors or omissions, whether arising from negligence, accident, or any other cause.
[i] Section 11 (2)(b) of the Securities and Exchange Board of India Act, 1992
[ii] Regulation 2(1)(l) of SEBI (Investment Advisers) Regulations, 2013
[iii] https://www.livemint.com/market/stock-market-news/all-about-sebi-s-war-on-stock-tips-on-social-media-11642098833866.html
[iv] https://www.sebi.gov.in/enforcement/orders/may-2023/settlement-order-in-respect-of-mansun-consultancy-private-limited-mr-p-r-sundar-and-ms-mangayarkarasi-sundar_71701.html
[v] https://www.sebi.gov.in/legal/circulars/apr-2023/advertisement-code-for-investment-advisers-ia-and-research-analysts-ra-_69798.html
[vi] https://asci.social/assets/files/ASCI%20Guidelines%20-%20Influencer%20Advertising%20In%20Digital%20Media.pdf
[vii] https://www.legifrance.gouv.fr/jorf/id/JORFTEXT000047663185
[viii] https://www.fca.org.uk/publications/guidance-consultations/gc23-2-financial-promotions-social-media#:~:text=Unauthorised%20persons%2C%20such%20as%20social,might%20constitute%20a%20financial%20promotion.
[ix] https://www.fma.govt.nz/library/articles/guide-to-talking-about-money-online/
[x] https://asic.gov.au/regulatory-resources/financial-services/giving-financial-product-advice/discussing-financial-products-and-services-online/