Overview

In a country like India, which ranks amongst the lowest in financial literacy, the number of retail investors in the capital markets have surged past 10 million since the pandemic. A very large section of such retail investors is vulnerable to misinformation as the rapid rise in investors has also been accompanied by a growing presence of unregulated and unregistered individuals or entities, such as fin-influencers, who disseminate financial advice through digital platforms like WhatsApp, Instagram, Telegram, and YouTube. Since these entities have been operating without any regulatory oversight, it is challenging to determine their qualifications for providing such advice. Moreover, such unregulated financial solicitation has also raised concerns about unethical practices within the market; such as market manipulation wherein there are reports in the public domain which have alleged plausible collusion between the regulated entities and unregistered individuals or entities spreading financial and investment advisory. Accordingly to address such growing concerns, the Securities and Exchange Board of India (“SEBI/Regulator”) has released a consultation paper dated October 22, 2024 on recognition as specified digital platform (“SDP/(s)/Platform”). This consultation paper has proposed a framework to recognize SDPs that will regulate associations between regulated entities and third parties, such as financial influencers. In order to curb unregistered advice and unauthorized market claims, the consultation paper outlines measures such as verified label or badge system for entities registered with SEBI. An SDP is a digital platform that is identified by the Regulator that implements preventive and curative measures to avoid prohibited activities. For being recognized as an SDP, the platform must demonstrate compliance according to the standards established by the Regulator.

The consultation paper provides that all the persons who are regulated by SEBI like clearing corporations, registered depositories and stock exchanges along with their agents are prohibited from associating with individuals providing investment advice or performance claims regarding securities, unless those individuals are registered and authorized to do so, by SEBI. This restriction however, does not apply to associations made through an SDP which is under an obligation to prevent activities explicitly prohibited by the Regulator. The consultation paper further elaborates on the fact that, for an entity to be recognized as an SDP it must implement robust mechanisms to prevent and address violations of securities regulations. Here, the key requirement is to work in tandem with the Regulator by sharing relevant data and on its guidance. Additionally, the utilization of Artificial intelligence (“AI”) and machine learning tools (“ML”) has been incorporated for monitoring instances of impersonation and fraud, if any. It has been proposed that only SEBI registered and recognized entities provide market related content and advertisements. The new draft circular allows recognized SDPs to act as intermediaries for securities related content and advertisement subject to compliance with preventive and curative measures entrenched by SEBI.

Vide the consultation paper SEBI has proposed for incorporating technological advancements happening constantly, and that the Platform should have a system for escalating and reporting fraudulent content and blacklisting mechanism for repeat offenders. For ensuring expedition of the recognition process, it has been mandated that application for recognition as SDP be submitted within three months from the date of issuance of SEBI circular contained within the consultation paper on recognition as an SDP. The Platform is also under an obligation to implement verified badge or label system for SEBI registered entities and ensure that content and advertisements only from such registered entities is permitted. Platforms are authorized to flag unregistered entities for further scrutiny and remove their content or advertisements. There lies an underlying exception wherein the Regulator may permit entities not registered with SEBI and individuals creating content solely for investor education provided they do not offer services or recommendations, make claims about return or performance, or promote any related products or services.

Objective of the consultation paper

The Regulator made an observation that a new breed of finfluencers are indulging in malpractices such as paid promotion, front-running and practice of duping investors through fancy products, the propensity of which has increased. Through various social media channels they rob gullible investors and put the trading systems on risk. Ensuring the recognition of these platforms would ensure they do not enable illegal activities related to securities such as unregistered entities offering advice or making unauthorized claims about performance of securities and accordingly, SEBI has suggested SDP(s) to have comprehensive guidelines and system to identify, analyze and to auto- check the registration/recognition status of the intermediary/entity from the whitelist published by SEBI, or their agents from the whitelist published by Association of Mutual funds in India and stock exchanges. The draft circular that underlay the consultation paper further illustrates preventive and curative measures to be adopted by entities for recognition as an SDP under SEBI (Intermediaries) Regulations, 2008 (as amended), Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018 (as amended), and SEBI (Depositories and Participants) Regulations, 2018. Thus, these are preventive and proactive measures for preventing claims by entities not permitted by the Regulator.

Unclear areas of ambiguity

1. The consultation paper does not mandate all digital platforms to register as SDP(s). Instead, the protective and curative measures proposed by SEBI apply only to those platforms that voluntarily opt for registration as an SDP.
2. The inclusion of AI and ML by SDPs increases the risk of data breaches. SEBI has not adequately addressed the accountability and responsibility of data depositories, nor has it outlined a applicable framework for data monitoring and regulation.The consultation paper does not address the issue of unidentifiable individuals and faceless entities using digital platforms, making them difficult to trace or regulate. It would be prudent for SDPs to prohibit unregistered profiles or anonymous identities from disseminating financial advice without proper authentication as the proposed turn-around time for undertaking curative measure would allow ample time to such unidentifiable individuals to solicit financial information using the SDPs and thereafter vanish into thin air.
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Ancillary information

1. Prior caveats by SEBI: For addressing concerns related to unregistered entities and claims not permitted by SEBI, the Regulator notified SEBI (Intermediaries) (Amendment) Regulations, 2024, Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) (Fourth Amendment) Regulations, 2024 ad SEBI (Depositories and Participants) (Second Amendment) Regulations, 2024.
2. Established prohibition: Under the abovementioned regulations, the persons regulated by SEBI, stock exchanges, clearing corporations, registered depositories and their agents cannot have direct or indirect association with certain persons. They include persons who give recommendations in relation to securities unless such persons are registered with SEBI or permitted to give such recommendation. It also includes persons who make any claim, return of performance, in relation to securities unless such persons are registered with SEBI or permitted to give such claim or recommendation.
3. Exception: These provisions are not applicable in respect of association through SDP. An SDP is a digital platform specified by the Regulator which has mechanism in place to take preventive as well as curative actions subject to the satisfaction of the Regulator.

Snippets of the Draft Circular issued by SEBI on Recognition as Specified Digital Platform

1. Preventive measures: These measures are pro-active actions in place for the prevention of fraud, impersonation, claims by entities that are not permitted by SEBI and presence of entities not registered or recognized by SEBI. A few preventive measures have been suggested for specified SDPs:
   1. Policy on collaboration with SEBI: The policy laid down by the Platform should be to the satisfaction of SEBI for sharing the information related to securities market on their platform with SEBI whenever asked to.
   2. Analyzing content under the regulatory purview of SEBI: The Platform should have necessary technical tools in place for analyzing content related to securities under the regulatory purview of SEBI. The tools should have certain identification capabilities which include:
      1. Scrutinization: The ability to identify if the content or advertisement is related to securities market, if the content or advertisement is SEBI registered or not, if the person or entity disseminating such content or advertisement is SEBI registered or not, is in the nature of advice or recommendation and if the analysis is in affirmative, it should be able to scrutinize whether such entity is authorized to provide should advise or recommendation.
      2. Checking the nature of function: The responsibility to check whether the content or advertisement had any explicit claim of return or performance related to securities. Additionally, to check if such entity is permitted to make such claim or advertisement by virtue of being registered with SEBI or if it is solely from the perspective of providing education in securities market.
      3. Restraining redirection: One of the preventive measures also includes to observe if the content or advertisement redirected to any social media like WhatsApp, telegram or e-mail thereby functioning as advertisement for call to action.
   3. Policy on violation of securities law: There should be in place, a policy implemented by the Platform for taking measures to the satisfaction of SEBI for dealing with violations of law related to securities market including claims and advertisements rendered by entities not registered or permitted by SEBI.
   4. Policy on impersonation related to securities market: It has been suggested that there should be strict measure against impersonation of SEBI officials and persons regulated by SEBI, market infrastructure institutions (“MII/(s)”) and their agents. In case a Platform already has a policy falling under the ambit, an onus has been thrusted on them by the Regulator to demonstrate that such requirements are covered under the existing policy for preventing impersonation.
   5. Allowing entities providing securities market related content to operate on Platform: The Platform should have a policy allowing only certain entities from providing securities related content and advertisements. They include intermediaries registered with and recognized by SEBI and their agents, entities exempted under regulations issued by SEBI, entities providing content exclusively for the purpose of investor education subject to the fact that such person should not provide advice or recommendation directly or indirectly, or makes claim of return or performance and does not direct to avail any services related to securities.
   6. Verified badge or label system for SEBI regulated persons: It has been proposed that a system be instated in place to provide badge or label to SEBI registered persons for enabling users to distinguish between entities registered with SEBI and otherwise. This will enable the Platform to bring down the content and advertisements by unregistered entities.
   7. Policy on transparency and accountability: It is has been suggested that the Platform have a policy in place for submitting periodic reports and other reports when required by SEBI. This is in furtherance of providing information on identification and action taken by the Platform pertaining to frauds, impersonation, unregistered activities and claims that are not permitted.
2. Curative measures: These measures are required to mitigate the impact of non-perfection and preventive measures. They are required for restoring investor confidence and market integrity. They include:
   • Ability to analyze content on Platform: The Platform should deploy advanced AI and ML tools for such purpose. This would help in examination of violative content and entities if any.
   • Mechanism for escalation of unlawful content:

     1. Escalation By SEBI, designated SEBI regulated persons, and MIIs: It has been proposed that the Platform have a mechanism in place to enable reporting of unauthorized content related to securities market by SEBI regulated persons, SEBI and MIIs.

     2. Reporting by Platform users: A mechanism should be instated in place for providing an opportunity to the Platform users for flagging misleading content disseminated by unauthorized entities. This would generate intelligence for further examination of such content or advertisement.

   • Action on reported content and advertisement: The Platform should have in place a policy to take action to the satisfaction of the Regulator, promptly verify the regulated content and take appropriate action in the turn around time. Certain actions were enlisted that include taking down the reported content or advertisement, blocking such content or advertisement, preventing the transmission of reported content, deactivating links and videos and blacklisting entities that are reported offenders.
   • Type of action: The Platform is vested with the capability of dealing with actions according to the matrices provided in the draft circular. In case a violation is pertaining to an advertisement and content, the action shall be preventive or curative in nature. Further, if violation is relating to channel, on three instances of violation, the channel will be removed. If the violation is pertaining to an entity, the entity shall be delisted upon three instances of violation.

Turn around time for taking action:

1. Preventive measure: In case the punishment pertains to an advertisement and it attracts a preventive measure, the turn around time to take action for the violation should be before the advertisement goes live on the platform. If it pertains to a content or channel and attracts a preventive measure, turn around time to take action for the violation should be within twenty four hours.
   
2. Curative measure: In case the punishment pertains to an advertisement and it attracts a curative measure, the turnaround time to take action for the violation should be within twenty-four hours. If it pertains to a content or channel and attracts a curative measure, turnaround time to take action for the violation should be within seventy two hours.

Disputes between Platform and entities: In case there is a dispute between the Platform and entity, the entity may approach the Regulator and the decision of the Regulator would be final. Additionally, in case there is a dispute between the Regulator and the Platform, the Platform may approach the Securities Appellate Tribunal (“SAT”).