Can SEBI crack down on unregulated social media financial gurus?

The urge to make gains without putting in much effort is widely prevalent in our society and that has created an insatiable demand for miracles. Unscrupulous gurus and babas have flourished for this reason. As have the so-called financial gurus on social media who promise astronomical returns on investments of a few thousand rupees, and that too within a trading day. Let's call it miracle-mongering in markets, a practice that cannot be totally stopped but can certainly be curbed by the Securities and Exchange Board of India (SEBI).

SEBI was set up at a time the markets were ruled by deep paranoia of massive scandals and scams. Thus, it focussed more on investor appeasement rather than investor empowerment. Why else would advertisements of financial security issuances get away with reading out the caveats and statutory warnings at a rapid speed?

The demand for miracles in stock markets and the supply of tips have soared in recent years with the all-pervasive spread of social media and the decentralisation of information. Fake Twitter profiles are offering free tips and promising mouth-water returns to trap naive investors into joining the Telegram channels of the so-called financial gurus.

On Telegram, many such financial gurus run paid channels, on which they offer stock tips. This is largely an illegal operation because they aren't SEBI-registered research analysts who can suggest stock calls or investment advisors who are allowed to even create portfolios. They don't take the licence because it places a lot of trading restrictions on them.

To advertise their services, these financial gurus post a regular narrative – of being self-made and of living the big life, with fancy cars and luxurious holidays.

Some financial gurus have created a plethora of fake handles to admire their own financial forecasting, supposed trading adventures and successes to create a further proof of concept. Other such financial gurus use these fake handles to discredit other professionals. It's a circus out there.

The dodgy practice came to a head when photo-shopped screenshots of trading statements claiming regular profits running into lakhs and crores were posted on social media. But a fake screenshot posted by a popular YouTuber got called out recently. He had posted a trade that was impossible to do because it exceeded the limit set by the exchanges. This caused a lot of fury online.

Sensing an opportunity to authenticate trading profit claims, an options analytical tools provider created a Verified Screenshot service that can be connected to brokers' terminals. It is a good initiative that may intimidate fraudsters but it may fail at a professional and reliable measurement of performance.

Last week, CNBC Awaaz managing editor Anuj Singhal busted a fake Telegram channel with thousands of subscribers. It was run in the name of the channel. He simultaneously took up the cudgels on the menace of fake performance reporting via photoshopped profit and loss statements on Twitter. This triggered pandemonium in the world of Twitter financial gurus.

An unregistered research analyst/investment advisor, who is known to be very aggressive, goofed up in a panic, hurting mass sensibilities by tweeting a distasteful post. Around the same time, it came to be known that the Securities and Exchange Board of India (SEBI) was looking into the market activity of this advisor.

SEBI's action escalated panic among dodgy financial gurus. Also, SEBI had ordered an unregistered advisory called Fingravy Wealth Creation to reimburse fees it had received for advisory services, which amounted to nearly Rs 6 crore. The tens of thousands of unqualified, inexperienced, ineligible and therefore unregistered financial gurus have since deleted their online footprints.

This single act of SEBI exercising its powers to investigate unregistered analysts and advisors proves that power is powerless unless exercised! SEBI should allocate resources to strictly enforce the rules it is empowered to frame.

To curb the practice of using social media by unregistered analysts and advisories to dispense misleading and false trade tips and investment advice, SEBI needs to work on a two-pronged strategy of investor empowerment and enforcement of regulations.

Investor Empowerment should comprise the following:

a) Investor education: SEBI can direct all registered market intermediaries ranging from exchanges, brokerage firms, portfolio management services providers, mutual funds, alternate investment funds, investment advisories, research analysts, and others registered with it to donate 1-2 percent of their profit to the National Institute of Securities Markets (NISM) as a compulsory corporate social responsibility contribution. The NISM should use these funds to generate investment empowerment educational content.

b) Grievance redressal: SEBI should warn everyone that dealing with unregistered market entities is a crime and that grievances cannot be redressed by way of orders to refund any fees paid to such entities. Yet, SEBI may penalize such unregistered entities by disgorging all the ill-gotten gains made by them by way of orders to transfer such gains to the proposed Sebi/NISM Investor Education Fund. However, investors who have been wronged by registered and regulated entities should be provided with timely redressal.

Enforcement of regulations should include the following:

a) Encourage whistle-blowers and reward them financially for supplying timely, accurate information about wrong-doers. Recent comments by SEBI chairperson Madhabi Puri Buch cajoling auditors to utilise third-party validation tools is a welcome positive change in attitude to involve all possible resources right at the top of market governance. Yet, it should not be used out of context to imply that self-appointed third-party screenshot verification providers are adding any value.

b) Take assistance from the Financial Intelligence Unit and Serious Fraud Investigation Office, both of which are multi-disciplinary bodies with access to data from tax authorities, exchanges and depositories to pin down unregulated service providers. If need be, help can be sought from local police to arrest and prosecute wrongdoers.

c) Curb misinformation menace on social media by making it mandatory for registered service providers to input their social media accounts on the SEBI registration portal and only accounts so registered may be allowed to post investment, trading or related information. Social media companies such as Twitter can be provided with an application programme interface (API) connection to this SEBI database of authorised social media profiles. Any complaint to social media platforms to delete or suspend unauthorised accounts must be processed in a time-bound manner.

d) Introduce performance measurement & reporting standards along the lines of the CFA Institute's global investment performance standards (GIPS). Statutory performance audits should be made mandatory by SEBI for those entities that use social media to influence investors.

The narrative has to be set by the regulator, not by the self-proclaimed financial gurus who are manipulating investors on social media. The turf has to be owned by the regulator in its entirety to keep it clean. The rules should be set by the regulator. This is necessary to prevent market participants from setting the mood to suit their goals or vitiate the atmosphere by discrediting rivals. This recent Twitter fracas is yet another testimony to the age-old truth that media will always be the most effective petitioner for the good of people and the regulator will be the most effective enforcer of fair play rules.