The rise of financial influencers in India is a cause for concern, as they have turned into a risk for investors by giving investment advice without being qualified to do so. This has the potential to induce stock price movements and harm the overall stability of the market.
The Securities and Exchange Board of India (SEBI) requires that individuals or entities providing stock tips must be registered on its rolls. However, most financial influencers providing such tips on social media are not registered, which violates this norm.
The modus operandi of these influencers is to first buy shares of a company through trading accounts and then circulate favorable messages about those scrips through social media among their thousands of subscribers, inducing them to purchase those shares, driving up the prices. The financial influencers then sell their pre-acquired shares, thereby pocketing large amounts of profits for themselves.
This type of manipulation of the market by unqualified and unregulated financial influencers is detrimental to the economy. It can lead to artificial inflation of stock prices, which may attract retail investors who are not well-versed in the market's intricacies. This may result in a situation where these investors buy stocks at artificially inflated prices, leading to significant losses when the prices fall.
Furthermore, financial influencers' advice may not be objective or unbiased, as they may have conflicts of interest or may not have the necessary expertise to provide sound investment advice. This may lead to investors making poor investment decisions, which can lead to significant losses and harm the overall health of the economy.
Regulation of financial influencers is necessary to prevent these risks to investors and the economy. In developed nations such as the United States, United Kingdom, Canada, Australia, and the European Union, laws are in place to regulate the community of financial influencers. These laws require financial influencers who promote securities to disclose their relationships with companies and potential conflicts of interest. However, in India, mere disclosure may not be sufficient due to a lower literacy ratio and a lack of awareness among retail investors.
The SEBI has released an advertisement code to put a full stop to misleading advertising by investment advisors and research analysts. This is a step in the right direction, but more needs to be done to regulate financial influencers. The market regulator has indicated that it is framing rules to govern the growing base of financial influencers on social media, with the intention of strengthening the regulatory regime on tips by unregistered persons. Unregistered financial influencers can be booked for violating the Prohibition of Fraudulent and Unfair Trade Practices regulations.
In conclusion, financial influencers are bad for the market and the economy. Their unregulated and unqualified advice can lead to manipulation of the market, harm to investors, and ultimately, harm to the economy's health. Regulation of financial influencers is necessary to prevent these risks and protect the interests of investors and the overall health of the economy.