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In order to bring clear market transparency and safeguard investor’s interests, the Security Exchange Board of India (Sebi) has released a new framework that targets the often murky ties between market intermediaries and unauthorised financial advisors. The fresh set of rules, announced on Tuesday (22 October 2024) particularly pin down associations that occur through digital platforms - an area where financial advice has increasingly moved to online mode.
The backdrop of this development can be traced back to August’24 when Sebi had amended regulations to clamp down on interaction between regulated entities such as stock exchanges, clearing corporations, and depositors - and entities that make performance claims or offer investment advice without any registrations by the market regulator.
These amendments come amid growing concerns regarding the rise of unregistered advisors using digital channels to reach retail investors, often promising returns without the requisite permissions. Recently, many cases of stock market and online trading frauds have been reported where retail investors were lured in by ‘unauthorised financial experts’ who typically used high bull market days as luring techniques.
What The New Frameworks Mean?
The market regulator’s new framework makes it clear: market intermediaries, their agents, and associated entities cannot have direct or indirect relationships with any party that provides investment recommendations or makes performance-related claims, unless those parties are registered with, or specifically permitted by, Sebi. This step intends to ensure that financial advisory to investors is regulated and transparent, reducing the risk of growing misleading claims of returns and timing market highs.
However, there is one exception to these provisions where Sebi has carved out a space for what it calls “specified digital platforms”. These are digital platforms that meet certain criteria laid out by the regulator. This expectation is for those platforms that can prove they have a robust mechanism in place to prevent and address any misuse or misleading activity. In other words, a platform that Sebi deems capable of maintaining a high standard of investor protection and market integrity may still interact with intermediaries and advisors under this framework.
However, the platforms should know that the criteria for such a designation remain strict, and only platforms that can satisfy Sebi’s requirements will be allowed this latitude.
This pass acknowledges the growing role of digital platforms in the dissemination of financial advice while also drawing a firm line between regulated and unregulated advice.
Investor Education Gets A Pass But Within Limits
The new framework also takes a nuanced approach to those who are solely involved with ‘investor education’. Any individual or entity is exempt from the new restrictions provided they steer clear of giving any investment advice or making any claims regarding the performance of the stock market.
This sets a clear distinction where investor education is encouraged within limits that it remains just that: Educational. This expectation is expected to ensure that investors understand markets but not at the cost of being led into trades prompted by unauthorised advisory services masquerading as education initiatives.
What Is Deadline To Implement These Rules?
To make sure these new rules are put in place timely, Sebi has given market intermediaries a three-month window to close any existing partnerships with entities that do not meet the specified criteria. This means stock exchanges, clearing corporations, depositories, and their agents need to quickly sever ties with any unregistered advisors or entities making performance claims. The tight deadline signals Sebi’s intent to quickly make the shift to a cleaner advisory environment from the current murky investor zone.
Moreover, Sebi’s efforts to regulate these associations are not happening in isolation. In a related move, earlier, the regulator also tweaked the Common Application Form (CAF) used by Foreign Portfolio Investors (FPIs).
How This Matters For Investors?
At its core, Sebi’s new framework aims to address a growing challenge: the surge of digital platforms offering advice without regulatory oversight. For retail investors, the promise of high returns from such unregulated sources can be enticing yet fateful as it often comes with risks of huge losses.
Sebi intends to protect investors from falling prey to misleading claims by enforcing stricter rules on who can offer advice and through which channels. However, the provision for “specified digital platforms” acknowledges the current reality wherein some of their platforms play a vital role in modern investment landscapes. At the same time, it also ensures that those platforms meet high standards carved by the market regulator.
