The Securities and Exchange Board of India has outlined a proposal that at first glance serves to protect Indians from fraudulent investment advice. In the age of pyramid schemes, attempting to address that problem is a good idea.
But the way SEBI proposes to go about this in the consultation paper is heavy handed, cracking down not on fraudulent advisory services but instead on discussions of stocks and stock tips on social media, email, and on SMS/Whatsapp.
This move would deeply restrict any free-speech and discussion around stock markets. Have a conversation with a friend about a rising stock on Facebook? If this regulation comes into effect, that will be illegal.
SEBI’s proposal says the following:
"No person shall be allowed to provide trading tips, stock specific recommendations to the general public through short message services (SMSs), email, telephonic calls, or any other social networking media such as WhatsApp, ChatOn, WeChat, Twitter, Facebook, etc. unless such persons obtain registration as an Investment Adviser or are specifically exempted from obtaining registration."
The economist Ajay Shah has pointed out that it is an increase in conversation and discussion that allows people to obtain accurate information. Doing the opposite closes such access to regular investors, legitimising only advisors who are registered to offer advice. And what amounts to a "stock specific recommendation" or a "trading tip"? The fuzzy definition here opens ordinary Indians to a load of trouble if they recommend a stock they saw success with: "Y stock gave me great returns in the past six months."
In the scenario that the SEBI proposes putting in place, an advisor on Facebook could legitimately suggest investing in X banking stock, but it will be illegal for an investor to reply saying that X is a bad recommendation, and he prefers Y because Y has a stronger balance sheet.
One solution
Discussion is critical key to healthy markets: people should be able to freely debate among themselves whether something is worthwhile to buy (or not). SEBI, in attempting to regulate this, is comparable to another regulator attempting to restrict an individual from recommending a bank service, or app, or washing machine, or any other product/service they use as a customer.
One option here is a narrower regulation, restricting public advice and commentary by registered advisory firms in stocks that they have holdings in. That may be more effective than the current broad-ranging proposal that cracks down on anyone commenting on stocks.
Some markets like the European Union have addressed the advisory issue by focusing on disclosure: advisors talking about stocks need to disclose holdings in those stocks.
The proposed SEBI regulation on the other hand is overly restrictive, interfering with the right of people to speak freely on social media. Protecting free speech always comes with consequences, some that regulators often don’t like. As Indian Institute of Management–Ahmedabad Professor Jayanth Varma points out, “Everybody wants to become a censor, because censorship is the most powerful weapon in a democracy."
This move however, will hurt decision-making and knowledge around investing in equity markets. Equity investing has a substantial learning curve for ordinary investors, and its partly through conversations offline and online with their networks that people grow familiar with trading. Choking this off is counterproductive. And free speech aside, the state should not be in the business of regulating comment threads and social chatter – any regulation that proposes such a move deserves a thorough vetting and relook. The cure against fraudulent investment advice is more freedom and transparency, not less.
SEBI is inviting comments on its proposed policy at sebiria@sebi.gov.in The last date for comments is November 4.
