Finfluencer Influence Under SEBI’s Lens: New Rules For Financial Advice And Delisting

Introduction:

On June 27, 2024, SEBI convened its 206th board meeting[1] and unveiled a series of reforms aimed at boosting transparency, safeguarding investors, and enhancing the efficiency of financial operations. The new measures include tighter restrictions on interactions between SEBI-regulated entities and unregistered financial advisors, more flexible delisting procedures, and relaxed disclosure norms for certain foreign portfolio investors. SEBI also revamped the process for public issues of debt securities, permitted short-term borrowing for Alternative Investment Funds (AIFs), and introduced a comprehensive cybersecurity framework for regulated entities.

About the reforms:

Association with unregistered investment advisors

One of the key changes SEBI introduced involves restricting SEBI-regulated entities from working with unregistered investment advisors, a move aimed at addressing the rising influence of financial influencers, or “finfluencers,” on social media. These influencers, popular on various social media platforms, some provide useful content, others are criticized for providing financial advice without proper approval, misleading investors, and making dubious claims about potential returns.

To address these concerns, SEBI has banned regulated entities from associating with unregistered financial influencers who offer advice or recommendations related to securities returns or performance. However, the new regulations allow associations with influencers who focus solely on investor education and refrain from making specific recommendations or claims about returns. This distinction aims to strike a balance between promoting financial literacy and protecting investors from misleading or unauthorized advice.

The restrictions on unregistered finfluencers are expected to curb the growing influence of unregulated financial advice, which has often led to investors making poorly informed decisions. By prohibiting SEBI-regulated entities from engaging with such influencers, SEBI is ensuring that only authorized and qualified individuals provide financial advice. At the same time, SEBI’s allowance for educational content acknowledges the role that social media influencers can play in promoting financial literacy and informed investing.

Delisting and counter-offer mechanisms

To make business transactions smoother and better protect investors, SEBI has revamped the voluntary delisting process. The updated framework introduces a Fixed Price Process alongside the traditional Reverse Book Building (RBB) method for companies with actively traded shares. With this new process, the buyer must offer at least a 15% premium above the floor price set by SEBI’s delisting rules. This change provides companies with an additional mechanism for delisting while ensuring that shareholders receive fair value for their shares.

While these changes have been generally welcomed, some critics have raised concerns that financial influencers, particularly those offering genuine advice, may be unfairly penalized by the new restrictions. These critics argue that finfluencers’ advice falls under the ambit of freedom of expression and that followers are not compelled to act on their recommendations. However, SEBI has taken a cautious approach, aiming to protect investors from potential harm while allowing for the continued dissemination of educational content.

Streamlined Disclosure for University Funds

SEBI has simplified the disclosure rules for University Funds and endowments that are registered or can be registered as Category I Foreign Portfolio Investors (FPIs). These institutions are now exempt from some of the extra disclosure requirements set out in SEBI’s August 2023 circular. To qualify for this exemption, the University Fund must have less than 25% of its assets under management (AUM) in India compared to its global AUM, which must be over Rs 10,000 crore. Additionally, the fund must prove its non-profit status by filing the necessary returns with its home tax authorities.

SEBI has streamlined the public issue process for debt securities and Non-Convertible Redeemable Preference Shares (NCRPS) to help issuers access capital more quickly. The new rules cut down the time for public feedback on draft offer documents from seven days to just one day for listed issuers and five days for others. The minimum subscription period is now two days instead of three, and the listing process has been sped up from T+6 to T+3 working days. These changes are designed to make raising funds faster and more efficient, benefiting both issuers and investors by simplifying the process.

These changes are designed to enhance market efficiency by allowing issuers to raise funds more quickly. The reduction in timelines will initially be optional for one year and will become mandatory thereafter, ensuring that all issuers eventually comply with the new regulations. SEBI has also provided issuers with flexibility in advertising public issues through electronic modes, making it easier for issuers to reach a wider audience.

The decision to mandate UPI for individual investors making investments up to Rs 5 lakhs in public issues further simplifies the process and modernizes the application procedure, encouraging greater participation from retail investors. By harmonizing procedures across various types of securities, SEBI is making it easier for investors to participate in the market, thus instilling greater market confidence and participation.

In its efforts to improve the regulatory environment for Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs), SEBI has introduced several measures to enhance the ease of doing business. These measures include allowing shorter notice periods for unitholder meetings, aligning disclosure timelines with financial results submissions, reducing the trading lot for privately placed InvITs, and revising the timeline for distribution payments. The reduction in the notice period for unitholder meetings, subject to prior consent from unitholders, provides greater flexibility for InvITs and REITs in conducting business, allowing them to respond more quickly to changing market conditions.

SEBI has also revised the timeline for distribution payments to five working days from the record date, ensuring that investors receive timely payments. These changes are expected to improve the efficiency and transparency of InvITs and REITs, promoting greater investor confidence in these sectors.

Cooling-Off Period for AIF Borrowing to Prevent Misuse

SEBI has introduced new rules to give Alternative Investment Funds (AIFs) more flexibility by allowing Category I and II AIFs to borrow for up to 30 days to cover shortfalls in investor contributions. This measure is designed to help AIFs address temporary funding gaps while investing, with the borrowing costs passed on to the investor causing the shortfall. To prevent misuse, SEBI has also mandated a 30-day cooling-off period between borrowings. These changes aim to streamline operations for AIFs, making it easier for them to manage their investments, while ensuring that borrowing remains a controlled and fair process.

Cybersecurity and Cyber Resilience Framework for Regulated Entities

Recognizing the growing threat of cyberattacks in the financial sector, SEBI has approved the framework. This framework is based on the CERT-In Cyber Crisis Management Plan and covers five key goals: anticipating, withstanding, containing, recovering, and evolving in response to cyber threats.

The CSCRF introduces several measures to strengthen the cybersecurity posture of SEBI-regulated entities, including the implementation of a security operations center (SOC), guidelines for API and mobile application security, and the creation of a Cyber Capability Index (CCI) to assess cyber resilience. Additionally, the framework includes a Software Bill of Materials (SBOM) to mitigate supply chain risks, ensuring that regulated entities are better prepared to defend against cyberattacks.

SEBI has provided entities with a timeline to adopt the new standards, with six categories of entities required to implement the framework by January 1, 2025, and all other entities by April 1, 2025. This cybersecurity initiative is expected to enhance the overall security of SEBI-regulated entities and ensure better protection against cyber threats.

Conclusion:

The regulatory changes introduced by SEBI in its 206th meeting represent SEBI’s aim to strengthen the regulatory landscape to protect investors and promote market stability. The focus on investor education, operational flexibility, and cybersecurity ensures that India’s financial markets remain competitive, transparent, and secure in the face of evolving challenges.

[1] https://www.sebi.gov.in/media-and-notifications/press-releases/jun-2024/sebi-board-meeting_84448.html

King Stubb & Kasiva,
Advocates & Attorneys

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