February 16, 2017

On October 7, 2016, the Securities and Exchange Board of India (Sebi) issued a consultation paper on amendments clarifications to the Sebi (Investment Advisers) Regulations, 2013. Though it contained several points, Sebi's plan to curb the “practice of providing trading tips messages containing buy, sell, hold recommendations on securities“ (i.e. point number 4.5.2) got maximum attention.

If this discussion paper is accepted without any change, no person will be allowed to provide trading tips and stock-specific recommendations to the public through short message services (SMSs), email, phone etc or through social media like WhatsApp, Twitter, Facebook, etc. unless such persons obtain registration as an investment adviser or are specifically exempted from obtaining registration.

Since it was construed as Sebi's effort to censor social media, there was a furore against this consulting paper. Instead of expressing their views through proper channel (by replying to Sebi), most on social media decided to troll Sebi. Some of the tweets were repetitive (i.e. same words were tweeted by several twitter handles) giving hints that some of these tweets are done by bots and paid by someone. Several eminent personalities also expressed their opinion against this social-media censoring.

Maybe because of these social media uproar, Sebi seems to have soft-pedalled this without taking any further action and the problem of tips continues unabated. First, this has become a big irritation for investors because most of these tips are unsolicited (eg unsolicited SMSes, emails, tagging investors into their tip posts, etc). Second, some investors or short-term traders have started believing in these tips and thereby losing money. Since most of these tip providers do front-running (i.e. first buy a stock and then give buy recommendations on it), this also amounts to market manipulation.

WHAT SEBI SHOULD DO
We are not suggesting censoring the social media because it is impractical. But definitely, Sebi needs to be alert on this front and to create specific mechanisms so that investors can complain immediately. For example, Sebi can create a specific phone number email to which investors can forward all unwanted tips received through SMSs email. Investors who lost money based on some tips also should be allowed to complain using similar method.

Similarly, Sebi can create separate ids for Twitter, Facebook, Whatsapp, etc. Since investors will be forwarding this voluntarily , collating data like this will be far easier than scanning social media for manipulation. Sebi can also treat these forwards as complaint and take action without waiting for a formal complaint. What mentioned above is the tips (both solicited and unsolicited) from unregistered entities. But what about the registered ones?

Sebi consulting paper also says “research analysts or research entity shall provide the research report to all class of clients at the same time." This is a great move and will stop the current practice of giving the research reports to institutional clients first and then only to retail subscribers.

To clean up stock research and to make more transparent, Sebi needs to force research analysts and research entities to keep their old reports in a common place (some research houses are already doing it by publishing on their sites).

This will help existing client of one research house to know the capability of other houses. To protect the interest of existing clients (i.e.who either pay for reports or accessing reports due to brokerage accounts), this public posting can be done after a week.

[The Economic Times]