[Sourav Paul is a fourth-year undergraduate student at the West Bengal National University of Juridical Sciences, Kolkata]
The rapid expansion of social media has significantly impacted securities markets, with the emergence of finfluencers, who provide investment advice on social media platforms. These finfluencers have a huge following, primarily comprising retail investors, and exert more influence than registered financial advisors. To safeguard this vulnerable group, the Securities and Exchange Board of India (‘SEBI’) in 2003 introduced the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, (‘PFUTP Regulations, 2003’), which aims to curb market manipulation and unfair trading practices in the securities markets.
On October 25, 2023, SEBI passed an interim order (‘BoC order’) against Mohammad Nasiruddin Ansari (‘Nasir’), a finfluencer who provided investment advice in the name of ‘Baap of Chart’ under the garb of offering educational courses on stock markets. The BoC order is the latest addition to a series of recent enforcement actions taken by SEBI against finfluencers (see here, here and here). SEBI observed that Nasir’s modus operandi attracted the provisions of the Securities and Exchange Board of India (Investment Advisors) Regulations, 2013 (‘IA Regulations, 2013’), the Securities and Exchange Board of India Act, 1992 (‘SEBI Act, 1992’) and the PFUTP Regulations, 2003.
Against this backdrop, I analyse the BoC order and specifically examine the applicability of regulation 4(2)(k) of the PFUTP Regulations, 2003. I argue that SEBI could have clarified the standard of recklessness and the contours of the said provision.
Ruling in the BoC Order
SEBI initiated the investigation after analysing Nasir’s buy/sell recommendations on Twitter, and Telegram. In the course of its investigation, it became evident that Nasir portrayed himself as a stock market expert on various social media platforms. Nasir conducted ‘educational courses’ on stock market trading. He promised assured profits to the course participants, provided the instructions delivered in such courses were followed. Further, Nasir consistently disseminated promotional content on social media channels such as YouTube, Telegram, WhatsApp, and Twitter, with the intent of attracting individuals to enrol in these educational courses. SEBI examined a few videos posted on their YouTube channel wherein he disseminated trading strategies that promised quick, consistent, and assured returns. Apart from online activities, Nasir conducted multiple physical workshops related to the securities market.
Furthermore, Nasir created private chat groups with investors who subscribed to his educational courses. SEBI reviewed the messages circulated by the tutors, and observed that Nasir, in the guise of imparting educational content related to the securities market, offered buy/sell/hold recommendations.
The central points of contention for SEBI, in this matter, were twofold: (a) the extent to which Nasir may have enticed or influenced investors to engage to deal in securities through false or misleading information, and (b) whether Nasir engaged in activities resembling investment advisory services, disguised under the pretence of delivering educational training through the sale of courses and workshops.
After examining Nasir’s messages on social media, SEBI concluded that he used educational workshops and courses as a façade to lure investors into dealing in securities based on his advice with a promise of assured profits. It observed that the advice disseminated on social media handles and in the educational courses was in the nature of investment advisory services. SEBI observed that Nasir’s actions fell within the purview of the definitions of ‘investment advice’ and ‘investment adviser’ under regulations 2(1)(l) and 2(1)(m) of the IA Regulations, 2003. Further, he was not registered under section 12(1) of the SEBI Act, 1992, and regulation 3(1) of the IA Regulations, 2003.
SEBI also observed that Nasir’s conduct attracted the provisions of the PFUTP Regulations, 2003. Details pertaining to SEBI’s findings in relation to the PFUTP Regulations, 2003 are elucidated in the next section.
A Missed Opportunity to Interpret Regulation 4(2)(k) of the PFUTP Regulations, 2003
The broad, overarching principles of the PFUTP Regulations, 2003 are enshrined in regulation 3 and Regulation 4(1). These provisions categorically prohibit fraudulent dealings in securities or the use of manipulative or deceptive practices relating to any securities transaction. On the other hand, regulation 4(2) of the PFUTP Regulations, 2003 specifically prohibits certain activities by deeming them as fraudulent activities.
Regulation 4(2)(k) of the PFUTP Regulations, 2003 was amended by way of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) (Amendment) Regulations, 2022 (‘2022 Amendment’) which adopted the recklessness standard. The provision notes that it would be deemed to be a manipulative, fraudulent or an unfair trade practice, provided it involves ‘disseminating information or advice through any media, whether physical or digital, which the disseminator knows to be false or misleading in a reckless or carelessmanner and which is designed to, or likely to influence the decision of investors dealing in securities.’ [emphasis added] The 2022 Amendment introduced the terms ‘careless’ and ‘reckless’ in the language of the provision. This provision specifically outlaws the dissemination of fraudulent information and unfair trade practices conducted through digital media.
In this case, SEBI has notably invoked regulation 4(2)(k) of the PFUTP Regulations, 2003 for the first time in the context of finfluencers. It observed that Nasir ‘recklessly’ and ‘misleadingly’ offered assured profits under the garb of educational courses, thereby fraudulently inducing the investors to invest in stock markets. Nasir claimed that he had been consistently generating profits ranging from 20% to 30% on a monthly basis for a period of 2.5 years. However, the information that he had incurred a net loss of INR 2,89,60,828.02 was concealed from the investors. SEBI also noted that the claims of certainty and accuracy related to profits in Nasir’s educational courses were misleading, and false and amounted to a flagrant violation of regulations 3 (a) – (d), 4(1), 4(2)(k), and 4(2)(s) of the PFUTP Regulations, 2003 read with section 12A of the SEBI Act, 1992.
Nevertheless, SEBI missed a valuable opportunity to provide guidance and interpret the terms ‘reckless’ and ‘careless’ introduced by the 2022 Amendment in regulation 4(2)(k) of the PFTUP Regulations, 2003. Reshmi and Chitranshi highlight that the standard of recklessness remains ambiguous in this provision. They argue that the gross negligence standard under the law of torts can be utilised to interpret the meaning of the terms such as ‘careless’ and ‘reckless’ in the context of regulation 4(2)(k) of the PFUTP Regulations, 2003. Given that this provision was applied for the first time in a case related to the finfluencer ecosystem, SEBI had an opportunity to provide clarity on the recklessness standard.
In the context of the United States, the Dodd-Frank Wall Street Reform and Consumer Protection Act, 2010, amendedSection 20(a) of the Securities Exchange Act, 1934. The amendment empowered the Securities and Exchange Commission to bring an aiding-and-abetting claim against ‘[…] any person that knowingly or recklessly provides substantial assistance to another person in violation of any provision’ of the Securities Exchange Act, 1934. The inclusion of the term ‘recklessly’ in this provision was a significant change. In the celebrated case of Sundstrand Corporation v. Sun Chemical Corporation, the Seventh Circuit Court established that recklessness encompasses a level of liability that exceeds the ordinary standards of care and prudence. It characterised recklessness as ‘[…] highly unreasonable [conduct], involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care […].’ Further, it devised an objective test and a subjective test to determine recklessness.
In summary, the BoC order had the opportunity to offer insight on the degree of carelessness or recklessness in cases involving regulation 4(2)(k) of the PFUTP Regulations, 2003. SEBI prima facie emphasised on the misleading and reckless nature of Nasir’s modus operandi. Nevertheless, if SEBI had considered the jurisprudence in the United States, it could have delivered a more comprehensive decision outlining the contours and nuances of regulation 4(2)(k) of the PFUTP Regulations, 2003. Such an approach could have offered valuable guidance and further clarification in this regulatory context.
Over the past few months, SEBI has adopted a proactive stance in curbing unregistered investment advisory services provided by finfluencers. SEBI’s efforts have encompassed a range of regulatory strategies, from initiating enforcement actions to releasing consultation papers on the regulation of the finfluencer ecosystem (see here, here, and here). In this context, SEBI’s BoC order is a welcome step as it applied regulation 4(2)(k) of the PFUTP Regulations, 2003 for the first time in a matter involving a finfluencer.
Nonetheless, it is worth noting that SEBI missed an opportunity to provide guidance regarding the interpretation of the terms such as ‘careless’ and ‘reckless’ in the said provision. This post suggests that SEBI could have immensely benefitted from the United States’ experience pertaining to the recklessness standard in similar contexts. It is hoped that SEBI will continue to develop the jurisprudence and provide regulatory clarity on regulation 4(2)(k) of the PFUTP Regulations, 2003, especially given the rising number of enforcement actions against finfluencers in India.
– Sourav Paul