Running Ahead and Running Amok

I have a piece in yesterday's Financial Express on front running with Rashmi Birmole and Manas Dhagat.

Many will recall the morning of 1^st March 2001 when the proverbial penny, long waiting in the shadows of the tech boom, finally dropped, triggering one of the most significant crashes in Indian stock market history. This canonical event, that went on to inform sweeping structural reforms in the years to come, also exposed an insidious and extensive pump and dump scheme orchestrated by one Ketan Parekh, no relative of the first author, a former broker, and several major players in India’s financial ecosystem. Nearly 23 years later, history seems to be repeating itself with another fraud masterminded by Ketan Parekh, uncovered by SEBI after a months-long investigation into trading records, mobile communications, IP address mappings and statements from key individuals.

The findings, released by SEBI in an interim order on January 2, 2025, expose a fraudulent scheme orchestrated to exploit sensitive, non-public information for illicit gains. This time around, though equally fraudulent, the modus operandi is fundamentally different from the last. SEBI’s investigation has identified several individuals, including Rohit Salgaocar, Ketan Parekh and others, who are found to have colluded to front-run the trades of an overseas institutional client, or ‘Big Client’, of two Indian stock brokers. For the uninitiated, front-running, is a form of market abuse where individuals trade securities based on advance knowledge of large, market-moving transactions by other investors. It allows the perpetrators to profit from predictable price movements, often at the expense of the original investor’s interests and to the prejudice of the public. The investigation also revealed the involvement of individuals who can be categorized into information carriers, front runners, facilitators, who played pivotal roles in enabling this malpractice.

The information about impending trades flowed from Rohit Salgaocar, a Singapore resident, whom the Big Client often consulted on trading decisions in the Indian markets. Salgaocar leveraged this role to access non-public trade information (as contrasted with non-public inside information), which was relayed to the front-runners. To add to this, traders of the Big Client, familiar with Salgaocar, interacted with him while executing trades in Indian securities. These communications typically took place over Bloomberg chats and calls. SEBI’s investigation revealed that Ketan Parekh played a central role in orchestrating the operation and coordinating between the individuals involved. Ketan Parekh and connected entities exploited sensitive trade information from the Big Client’s impending transactions in various securities to generate profits to the tune of roughly 65 crore rupees.

The operation involved three distinct groups. Rohit Salgaocar, based in Singapore, acted as a conduit for non-public information (NPI). By leveraging his role as a director of Strait Crossing Pte. Ltd. and MoUs with brokers, Salgaocar obtained detailed information about the Big Client’s substantial market transactions. Using this information, Ketan Parekh directed employees of stockbrokers, as well as certain individuals who executed trades through private companies. These entities positioned themselves to benefit from price movements triggered by the Big Client’s large orders. The frontrunners used their access to trading accounts and networks to ensure seamless operations, directly communicating with Ketan Parekh. A notable aspect of the operation was the use of novel trading strategies termed as BBSB (Buy-Buy-Sell-Buy) and SSBS (Sell-Sell-Buy-Sell). To illustrate, in the BBSB approach, the perpetrators would purchase shares before the Big Client’s buy order was placed in the market, which they would consistently match in terms of timing, pricing, and quantity, providing strong evidence of prior knowledge and coordinated execution, and then also go on to sell the remaining shares in the open market.

Privileged access to non-public information (NPI) distorts market fairness, which lays the foundation for investor trust. When trust diminishes, individuals and institutions become wary of investing, perceiving the market as inherently unsafe. In this case, the Big Client’s transactions, aimed at executing legitimate investment strategies, were compromised. The illicit profits were found to have been shared among the perpetrators, with Ketan Parekh orchestrating the scheme and distributing trade-related instructions. These coordinated trading patterns were critical to masking the front-running activities and misleading market observers.

The data released by SEBI for 2022-24 reveals a concerning rise in front running cases, with numbers tripling every consecutive year. Between 2020 and 2024, nearly 116 front-running cases have been taken up by the regulator. This highlights a troubling trend of escalating violations emphasizing the need for more vigil. At the centre of these cases lies the information leaker, who, based on past data, has predominantly been a dealer servicing the broker’s institutional clients. While the exponential rise in front-running cases may reflect more pro-active surveillance and enforcement, it is equally important to consider scenarios and systemic issues that make front-running possible and erode trust in the market. The broader policy implications are also significant and any questions around market integrity impacts private investment and capital formation, ultimately weaking economic growth. The lack of adequate oversight has made it easier for front-runners to leak sensitive information, allowing those with access to exploit it for personal gain.

It is time to adopt a more targeted approach to front-running that addresses its root causes. Brokers and other fiduciaries must re-imagine its compliance strategy and contemplate measures that minimize the possibility of front-running in the trading process by design. At the client end such measures, could include rotation of specific brokers by institutional clients, splitting up of large institutional orders between multiple dealers and systematic checks to closely monitor broker activities. Furthermore, introducing stringent accountability frameworks for brokers, accompanied by enhanced oversight of employees engaged in large-volume trading, can also strengthen preventive measures. The broking community, needs to collectively adopt a higher standard of monitoring and surveillance over dealer activities. Additionally, brokers, whose dealers are often the primary source of such leaks, should face stricter liabilities. Restrictions on access to communication channels during critical trading activities, such as proper implementation of dealing room restrictions, should be reviewed periodically to ensure that such restrictions don’t merely exist on paper. Separate dealers can be assigned for institutional trades, subject to a higher level of monitoring. These measures would help reduce the risk of sensitive information leaking and ensure greater integrity in trading operations.

The growing prevalence of front-running cases highlights the urgent need for an innovative strategy that addresses systemic flaws, enforces accountability and fosters a fair trading environment and SEBI’s improved surveillance and heightened enforcement action bode well. But mere enforcement action by the regulator will not suffice and the industry must come up with stringent best practices in internal surveillance and supervision which are adopted industry-wide and become a benchmark before any institutional clients approaches them.

Legal500 ranking of Finsec Law Advisors

Delighted and honoured that Finsec Law Advisors is recognised as a distinguished law firm in the space of financial services regulatory for 2025 by Legal500, London an international agency which ranks law firms globally based on client feedback. Grateful for the kind words by clients.

Cut all that flab from reg laws: Why SEBI's securities laws need a revamp

I have a piece in today's Economic Times on the need to eliminate 80% of all regulatory laws and how precision and brevity are important in designing law, specially law which is easy to pass without parliamentary approval. Below is the full piece:

It’s a Doge eat regulation world

 

Regulators think of introducing new regulations from two lenses. First in terms of errors. Whether the law will harm innocents or let the guilty get away. Second, in terms of cost-benefit analysis because every law has a cost on the market. In addition, for good process, they look at views of expert committees and exposing draft regulations to public comments. 

 

Students of criminology (with its origin in logic and later statistics) will immediately recognize the two error types. Type I error occurs when a guilty person escapes because the law is too lax. This error prioritizes protecting the innocent at the risk of letting some guilty individuals go free. Type II error occurs when an innocent person is found guilty. This reflects an overly stringent or biased system that compromises individual rights and undermines justice. 

 

Sadly, a lot of current regulations falls within these errors. In fact, the SEBI law against fraud is drafted so sloppily that it simultaneously creates both type I and type II errors at the same time. While it is easy to blame SEBI, many of these laws were created by market experts from the industry. The law against fraud, the law against insider trading and the takeover law are the most egregious examples (and also the cornerstone of securities laws).

Let’s take the example of the securities law against fraud. Fraud has been well understood for centuries under common law, even before a formal legislation came in. Based on the common law, five ingredients were identified: intent, materiality, mis-statement, causation and harm. These ingredients with minor modifications for the anonymous securities markets have created the US rule against fraud commonly called rule 10b-5 never modified since its introduction in 1942. There are now tens of thousands of US court rulings chiseling each of the requirements of the ingredients. That’s how the law becomes more sophisticated and nuanced.

Take the Indian law now, in what is called the Fraudulent and Unfair Trade Practices regulations of SEBI or FUTP. None of the five ingredients are required to prove fraud. I had written an article in this paper in Sept 2018 that under securities law I can prove that walking, running and swimming were all fraud. These kind of laws may sound fair to a layman, but if you put a lot of random people in jail for murder, likely-some-will-be- murderers kind of logic is not really a good way to draft law and puts the common law system of ‘innocent till proven guilty on its head’. Yes, it indeed makes the task of the prosecutor easy to put everyone they see in jail.

The other, somewhat related problem is prolixity. We love to write laws. With a lot of words. It may not make any qualitative difference in liberal arts subjects whether you describe an object with a thousand words or ten thousand. However, law is more akin to STEM subjects. At the cost of sounding pompous, I would go so far as to say, it is akin to surgery. Every single comma is like a millimeter while conducting surgery. Ask the insurers how the 9/11 insurance contract was drafted and whether the ‘event’ included two plane attacks or one, decided whether they paid an extra 3.5 billion dollars or not. With laws, the consequences can be alarmingly more serious than with drafting contracts. 

 

Let’s just start with one comparison and two examples from the same domain of fraud and insider trading laws in the securities markets. First, the anti-fraud rule in the US has 124 words. The insider trading law has 0 additional words as it is subsumed in the anti-fraud Rule. The Indian equivalent FUTP has over 4,400 words and the insider trading regulation has over 20,000 words. These additional 24,000 words are not just surplusage, but cause harm to innocent people, and let the guilty free. And no, we didn’t try to create a better definition, Regulation 3 of FUTP is a virtual lift off of the US rule. We just chose to write another 24,000 words and stuck a long tail on what matters.

 

Just look at one example where the Supreme Court had to intervene in a case where a person who had good news sold in the markets and was accused of insider trading. In its argument, SEBI relied on the fact that the regulation does not mention the direction of trading and thus the person will be found guilty. Even a high school student will note the absurdity of this argument, buying while holding unpublished bad news or selling while in possession of good news is irrefutable proof that insider trading did not happen. 

 

Even worse is the deeming provisions of these laws. For example, if a woman were to share the closure of a large M&A deal with her husband for going out on a celebratory dinner is a criminal according to SEBI laws on ‘need to know’ basis of sharing information even where no mis-use of the information occurs. The deeming provisions of insiders would deem almost any semi-random communication with any other person as refutable proof that the person illegally passed on information. If I were to give a legal opinion to a company on matters of intellectual property, and bought a few thousand shares contemporaneously, there could be a deemed provision that the company passed on illegal information (say quarterly earning) to me. The only way I will be able to disprove it would be for me to record every conversation had with company officials, and if I were to meet them, put a GoPro camera on my head while having dinner with them. The insider trading laws require no element of being an insider, no need to show trades and even no need to show any inside information. There is a need to take Elon’s scalpel, and cut down regulations and the overly broad laws. By my estimate, the existing laws of SEBI and other regulators could easily be improved by cutting them by 80% and bringing in precision. And we could see a real ease of doing business in India for public companies. 

 

The author’s book Fraud, Manipulation and Insider Trading in the Indian Securities Markets fourth edition will be published by LexisNexis next month. 

 

Decoding with Finsec - Episode 1 (December SEBI board meeting analysed)

 Introducing the first episode of ‘Decoding with Finsec’ on Youtube. We dive into the key proposals which were greenlit by the Securities and Exchange Board of India (SEBI) on 18th December 2024.

From stricter norms for SME IPOs to classifying material events as unpublished price sensitive information (UPSI) under the insider trading regime, join us as we dissect the recent changes and explore whether these reforms are geared towards enhancing the ease of doing business for market participants or designed to ease SEBI’s regulatory responsibilities. __________________________________________________________ Time Stamps: 0:00 - Introduction 1:21 - Stricter norms for SME IPOs 8:36 - Permitted activities by merchant bankers 17:36 - Agency for verification of past returns 22:31 - Events deemed as 'unpublished price sensitive information' 29:41 - Draft PUSTA Regulations 31:31 - Skin in the game by AMC employees

The future of Algo Trades

I have a piece with Parker Karia and Pragya Garg on the future of algo trading and its regulations in today's opinion page of Financial Express. Please see below the full piece:

"Among the flurry of consultation papers issued by the securities market regulator over the past few months, in December 2024. SEBI proposed significant changes to its framework governing algo trading. To recap quickly, algorithmic trading, or algo trading, refers to any trading activity that automates trades, and does not require manual intervention to place any orders, or monitor prices.

There are two ways in which one can carry out algo trading. The straightforward method is to use the algorithms provided by the stock broker, if that is a facility your broker provides. The other route is through APIs (Application Programme Interface), which enable electronic systems to connect with each other.

Think of it as a data pipe which carries your algorithm. APIs enable the transmission of information, and as a result, a third party can create a code that will execute itself on the broker’s platform. APIs are what enables you to book an Air India flight on Goibibo or avail a loan from a bank through a distributor.

In the context of algo trading, third parties provide their algo on say, Platform X, which is connected to the broker’s platform through an API. Thus, orders placed by the client on Platform X get passed on to the broker. Now, while a broker can identify that an order is coming in through an API, it cannot verify that the order is an algo order.

In 2021, being concerned with the rise of unregulated and unapproved algos, SEBI had proposed to treat all API orders as algo orders. This was a flawed approach, and a departure from SEBI’s mission to encourage innovative and digital solutions in securities market, as the regulator’s proposal would have retarded connectivity between brokers and other sophisticated players connecting to them for non-algo purposes.

It appears that the proposal has been scrapped, and after extensive consultations with the industry, a more practical approach has been proposed.

With respect to API orders, SEBI has suggested that an ‘Order per second’ threshold be specified, and that all API orders above such threshold would be treated as algo orders.

Secondly, SEBI has proposed to bring ‘algo providers’ within the regulatory ambit. These algo providers would be agents of stockbrokers, similar to the present ‘Authorised Person’ or the erstwhile sub-broker concept. Algo providers would also have to register with the stock exchange, and also get their algos approved by the exchange. This would ensure that the broker is responsible for customer grievances, and the redressal mechanism deployed by SEBI would be available to clients of algo providers.

Individuals who design their own algos would also have to get them approved by the stock exchanges through their broker. These can then be used by the investor’s immediate family as well.

The regulator has also sought to categorise algos into ‘White Box’ and ‘Black Box’ algos. White Box algos, also known as ‘Execution Algos’, are those which execute orders based on fully transparent algorithms, where the logic, decision making processes and underlying rules are accessible and understandable to users and is replicable. On the other hand, Black Box algos are algos whose logic is not known to the user and is not replicable, or where the user cannot see the internal workings and rationale of the algo. For providing Black Box algos, one would be required to register as a research analyst, and for each algo, a research report would have to be maintained, and in case of any change in the logic governing such algo, it would have to be registered afresh, along with a new research report.

The proposed framework places significant responsibilities on stock brokers. Brokers would have to put in place systems and procedures to detect, identify and categorize all orders above the specified ‘order per second’ threshold as algo orders. They would also have to make sure to have the ability to distinguish between algo and non-algo orders. Further, brokers would no longer be permitted to offer open APIs, to ensure identification and traceability of the vendor and end user. Whether such severe restrictions are required or not, in view of the measures such as the ‘order per second’ threshold, may require some more thought. APIs have uses beyond algo trading. The proposed circular should not stand in the way of such non-algo trading use case scenarios.

There is a fair bit of work that the stock exchanges would also have to do. First, they have to define the roles and responsibilities of brokers and empanelled vendors, and lay down the criteria and process of empanelment of vendors. A turn-around-time has to be specified for registration of algos, including a fast-track registration for certain algos, such as White Box algos.

Further, the stock exchanges would have to deploy additional resources as well. The exchanges would be required to conduct post trade monitoring of algo orders and trades and put in place a Standard Operating Procedure for testing of algos. Further, they must have the ability to use a ‘kill switch’ to stop malfunctioning algos.

Additionally, they would have to supervise/inspect that stockbrokers have the ability to distinguish between algo and non-algo orders, and issue detailed operational modalities, regarding the roles and responsibilities of stock brokers and algo providers including risk management system of stockbrokers for API orders.

The present proposal thus seems to be more carefully thought out, and seeks to adopt an approach that strikes a balance between the interests of the stakeholders and concerns of the regulator. In another positive move, in its last board meeting of 2024, SEBI’s board granted approval for the recognition of a ‘Past Risk and Return Verification Agency’ (PaRRVA), which shall carry out the verification of risk-return metrics inter alia in relation to algo trading.

There are still some points which may require a re-think as algo trading picks up. For instance, SEBI’s earlier question of whether an algo should be a facility provided by a research analyst or an investment adviser, or a separate class of regulated entities altogether. With the proliferation of AI, the roles, responsibilities, risks and liabilities are getting redefined.

However, there are few items that may require consideration soon, if not now. For instance, algos may be designed by artificial intelligence. The risks and liabilities that may arise out of such instances must also be deliberated upon carefully, along with the roles and responsibilities of the elements involved. While there may never be one right answer, and regulation of something as innovative as algo or AI based algos is bound to create some unnecessary bureaucracy in the process, it is important for the regulator to at least have some grip on something which could have systemic impact on the markets."

Defining USPI

Today's Financial Express has a piece by @_baldemort__ @JRishabh2001 and me on the proposed expansion of the definition of what would constitute material under a relook at the listing regulations, to make them more in line with the definition of material in the insider trading regulations. While broadly ok, there are certain areas of caution. For instance pre-mature disclosure will chill forensic audit, because no company would like to attract negative attention till the forensic report actually finds wrong-doing. That would be a regulatory self-goal. The full piece is copied below:

The Securities and Exchange Board of India (“SEBI”) released a consultation paper on November 9, 2024 proposing revisions to the definition of Unpublished Price Sensitive Information (“UPSI”) under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”). To this effect, SEBI has introduced thirteen (13) new proposals to broaden the scope of the UPSI definition to include certain material events specified under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”). These include, among others, upward or downward revisions of credit ratings, proposed fund-raising activities to be discussed at Board meetings, agreements impacting the management and control of the company, initiation of forensic audits, outcomes of certain litigations, and the award or termination of significant contracts or orders not in the ordinary course of business. Some additions are well-founded, as such events significantly influence investor decisions and market movements. However, certain inclusions may dilute the framework's purpose by covering routine operational matters or classifying less material disputes as UPSI.

The relationship between material events and UPSI has evolved over time. Initially, the definition of UPSI under the PIT Regulations included within its scope, information related to all material events as per the listing agreement. However, an amendment to the PIT Regulations in April 2019 removed the direct link to materiality. Instead, listed entities were required to exercise judgment and prudently classify information as UPSI to align with the intent of the PIT Regulations. Despite this, instances of failing to categorize information, apart from those explicitly specified under the PIT Regulations, continued to persist. SEBI noted that listed companies were not exercising due care to classify or consider certain price sensitive information as UPSI. To address this issue, SEBI released a consultation paper on May 18, 2023, proposing to align the definition of UPSI with material events under Regulation 30 of the LODR to improve clarity and ensure consistent compliance.

In its latest consultation paper released on November 9, 2024, SEBI aims to address concerns raised in public feedback regarding the proposal to include material events under Regulation 30 of the LODR Regulations within the definition of UPSI. These include concerns over the limited impact of all Regulation 30 events on securities prices, recommendations to prioritize specific material events, and difficulties in compliance management. In this context, determining whether a material event falls within the scope of UPSI requires evaluating whether events warranting disclosure are, in most cases, also price-sensitive.

The new proposals recommend including regulatory actions against the listed entity, its directors, key managerial personnel (“KMPs”), and subsidiaries within the definition of UPSI. However, not all regulatory actions or orders carry the same level of significance or are likely to impact prices. For example, regulatory actions such as notices resulting in minor penalties for technical defaults are unlikely to have a substantial effect on stock prices. Similarly, actions against non-material subsidiaries that are not directly involved in the listed entity’s core and major operations may not significantly alter market perception. More importantly, even if material, ‘action initiated’ should never be the standard for disclosure. Everyone is assumed innocent unless proven guilty. To put in public domain a very preliminary charge or prima facie case would be unfair to the individual or company being investigated, ruining their image, even if ultimately exonerated. The only acceptable standard must be when a person is indeed found to have committed a wrong.

The Consultation Paper also proposes including changes to KMPs within the UPSI definition, even in cases unrelated to governance concerns, disputes, or financial irregularities. Additionally, it suggests incorporating information about the outcomes of litigation or disputes that could impact the listed entity. While rulings that result in significant financial liability may affect stock prices, outcomes that are pre-disclosed or anticipated, where the market has already priced in the potential impact, may not always be price-sensitive. As a result, events covered under Regulation 30 of the LODR Regulations require further independent analysis of their price sensitivity to determine whether they should be included within the scope of UPSI.

However, proposals for information such as upward or downward changes in ratings are inherently price-sensitive, as they directly affect the perception of a company’s creditworthiness or risk profile and are closely monitored by investors. Similarly, including award or termination of order/contracts not in the ‘normal course of business’ is justified because both the award and termination of contracts outside the normal course of business often indicate significant changes to the company's future cash flows, market position, or operational strategy. These events could lead to price movements. Of course, a material filter should also be applied, as a Re. 1 outside normal course of business contract should not be required to be disclosed.

 

The proposal to include information in relation to initiation of forensic audit or receipt of final forensic audit may raise speculations about potential mis-statements, misappropriations, or irregularities in a company’s financial dealings is too pre-mature. Indeed, if at the preliminary stage this is required to be disclosed, few companies would initiate a forensic audit for the fear of bad press. Indeed, the company would get bad press if and when a finding of mis-statement is found by the forensic report. Mandating a disclosure pre-maturely would be a regulatory self-goal.

At this juncture, it is important to note that the definition of UPSI is intended to be inclusive, already covering disclosures under the LODR Regulations that may be price-sensitive. The current proposals reflect SEBI's intention to better align its regulations with the realities of market dynamics. By broadening the definition of UPSI to include material events required to be disclosed under Regulation 30 of the LODR, SEBI acknowledges that certain events, even if they are not inherently market-sensitive at first glance, could have significant implications for investor perception and are not currently being disclosed. As a free market supporter, the authors believe in the current approach, but SEBI may be right in changing standards if it has data that people are being too cute with disclosures.

Through this approach, SEBI seeks to capture a wider range of corporate actions and events that could influence the financial standing or public perception of a listed entity. However, this broad interpretation introduces complexity, as it may lead to the classification of at least some routine operational events as UPSI, even if their market impact is limited or uncertain. Similarly, some other concerns with respect to forensic audits and under investigation or under enforcement events should not be disclosed till a finding of fault.

SEBI's proposed revisions to the UPSI definition aim to address changing market conditions and improve investor protection. Expanding the scope to include more material events under the LODR Regulations helps with clarity and compliance. However, it also creates challenges in distinguishing between price-sensitive information and routine operational matters. A consistent and focused approach, based on the likelihood of an event affecting market prices, reducing adverse impact on innocents and preventing self-audits by pre-mature disclosure would ensure that only truly relevant disclosures are classified as UPSI. This approach would help maintain the effectiveness of the insider trading regulations, reduce unnecessary compliance burdens while aligning the rules with current market practices.

 

From Reels To Rules: Sebi’s New Era Of Finfluencer Oversight

Rashmi Birmole,  Pranjal Kinjawadekar and I have a piece in the Financial Express of 30th Nov 2024 on the new structured digital platforms to regulate unregulated influencers being associated with registered SEBI intermediaries. The full piece is as below:

The regulation of finfluencers has been a subject of debate long before any attempts to bring them within the regulatory fold. Designing a framework to address the spread of unauthorized advice or misleading claims to an impressionable audience has had its own challenges, especially given the absence of fiduciary duties and a code of conduct. While such activities could be penalized as fraudulent practices or unregistered advisory, given the scale of misinformation and justifiable risks surrounding investor protection and financial stability, there was a growing need to also consider pre-emptive solutions.

To that end, in August 2023, SEBI proposed to limit the association of regulated entities with unregistered persons, like finfluencers, in a bid to disrupt their revenue model. The proposals culminated in amendments to certain key regulations on August 26, 2024, that barred regulated entities from associating with persons who provide advice, recommendations or performance claims, without being registered to do so by SEBI. However, such associations were allowed if carried out through a ‘Specified Digital Platforms’ (SDPs) recognized as such as SEBI, based on whether the specified preventive and curative measures could be demonstrated by such platforms. This was also followed by a directive to regulated entities to terminate all existing contracts with individuals providing unregistered advice or making performance claims.

On October 22, 2024, SEBI released proposed measures based on which digital platforms would be recognized as SDPs. Digital platforms have also been broadly defined to encompass any platform that facilitates communication between two or more individuals and allows user-generated content.

The criteria released by SEBI can be seen as two-fold – preventative and curative. Preventative measures are envisaged as proactive actions to prevent fraud, impersonation, unauthorized claims and presence of unregistered entities. Several of these measures, such as implementation of systems to identify and analyze content related to securities (including advanced artificial intelligence (AI) and machine learning (ML) tools), policies to take action against securities market violations and impersonation, allowing investor education content and use of verified labels to distinguish registered entities seem premised on creating a digital ecosystem that is well-equipped to identify and filter out unauthorized advice, claims or advertisements. However, what is truly striking, even upon a first reading of the proposals, is the breadth of power given to SEBI on multiple levels. Whether in terms of requiring an SDP to share securities-market related data on request, act on inputs received from SEBI, take measures to the satisfaction of SEBI and even periodically report to SEBI, in a manner akin to regulated entities.

Curative measures, on the other hand, are intended to address the gaps in preventive measures. The requirement for prompt escalation of reports regarding unlawful content and unauthorized entities by SEBI, regulated entities and users alike, is intended to restore confidence and enable prompt identification of such content. The SDPs would also be bound to act on such reported content within strict turnaround times, which may also include takedown or blocking of content and blacklisting of repeat offenders. Interestingly, the action that a platform takes should be to SEBI’s satisfaction. This leaves little to no room for the platform to arrive at objective conclusions based on its own verification and is essentially a carve-out for SEBI to direct content to be blocked or taken down, without further scrutiny.

Considering the growing influence of social media and influencers in today’s day and age, it is evident that the prospect of being recognised as an SDP would appeal to a number of digital platforms. While the implications of SEBI’s extensive powers under the SDP proposals on free speech and the legality of creating substantive obligations through a circular warrant a separate conversation of its own, digital platforms considering recognition as SDPs must be cognizant of the extent of SEBI’s potential involvement in their activities, if they were to succeed. Moreover, given that SEBI’s decision as to whether certain content qualifies as ‘advice’ or ‘performance claims’ is likely to be the end all, with platforms bound to take action to its satisfaction, it is possible that legitimate conduct may also be impacted, unless stronger controls are worked into the framework.

The proposals also call for platforms to implement policies for providing data upon request, thus increasing SEBI’s oversight of financial activities in digital media. However, the lack of clarity on the specific data to be shared may create compliance challenges, particularly in respect of end-to-end encrypted data, which may deter them from seeking recognition. Further, the costs of integrating advance AI systems could potentially deter new entrants and smaller platforms. Automated systems may also unintentionally flag legitimate content as violative, resulting in unwarranted disruptions. This risk extends to lawful content or advertisements being mistakenly identified as violations, which is precipitated by the absence of any redressal mechanism apart from approaching SEBI.

When compared to international practices, SEBI’s approach seems to be comparatively more intrusive and wider. The Financial Conduct Authority (FCA) in the United Kingdom employs a collaborative model, integrating its oversight with existing digital regulations rather than introducing standalone frameworks for financial content. The FCA partners with Ofcom under the Online Safety Act, emphasizing shared responsibility for online platforms while avoiding the role of a direct regulator. Similarly, in Australia, the Australian Securities and Investments Commission (ASIC) has partnered with online platforms to enforce verification processes for financial services advertisements. This collaboration reduces fraudulent promotions while minimizing compliance burdens on digital platforms. For instance, Google now mandates that financial services providers verify their Australian Financial Services licenses, issued by ASIC, before advertising. Providers must also complete Google’s advertiser verification program, a policy aimed at curbing financial fraud through online advertising.

While SEBI’s initiative to regulate digital platforms is a welcome step towards addressing the proliferation of unregistered financial advice, the framework’s stringent requirements raise several practical and legal concerns. Ultimately, the SDP proposals represent a significant shift in its regulatory strategy, signaling a move towards tighter control and attempting to bring platforms that fall outside SEBI’s jurisdiction, within its regulatory ambit by reason of having facilitated the publishing and availability of financial content. The new norms must face three challenges. One, of how it acts within the framework of freedom of speech, specially in borderline cases. Two, whether the regulator has the bandwidth to administer such a large mass of the regulatory unwashed masses and whether this SEBI-Administered Facebook (SAF) will have any takers. Third and most importantly, whether any of the millions of people with views and youtubers would at all want to be on a platform where the SEBI-Suaron’s eye is ever-watching. How these proposals unfold in response to the financial sector and social media platforms alike remain to be seen.