Sebi’s proposals may raise compliance costs for smaller digital platforms
Sebi's proposed framework for Specified Digital Platforms or SDPs necessitates advanced compliance measures, including AI and ML tools, which could impose significant costs on smaller platforms. Experts stress the need for a transparent liability structure and regulatory oversight to ensure compliance.
Regulated entities should prepare for higher expenses if the proposed framework by the Indian capital market regulator for recognizing specified digital platforms (SDPs) is implemented, according to experts. Also, the market regulator will need to develop a clearer liability structure for such SDPs, they said.
On 22 October, the Securities and Exchange Board of India (Sebi) released a consultation paper outlining a new framework that will allow recognized SDPs to act as intermediaries for content related to securities, provided they adhere to strict measures specified by the regulator.
A digital platform is a software and media platform that enables users to interact online and create, share and access information using its services. An SDP will be expected to have a mechanism in place to take preventive as well as curative action to ensure that it is not used for any activity specifically prohibited by Sebi.
These platforms will be required to demonstrate robust mechanisms, including collaboration with Sebi, sharing relevant data about securities markets, and deploying advanced technologies like artificial intelligence (AI) and machine learning (ML) for content monitoring and reporting fraudulent content.
Cost of technology
Adopting AI and ML tools will have financial implications for smaller platforms. While due diligence, notice-and-takedown regulations and badging of approved users are common for significant platforms under existing Indian and global norms, implementing Sebi’s mandate about SDPs using AI and ML tools to identify content “related to a securities” will prove to be more challenging, said Arun Prabhu, partner and head of technology at law firm Cyril Amarchand Mangaldas.
These tools could significantly reduce the burden on SDPs for identifying securities-related content. But purchasing sophisticated and advanced AI and ML tools “will be expensive, and the financial implications will be more pronounced for smaller digital platforms,” said Rajiv Sharma, a partner at law firm Singhania & Co.
The other option is to do it through third-party solutions and cloud-based services without incurring excessive financial burdens, according to Sonam Srivastava, founder and fund manager at Sebi-registered investment advisory firm Wright Research.
“While larger platforms may find it easier to integrate AI and ML technologies, smaller players will need to adopt cost-effective solutions or partnerships to remain compliant,” said Srivastava, adding that investment in compliance remained crucial for competitiveness.
Platforms like YouTube, Rigi.Club, Cosmofeed and Moneyyapp, which have direct-to-consumer interactions and monetization, may possibly be affected by this circular, experts said. Mint reached out to the platforms for their responses. A few reserved their comments until after the proposal is approved by Sebi.
Moneyapp, a fintech platform for creators, said the company was closely monitoring developments regarding Sebi’s proposed framework. “While the regulatory framework is a step in the right direction to foster innovation and protect consumer interests, it is important to assess the potential financial implications,” founder Fayyaz Hussain said.
MoneyyApp was committed to fulfilling all compliance requirements and is mindful of the additional costs that may arise from. “AI and ML costs were nominal if implemented smartly. Of course, that depends on AI agents and the quantity of data which has to be processed by AI agents,” Hussain said.
Legal framework and liability
Apart from costs, experts also highlighted a critical aspect of the proposed framework: a transparent liability structure for SDPs. The proposal clarifies that in the event of disputes between an SDP and other entities, they may approach Sebi, and the SDP could subsequently approach the Securities Appellate Tribunal.
“As a matter of practice, foreign jurisdictions grappling with similar issues tend to hold entities providing misleading information liable rather than the platforms,” said Moin Ladha, partner at law firm Khaitan & Co. “Given the volume and nature of content such SDPs may host, it will be interesting to see how this is managed in the Indian context.”
Others also proposed that Sebi establish a specific authority staffed by experts to supervise and regulate SDPs. According to Smrithi Nair, partner at Juris Corp Advocates and Solicitors, Sebi can lay down the framework for how applications will be made to this specified authority and empower it to audit, inspect and request additional information and credentials from the SDPs.
Additionally, the requirement for SDPs to share data with Sebi raises concerns regarding data privacy and user consent. Purusharth Singh, co-founder of law firm White & Brief’s Sidebar, suggested that such provisions should align with existing privacy laws like the Personal Data Protection Act (PDPA) to ensure that data-sharing mechanisms are compliant and user consent is appropriately obtained and protected.
Mitigating market influence
Even as experts cautioned that effective implementation of the proposed framework will require a balanced legal structure, most viewed the paper as a positive step toward mitigating the influence of unregulated actors.
The consultation paper came against the backdrop of Sebi’s scrutiny of financial influencers offering unsolicited investment advice, Nair said. “In a country where the average financial literacy is below 30%, such unauthorized persons can create economic problems for investors and contribute to market manipulation. Regulators worldwide are grappling with individuals posing as ‘finfluencers’.”
Also read | F&O action: Sebi’s move to curb option volumes to have substantial impact, says NSE chief
Comparing the situation in India to international frameworks, Nair said regulatory bodies in Australia and Europe have begun implementing measures against misleading financial advice from influencers. The Australian Securities and Investments Commission (ASIC) introduced thresholds for determining whether a finfluencer’s advice constitutes financial advice, while the European Securities and Markets Authority (ESMA) enacted regulations to curb hidden marketing practices.
Experts were also hopeful that recognizing SDPs could enhance market integrity by ensuring that only registered entities can operate within the digital financial ecosystem. Wright Research’s Srivastava hoped that increased security and enforcement actions will diminish the presence of entities that pose significant risks to investors.
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