Sebi’s finfluencer rules to hurt foreign brokers

The Sebi headquarters in Mumbai.  (Reuters)
The Sebi headquarters in Mumbai. (Reuters)


In August, Sebi released a consultation paper proposing a fee structure for analysts and investment advisers

The Securities and Exchange Board of India’s (Sebi) bid to tighten regulations on financial influencers, or finfluencers, could have unintended consequences on overseas banks and brokers providing services to foreign portfolio investors (FPIs), two people familiar with the matter said.

In August, the markets regulator released a consultation paper proposing a fee structure for analysts and investment advisers. In the paper, Sebi suggested that fees for investment advisers should be paid through a portal monitored by a Sebi-recognized supervisory body. The idea is to ensure that only Sebi-registered advisers give stock advice and prevent unregistered finfluencers from accessing the platform.

However, many foreign banks and brokers offer bundled services, comprising broking, custodian and research services, making it difficult to ascertain the value of just the research services, said a custodian privy to the development.

“Even after a value is arrived upon, payment of the fee must be done through the platform, and FPIs don’t do direct transactions in India generally. Hence, custodian banks will be forced to ensure compliance. There are more than 10,000 FPIs in India, and each one of them uses research services of multiple firms, increasing the compliance burden on banks," said the person cited above.

An email sent to a Sebi spokesperson remained unanswered.

In response to the consultation paper, the Asia Securities Industry and Financial Markets Association (Asifma), a lobby group for FPIs, said altering the current broker-dealer structure could have unintended consequences.

“The proposed mechanism could potentially disrupt most banks’ research payment mechanism in APAC (Asia Pacific) and India, and create additional frictions operationally to price, monitor and reconciliation of those payments with institutional clients," Asifma said in its response. “Altering existing broker-dealer market mechanisms by which research is paid for carries the risk that there could be unintended consequences to the research market ecosystem and by association the capital markets, including the possibility of reduced stock coverage, impairment of overall market transparency and potentially the ability of small-medium cap companies to access capital."

Market participants said foreign institutions generally follow standard procedures while availing of any third-party services, including that of research analysts. “Sebi’s idea is to cut the unregistered advisers, and that concern doesn’t apply to FPIs since they generally employ the big banks and brokers to provide research service," said the second person cited above.

Asifma has proposed that Sebi should exempt bundled trading services from the ambit of the proposed payment mechanism. “We also suggest that Sebi should clarify that broker-dealers whose payment mechanisms are already covered under the existing regulation are not in scope for the proposed payment mechanism."

In the discussion paper, Sebi said the creation of an exclusive platform will help registered investment advisers and research analysts differentiate themselves from unregistered entities. To be sure, Sebi rules prohibit any unregistered entity from providing research services to clients on listed companies. However, the prohibition has been very difficult to enforce after the advent of social media platforms, said market participants. In some cases, Sebi observed social media influencers, along with certain company insiders or traders, were forging schemes to pump certain stock prices.

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