INTRODUCTION
The Future & Options (“F&O”) segment, once primarily driven by institutional investors, has witnessed a remarkable surge in retail participation over the last few years.. This shift has led to a significant increase in monthly turnover in the F&O segment, reaching Rs 8,740 lakh crore in March 2024, from Rs 217 lakh crore in March 2019. This influx has been driven by factors such as the growing interest in the financial market, easy accessibility to online platforms, and most importantly, the influence of finfluencers. While these factors present tremendous opportunities, they also raise concerns about the risks and potential misuse of the platform by individuals given this market is complex and volatile, and even after this surge, 93% or 9 out of 10 traders incurred losses, with the aggregate loss exceeding 1.8 lakh crore between 2022-24.
In light of this issue, the Securities and Exchange Board of India (“SEBI”) issued a consultation paper to restrict and regulate the role of financial influencers, commonly referred to as finfluencers. Finfluencers are individuals or groups who share financial advice on social media platforms, attracting investors by simplifying complex financial concepts. While some provide valuable insights, others may promote risky investments, such as in F&O trading, often without adequate disclosure of potential risks and challenges, raising concerns about their growing influence on retail investors. In another consultation paper on the F&O market, one of the key highlights was to increase the minimum lot size of investing in the security from Rs. 15 lakhs to Rs. 30 lakhs. The proposal is lauded among institutional investors as larger lot sizes can limit speculative trading by retail investors thereby providing a more stable environment. While reduced competition from retail investors may allow institutional investors to exert greater influence, it could also have severe repercussions on retail investors—often middle-class individuals from tier 2 and 3 cities—who are more likely to invest at smaller lot sizes. While curbing speculative trading is crucial for market functioning, excessively high capital requirements by increasing capital size can dissuade them from investing. Instead, the focus should be on educating the investors through authorised channels beyond popular finfluencer channels, which would help them navigate the complexities of the F&O market more confidently,
ROLE OF FINFLUENCERS – NAVIGATORS OR MISGUIDES?
Finfluencers, often individuals or entities on platforms like YouTube, provide content focused on trading tips, investment strategies, and overall market analysis to simplify the complexities of the financial market. Finfluencers, as elucidated above, are individuals or entities on social media platforms like YouTube, who create content aimed at simplifying the complexities of the financial market by offering trading tips, investment strategies, and market analysis. They act as a valuable source of insights for new investors; however, the issue arose when this led to significant losses for many. The impact of finfluencers is compounded by the fact that retail investors are usually middle-class individuals having no expertise in the financial market. Moreover, as per a recent study by SEBI, almost half of the traders are new to the market, out of which 92.1% have incurred losses. Hence, many rely on YouTube as a primary source for learning trading skills and gaining market knowledge.
It is crucial for investors to not rely on finfluencers, but rather focus on channels providing a deeper understanding of the financial principles. The SEBI (Investment Advisers) Regulations, 2013 mandate that only registered advisers can provide financial advice, yet many unregistered finfluencers bypass these regulations by disguising financial advice as “educational content”, making enforcement difficult due to the vast and decentralized nature of these social media platforms. SEBI issued a paper regarding the disassociation of registered with unregistered entities. While this move is commendable, it may not be sufficient to address the underlying issue. This is so because, despite regulatory measures, investors, driven by the expectation of quick profits combined with the lack of awareness are more likely to be drawn towards unregistered channels. To effectively address the problem, a more comprehensive approach is necessary. This should include financial education and awareness campaigns that empower investors to make informed decisions and avoid falling prey to misleading advice.
FOREIGN JURISPRUDENCE- LESSONS FROM EUROPE
While this growth in the stock market represents a paradigm shift in how Indian investors view the country’s economy, there is a pressing need to protect their interests from fraudulent and frivolous finfluencers.
. In its place, the European Union’s (“EU”) Capital Markets Union Action Plan (“the plan”) provides an exemplary model for other jurisdictions to meet the needs of retail investors. By providing them with a safe space to align their investments with duly informed preferences, the EU’s plan sets the stage for ensuring investors’ interests lie at the heart of the stock market. One of the key proactive measures in the EU’s plan is to enhance the disclosure process of disseminating products and service information to the retail investors, ensuring the retail investors duly know the objective of the company in which they are investing. Additionally, retail investors are protected from misleading marketing by holding finfluencers accountable for the investment education they provide through social media, celebrities, or third parties. For instance, the finfluencers are required to maintain a record of their market communications and practices. By doing so, such finfluencers fall under the regulatory scrutiny of any misleading market communication. Additionally, the qualifications of these financial advisors are upgraded to maintain credibility and security for the investors. However, similar to the EU’s Capital Markets Union Action Plan, SEBI has its own disclosure rules i.e. SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations 2003. This regulation aims to curb existing practices of false advertising and disseminating misleading information. However, an extensive disclosure requirement, as seen in the EU’s plan, is missing in SEBI’s guidelines. This article proposes including finfluencers under SEBI’s 2003 regulations, requiring them to disclose risk mandates before engaging in financial advocacy.
F&O TRADING: LEGAL SPECULATION OR HIGH-STAKES BETTING
With the accessibility of online trading platforms, investors compete and invest in F&O trading according to their financial capabilities. However, many investors quickly to delve into this without understanding the risks this segment entails. While this financial tool provides lucrative investment opportunities to small and medium-scale investors, there is a concerning trend among novices who are investing in the market by relying on the information disseminated by finfluencers. This trend is turning the F&O segment into a gamble.
The Unique Selling Point of the F&O segment is the potential of high returns; however, this same enticement can mislead inexperienced investors. Many retail investors are attracted towards these financial tools in hopes of earning quick profits. Subsequently, their hopes are exploited by the social media finfluencers, who often fail to disclose the risks involved in the F&O segment. Ultimately, what begins as a wealth-creation tool is often reduced to reckless gambling. Despite substantial losses, the F&O segment continues to experience an upsurge. This is can be corroborated by the recent statement of the SEBI chairperson Madhabi Puri Buch, who reported that households are losing Rs. 60,000 crores annually in the F&O segment, yet there is an upsurge in the number of people investing in F&O every year. Therefore, SEBI must take additional steps to protect the interests of these investors.
RECOMMENDATIONS
As evident from the discussion above, financial literacy is the cornerstone of making informed investment decisions, and India needs to establish a robust framework to promote it. Investor Education and Protection Fund under Section 125 of the Companies Act, 2013 aims to promote awareness among investors, but lacks a clear strategy for educating investors. One recommendation is to introduce mandatory investment courses for investors entering the market. Partnering with universities and other educational institutions could also be beneficial, as early instruction in financial principles would prevent reckless investment decision-making.
Additionally, while SEBI’s recent step to restrict the association of unregistered finfluencers with registered ones is commendable, it is insufficient to address the root cause of the issue. A stricter disclosure framework should be implemented requiring SEBI to mandate comprehensive registration of all the advisor including the details such as qualifications and affiliations, and such information should also be promptly displayed on the platform. Moreover, regular audits should be done to ensure compliance with the regulatory requirements.
The key difference between authentic trading platforms and finfluencers is that while the former demonstrates the risk associated with F&O before granting access to the investors, the latter highlights the flashy side of the F&O segment without mentioning the high risk attached to it. For instance, digital applications like Groww have introduced a new F&O safeguard, designed to protect users from losses in this segment. It triggers a warning if losses exceed Rs. 50,000 or 50% of the margin, whichever is higher. Additionally, to continue trading, users must submit financial proof such as bank statements and Income tax returns etc within 30 days; otherwise, the platform restricts access to F&O trading. Furthermore, on Groww’s mobile application, the first thing displayed is the warning that 9 out of 10 equity traders incur net losses. Moreover, the average net trading loss of Rs. 50k is mentioned to educate investors on the risks involved. The absence of this information can be witnessed in the guidance offered by finfluencers. Finally, a mechanism should be formulated to penalize unregistered finfluencers for non-compliance with the SEBI Guidelines.
CONCLUSION
The rise of retail investors in the F&O segment, particularly driven by the influence of finfluencers, is reshaping the financial trading landscape in India. While this trend brings new opportunities, it also introduces significant risks, especially for those lacking financial literacy.
The statistics are alarming and call for immediate regulatory intervention. Finfluencers, with their persuasive content and exceptional confidence, often undermine the significant risks involved, luring inexperienced retail investors into high-risk trading without fully educating them about the repercussions. Knowledge gap is the dividing line between retail investors and their institutional counterparts. The former lacks the resources and the expertise to make informed decisions, thereby making unverified finfluencers as their torchbearers. This leads to a risky situation where many retail investors are engaging in trades that are nothing less than gambling than informed investment. SEBI, in its efforts to counter these risks, has put forth regulatory measures that would tighten the scrutiny over financial influencers.
While SEBI’s approach is well-intended, it risks driving out retail participation altogether. This extreme step could potentially limit the participation from that segment of population, who with proper guidance and education, could make the best out of this market. A more balanced approach would be a comprehensive strategy that blends regulation, education and monitoring which will ensure a level playing field between the retail and institutional investors, empowering individuals to make informed decisions while safeguarding the integrity of the market.
This blog is written by Arnav Srivastava and Abha Singhal, Rajiv Gandhi National University of Law, Punjab