Decoding the SEBI consultation paper on regulating financial influencers

Financial influencers or finfluencers have become incredibly popular in the last 4–5 years. While there are a lot of amazing people who teach people about trading and investing, there are many who sell greed and set the wrong expectations. SEBI recently came up with a consultation paper on regulating finfluencers. In this video, Nithin, Abid (Co-founder & CEO of Sensibull), and Sandeep Parekh (Managing Partner of Finsec Law) discuss the issue of finfluencers, SEBI’s consultation paper, and the challenges of regulating them.

If you have any questions about the regulations, Nithin is answering questions here. If you see our referral code being used by people offering tips, unregistered advisory, and illegal portfolio management services, please let us know by creating a ticket here.

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Highlights from the conversation

Nithin

• The thing that bothers me the most is while there are influencers who are going and educating, I think the big problem here is that a lot of them are also setting the wrong expectations from the market, which is the crux of the problem.
• If India has to grow, the capital markets have to grow, and you want people to come invest, and trade in the long run. You don’t want people to come and go, and this has happened many times historically for this country, and that’s one of the reasons the capital market participation is still shallow despite being such a large country.
• I think the most important thing about trading is to quickly realize if it’s meant for you or not. I think a lot of people get carried away and try to throw good money at bad money. I think the biggest trade in trading is really to stop trading. It’s to know when to give it a shot; if it doesn’t work, have a time stop or a money stop and don’t do it after that, and I think anyone who claims that it’s easy to make money trading the market is a bad influence. Just stay away from that person.

• I can’t think of too many people who are consistently making money trading to talk about it publicly. I haven’t come across anyone because people who trade and make good money usually like to be private and are very fearful about telling someone else about strategies that are making money. It doesn’t work like that.

Sandeep

• Based on the quality of all the seminars and the training that I’ve seen online at least, I’ve never paid for this. Based on what I have seen on Twitter, etc., it’s kind of atrocious quality, really, most of it doesn’t even qualify for education, but it’s a byproduct of the free money we have seen over the past two-two and a half years, and I think the biggest teaching is gonna be people burning their money.
• If somebody really knows how to make money, why will they share it with somebody else? it’s logic 101. By definition, almost all of them are either snake oil salesmen or they’re just outright frauds.
• If somebody wants to throw their money in the ocean, you can’t stop them. People have to first throw their money in the ocean to realize it’s not going to come back.
• If somebody finds Rs. 100 note on the road, are they going to give it to you or keep it to themselves? If someone really knows how to make money, why would they share it with somebody else? Logic 101.

Abid

• Because of this front-running pump and dump and the whole IPO peddling issue, I really, really am worried that this is a much bigger problem because I have not seen a single registered analyst or an RIA who has a hundred thousand people to reach, but I really can’t count how many people I know who run Telegram channels or YouTube channels with three million, four million kind of subscribers and this is the problem.

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Transcript of the video that’s been edited for readability.

Abid: Hello, guys, and welcome to this podcast, a very important one that we are hosting on an extremely critical piece of regulation that has come out from SEBI over the last week. This is a consultation paper that the regulator has introduced, and this consultation paper is on the association of SEBI-registered intermediaries and regulated entities with unregistered entities, including finfluencers.

Now, this was launched last week. I had to talk about what this is about and what it means to the financial sector and the community. We have with us Sandeep Parekh, who’s the foremost voice in India on regulations in the financial sector, and we have Nithin, the CEO and founder of Zerodha. 

Hello Sandeep, hello Nithin.

Sandeep, Nithin: Hi.

Abid: So I’ll give a brief coverage of what the meta is about, and then I’ll let Nithin and Sandeep take over this thing to tell us more about what this is about.

So basically, the regulator hinted last week that they are concerned about the financial influencers who are unregulated, who are playing a large role in the industry as of now and the regulator has said in the paper that they are worried about the fact that finfluencers are taking incentives to sell products, services or securities and they’re worried that the finfluencers may not have the requisite expertise to do this and they’re also worried that they’re not subject to any code of conduct when it comes to what they say or act so, therefore, they want to curb this, and the meta of the paper is that to curb this they attempt to disrupt the revenue model of the finfluencers which basically means that the paper says that registered entities such as brokers, RAs, RIAs, etc. cannot give any kind of incentives whatsoever to influencers any kind of promotion.

They also want to make finfluencers responsible for their actions, so they are hinting at some registration, and then finally, they are trying to make finfluencers more accountable by giving a complaint link, etc.

So let me just leave it to Sandeep. Sandeep, what do you make of this paper? What is this all about? Where is this coming from?

Sandeep: I think this is coming from a lot of flak SEBI has been getting over the past year plus, saying that you guys are not really taking charge of the securities market, the financial markets. You are supposed to make sure that you don’t have people who are like snake oil sellers who try to sell all kinds of inappropriate products, they’re getting commissions from people, they’re getting money from people when they’re not disclosing that, and essentially they claim they’re educating people but what they’re doing is misleading people into wrong investments. 

I think it’s in that backdrop that SEBI has said, okay, look, we are going to look at it from two angles. One is we want to protect freedom of speech, which is of course, guaranteed in the Constitution. If I talk to Nithin or you about company X, or even options trading or how it’s done, etc., that falls within my constitutional right as such versus my responsibility to disclose any conflict of interest.

Let me spend 30 seconds on probably the oldest case on something like this. In the U.S. Supreme Court case called SEC versus Capital Gains, which looked at this topic for the first time long back then, a person was making recommendations to purchase or sell stocks, but just before the recommendations got put out to his customers or investors, he was buying maybe half a day before that, and the SEC went after him not for fraud, but for breaching his fiduciary duty. 

His response all the way to the U.S. Supreme Court was, look, this is not biased research. I genuinely believe this stock is really good, and I’m saying that. The Supreme Court sided with the SEC, saying, No look, this is not an actual fraud, but whenever you’re in a relationship like this, you really need to disclose your interest before you make this recommendation, particularly given that you are actually trading ahead of your client in this.

So I think we’ve had, in a way, a convergence of the ASCI standards, which, of course, is not really a regulator today, but interesting guidelines have come from there for regulating influencers, and I think the SEBI paper is the starting point. 

The third thing I think from the enforcement angle would be almost every week if you see the SEBI website, they’re passing some order against one person or the other for violating either investment advisor regulation, providing investment advice without being registered, or research analyst regulation. So, I think that’s the backdrop of this paper.

Abid: Nithin, Would you like to add something here?

Nithin: As Zerodha, we’ve been beneficiaries of this. Again, this has been my problem because life is full of contradictions, right? I mean, this is one of these things I’ve been bothered about because while there are influencers who are going and educating, I think the big problem here is that a lot of them are also setting the wrong expectations from the market, which is the crux of the problem. 

This whole “it’s easy to make money in the market” or how easily or how quickly I’ve made this money, so you can also do it. As long as someone is setting this wrong expectation, I think it’s bad for the business in the long run, while in the shorter run, we might benefit in terms of an uptick in accounts, not just Zerodha, all the broking community, people come to the stock markets with the wrong expectations, they are gonna get disappointed and they’re not going to be around for the long run. You want people to come if India as a country has to grow, the capital markets have to grow, and you want people to come invest, and trade in the long run. You don’t want people to come and go, and this has happened many times historically for this country, and that’s one of the reasons the capital market participation is still shallow despite being such a large country.

So, I’ve had this problem right from the start. Whenever this influencing thing took up, especially after COVID, it’s just gone bonkers. The number of people going out there and creating content and making it seem like it’s very easy to trade in the markets. 

Some of them are doing outright fraud. If someone is manipulating their P&L and showing it, it’s a problem. It’s a fraud if someone is manipulating a P&L, there is no other way around it. One of the reasons I think why you guys first started with that Verified P&L at Sensibull and then us extending that was saying that if someone is putting up a screenshot of a P&L, we rather have a Verified P&L versus a screenshot because at least then someone can’t be manipulating the P&L itself by using photoshop, etc. to edit the screenshot. 

So, that’s the other thing. According to us, at least internally the way we are thinking is if someone’s making these false claims, there should be some kind of action taken against them because it’s just outright fraud of sorts. I think the problem for us as a broker is something I’ve highlighted. We recently had this Q&A running on TradingQnA around this that, as a broker, the thing is, we can’t on our own take a stance here because today, influencers also wield a lot of power, and us taking a stance can potentially backfire against the business and whatever has to happen, has to happen through a regulatory framework of sorts and I think this consultation paper is really the right direction which kind of addresses these problems, which is someone who is behaving like an advisor and an analyst. 

Today, I think a lot of people are taking this whole freedom of speech stance here to say that “I’m allowed to act like one because I’m not collecting any money from the user directly”, but they are indirectly making money. A lot of ad revenue, a lot of commissions, etc., the consultation paper kind of addresses that. I still don’t know how the ad revenue bit will play out. This is something I wanted to ask Sandeep, actually. 

Is it okay to behave like an advisor analyst and not make any direct money, but what if you’re generating ad revenue out of it? Is that okay? Because the problem here is the louder you are, the more viewership you get. So the incentive is always skewed to be loud on social media and if you’re somehow able to generate ad revenue, say tomorrow, none of the capital market intermediaries pay any of these influencers, the influencers still can generate a lot of ad revenue. How do you see that playing out, Sandeep? This is something I wanted to ask you.

Sandeep: I think SEBI has a neat answer to that which is, we have one baby which is ours, the other baby is not ours.

The first baby is that the idea is to register finfluencers which probably will mean that they have to number one get a registration number from SEBI and number two they will be accountable to SEBI for not making these disclosures which, when I read them along with the ASCII code, which is quite sophisticated and granular as it even talks how many seconds the disclosure etc. should be.

If you read these two together, what SEBI really is saying is if you are registered, we’re okay for you to associate with people within our domain, like brokers, investment advisors, etc. can use finfluencers for marketing their services or any other affiliations so long as the disclosure is made.

And the other, the disowned baby, is really that if you’re not registered, you can do whatever you want really, we can’t control you. It’s freedom of speech. Even if it goes to the level of fraud, I think SEBI’s stance seems to be that we will not associate or be responsible for that fraud. As an investor, you kind of take ownership of people who are not registered because here we are telling you that we’re going to register a handful of them, and you should deal with those finfluencers.

I don’t know how SEBI is going to actually deal with it if it gets to something worse than today because they’re getting a badge of honor from SEBI itself that okay, you are a registered SEBI finfluencer. Based on the quality of all the seminars and the training that I’ve seen online at least, I’ve never paid for this. Based on what I have seen on Twitter, etc., it’s kind of atrocious quality, really, most of it doesn’t even qualify for education, but it’s a byproduct of the free money we have seen over the past two-two and a half years, and I think the biggest teaching is gonna be people burning their money.

Beyond a point, if somebody wants to throw their money in the ocean you can’t stop them so that seems to be SEBI’s stance.

Nithin: Does it even come under SEBI’s power, for example, as the consultation paper suggests, as long as this person influences whoever is getting paid by a registered SEBI intermediary, at least you know they can control that, but if a person’s got no relation directly with the capital markets does it even come under SEBI’s powers and can they really do something about it?

Sandeep: So the answer is yes, and to the extent that if somehow it falls within the definition of investment advice or research analysis, then it could fall within SEBI’s domain, and as I said, almost every week, we are seeing one order coming up from SEBI under both of these regulations. So if it falls within that, SEBI can and does take action, but a large majority of that is either, you know, so-called educational material, some of it is actually genuinely educational, and a lot of it is ad revenues like you said. I put out a YouTube video on how to trade an option, then I’m getting paid from whoever is paying me for that, etc. 

So, both of these would continue to remain outside SEBI’s domain, even to the extent of fraud occurring. If let’s say there’s a kind of a manipulated P&L, I don’t think SEBI wants to intervene, and I think just the quantum of the bandwidth required to go after each influencer is something that is kind of restraints SEBI’s hand is my guess.

Nithin: On this RA, RIA piece, I had one last question. If a person, this is my understanding, if there is any commercial arrangement, is really when you need to be registered? Is that understanding right? For example, I am telling you what stock to buy, but I’m not charging you a fee for this. I’m just doing it as freedom of speech or out of free will. Is it considered as an RIA, if there’s no commercial arrangement in place? I mean, is the same thing with RAs as well?

Sandeep: The answer is different from RAs and RIAs.

For RIAs, the definition of investment advice is someone who does something for consideration. But when you look at the definition of an investment advisor, it says you could either be a person who’s giving investment advice for consideration or putting himself out as an investment advisor. So even if it’s without consideration but you hold yourself out, it’s a technical legal term, which essentially means that you put up your board saying that I am an investment advisor, and I’m providing these services, then without consideration, you will fall within the definition of an investment advisor.

Research Analysts actually have no requirement of consideration, so it’s much broader, and therefore, anybody who provides a research report would fall within the prohibition, which is the requirement of registration. If you provide research analysis without registration, you could get in trouble.

Nithin: Then how is everyone doing it? Because everyone is putting out a view on social media, everyone is getting on TV channels and giving recommendations. How is that working without any registration, then?

Sandeep: For investment advice, there are three categories. One is that you registered as an Investment Advisor, and therefore, by doing all your disclosures, you can go ahead and make recommendations.

Second, there are certain intermediaries, like stock brokers, including portfolio managers and distributors, etc., who have an incidental exemption, so they can come on channels and talk about it.

And then the third category is the one that we’re talking about, which is unregistered people who come out and give gyaan on either specific companies or if they are talking about generic stuff, as they’ll probably fall within the educational exemption. But a lot of people who give specific investment advice on stocks would fall within the prohibition of providing advice without registration.

As I said, the numbers are too large for SEBI to manage, which is why you don’t see as many orders as you would want to see. Again, that at some point, it will clash with freedom of speech. The dividing line is not always very clear as to where freedom of speech ends and where reasonable restriction actually begins.

Abid: There’s one more thing: we are an RA, and we follow the RA code very extensively. So, the RA regulations of 2014 clearly say one thing: If I were to opine about the general direction of the index or the broader markets, then I don’t need any license for that. Basically, if I’m going out there and saying I think Nifty will go up, or all IT sector stocks will go up, or Bank Nifty will go down, then I don’t need anything. I’m just a person with a mic and a camera. I can go on YouTube and say that.

The catch comes in when I say SBIN, nice price to buy at 231, or if I say Nifty 19500 Call looks decent to buy. 

So if it’s a specific instrument like a Nifty call or a Bank Nifty put or SBI stock that requires an RA regulation, even for me to say that this looks good, this looks nice, but if I’m just saying Nifty looks good, Indian banks are attractive, or all the Indian IT companies might have a bad time next year, then it is not required.

The point is that this entire thing is so hazy that most people, including the people inside the industry, are not entirely aware that there is a differentiation between broad sectoral views and specific instrumental views, so in that gray area, a lot of people go to YouTube, and like Sandeep pointed out, the regulator can’t go behind every single person in jhumri telaiya and ask, boss, what did you say last week? 

So I think that gray area plus the fact that enforcement is difficult is what is really making people say to buy Bank Nifty calls today. I think that’s one area to look into.

Sandeep: Just to add, I should have mentioned that very clearly. I think you already pointed out that research analyst regulations does talk about these exemptions for general advice with respect to the markets, etc., so I think it’s reasonably well understood, I would say, within the sophisticated and limited market of registered research analysts, but I don’t think most people outside that community understand how that goes, and therefore they dabble in both.

Abid: Sandeep gets it; I get it; Nithin gets it; but people don’t. So they can’t even go to SEBI and complain. Boss, this guy asked me to buy Bank Nifty last week.

Nithin: Got it. Abid, over to you; any other question? 

Abid: So one of the things that I want to understand from Nithin is, how bad is this thing anyway? How much of a scale are we looking at? How truly gone is the system? 

Nithin: It’s really hard to put a number to this. At Zerodha, between 10 and 15 percent of new business comes through referrals.  

Abid: Oh, that’s it, so that’s not significant.

Nithin: It’s not, I mean, in the sense that this is accounted for. That means this comes through a referral link, and this also includes, we have tens of thousands of customers who use these referral links to <inaudible>. So the finfluencer piece is maybe five percent—half of that—and the rest of the piece is really customers referring to each other. 

Abid: I don’t think the paper is clear on that; the paper is saying that a limited number of retail client referrals are okay, and the consultation paper says that.

Nithin: The question here is, how do you define retail customer and influencer? Because everyone today has a social media account, and everyone’s saying something about the market and potentially sharing affiliate links, etc. 

So, how do you define who’s an influencer and who’s a customer? Is it based on a certain audience? I think there’s one regulation from before that says if you have more than a million followers, you are a celebrity, and a broker is not allowed to associate with the celebrity. So will SEBI come up with a number like that, do you think, Sandeep? As in, who is a finfluencer?

Sandeep: Yes, they most likely would because this paper is actually very sketchy and grammatically quite dense. For instance, they used the word limited referral. I have no idea what that means. So it’s got a lot of phrases that are not very clear, and it’s just very brief; this touches on the topic. So either, they’re not very clear at this stage, but they will obviously have to come out with a very detailed circular on what they mean and what the definitions are for who is going to fall foul. 

And not everybody understands that they need to be registered to provide investment advisor research analysis, so I think a bit of financial literacy for the finfluencers is also quite important. The thing that they dole out very freely is something that they need to receive as well. 

But broadly, I think SEBI’s mantra, which I also put in my book, is that SEBI sees this role as somebody who removes ignorance from the market and not stupidity. This distinction is really important because, beyond a point, if somebody, like I said, wants to throw money on the ocean, SEBI is not going to come and stop them. 

So if people are taking absurd advice from unregistered people when they know they should be working only with registered people, beyond a point, SEBI is not really going to care, and this also comes from the bandwidth issue that I mentioned.

Nithin: I want to ask you a question; you interact with a lot of traders as well. How big do you think that problem is? You’re actually the one who is doing a lot more of this interaction through your YouTube channel, so how big do you think this is?

Abid: I think this is horrible. I’ll tell you why because I think this is way bigger a problem, especially when it comes to derivatives than anything else, and there are three major problems with which I have a concern. I shadow-follow a lot of telegram groups in India without letting them know that it is me. 

So one of these days, I noticed something: there was an option on a smaller capital stock, which I think was IHCL (Indian Hotels), and there was an ATM option that was trading at some price now in that particular group. A call came asking people to buy IHCL options on a particular strike, and this was not a very liquid strike. First of all, even in IHCL, the ATM option is not very liquid; we are talking about a less-traded option. Now, after the call came, the option price moved more than the stock price, whereas theoretically, an option price can never move more than enough because the option is always a percentage of the stock price. 

An ATM option can only theoretically move 50 percent of the stock price, but the call given in that telegram group of over some 50,000 people was so big that they moved the option price more than the theoretical value, and somebody benefited from it, and now my problem is that my biggest worry is that, are influencers front-running less traded derivatives because on IHCL, I think the lot size at that time was 2000 per lot, and if somebody captured two rupees on a single lot, that’s 4k. If 10 people make this mistake, the influencer has actually made 40K on a call. 

The second problem I’m worried about is seeing a lot of people come on shows and say that this IPO looks good. This is blatantly violating the RA regulations and even the RIA regulations for that reason. Now the problem is, there’s no way you can prove that the influencer might not have taken a financial incentive from the promoter of the company to say, Look, boss, please peddle this to some retail investors, I want a nice exit. 

The third thing which of course I am worried about is that there is possibility that somebody who owns a large enough Telegram group, let’s say a hundred thousand people, there are several Telegram groups in India that have a hundred thousand people or more, none of which have an RA regulation. How do I know that they are not market-making? Basically,  they are not putting the bid and offer in for something they are giving calls in.

So I can say, Okay, by this option at X price, put the offer in the market, and then later I can say, Okay, stop loss time; please get out at this price, and I can make the bid also. 

So because of this front-running pump and dump and the whole IPO peddling issue, I really, really am worried that this is a much bigger problem because I have not seen a single registered analyst or an RIA who has a hundred thousand people reach, but I really can’t count how many people I know who run Telegram channels or YouTube channels with three million, four million kind of reach, this is the problem. 

Nithin: Sandeep, now for this Telegram group issue, I know that potentially the person who’s running is not even an influencer; it could just be an anonymous person. How do you tackle this problem? It’s almost impossible, isn’t it? 

Sandeep: Yeah, I think it’s impossible, and I think the only part of the answer is really investor education—that pretty money doesn’t exist in the world. Part of it, I think, learning has to be learned firsthand; you have to be foolish enough to waste money on a Telegram channel. Hopefully, it’s not selling the house and burning that money.

Beyond a point, it’s very hard to kind of prevent stupidity, and I’m being blunt about it, but if you think that there is free money available anywhere in the world, I think you have to be pretty deluded. Whether it’s coming from a Telegram channel or whether somebody finds a 100 rupee note on the road, are they going to give it to you or are they going to keep it themselves? That’s the question you have to ask before following these guaranteed strategies of making money, and whether they pump and dump or whether there are other forms of manipulation, almost all of them are guaranteed to be that. 

If somebody really knows how to make money why will they share it with somebody else, it’s logic 101. By definition, almost all of them are either snake oil salesmen or they’re just outright frauds.

There is a bit of education involved, so I don’t want to diss every single one of them, but you could learn options trading and probably make what in economics is called rent. I don’t think you can make profits out of it, but you can probably make small amounts of money here and there. Of course, given the risk, 

So I think overall a large part has to do with, number one, investor education, and number two, just the whole regime of free money ending in the Western world, and I think that’s percolated down to India as well. People who looked at all the meme stock mania in the West thought that you could make free money in India as well. 

The fact is, statistically, as you’ve been pointing out, I’ve probably seen more than 20 posts of yours talking about the SEBI paper. Beyond a point, I’m sure even you get tired of telling people, Okay, these are the official numbers; it’s in our interest to kind of not tell you this, but we’re telling you this nonetheless, so beyond a point, how does SEBI or Nithin kind of tackle a problem like this? 

Nithin: We’ve thought about it quite a bit. I think the right time to teach all of these basic money lessons is maybe even before you start making money. There’s something that we’ve been trying to say: You need to introduce a little bit of Finance in schools and colleges because once you have fear and greed and all your money biases take over you, it’s very hard to change the way you think about money. but yeah, you’re right, I think more people have to come out there and talk about how there is no easy money out there

Abid: Just one question on the reverse side of the argument, Nithin, you’ve been saying that the expansion of financial markets is very critical to growing the economy and making people more inclusive in the whole financial sector. But, let’s face it, there’s no financial inclusion in India. How many people actually invest in stock markets? If you generally look at any country, the growth in capital markets is essentially the driver of bringing capital to companies and getting them to grow.

Now the point is: we can say everything that we want against them, but the truth is before influencers, nobody probably has had the scale or reach of some of these names to educate the common man or woman in India to come to financial markets. They have given much more intro.

I agree that some people might have started investing through them and lost money in a market that went up 100%, while some people’s portfolios might be 30% down, but it doesn’t deny the fact that most of the people who made their first demat account transaction after COVID probably did it because they listened to a YouTube video. So wouldn’t you think that a step like this to make influencers extremely regulated would just be a step back in popularizing financial markets?

Nithin: Firstly, a lot of people think India is all options trading, but it isn’t. In the last year, I think there were 40 lakh people who traded on options once, and there were almost two crore Indians who traded in stocks. So options trading, while it contributes to 80%+ of exchange turnover, really comes from 20% of the active population out there.

So this whole option trading thing is a problem, but it’s not as widespread as people think it is. You’re right, as in, I think whatever growth we’ve had in capital market participation in the last two or three years would not have happened if not for a lot of people going out there and talking about it on social media. Unlikely, and I think what would have otherwise taken maybe five or six years has happened in the last two or three years, as in just the growth of the capital markets.

The only problem I’ve had with the whole influencing janta has been setting wrong expectations, as long as you know they can correct that. I mean, we need this, we need people to be going and talking about why people should be investing in stock markets, etc. The only thing I think we should try to figure a way is to have some framework where the expectations are set right, which is that there is no easy money to be made in the market because if the expectation is not set right like I said earlier people will come and go.

While we’ve seen a lot of growth, one little drawdown in the market and they’ll all disappear because in that way it is good for the shorter run but not good for the long run and we need to kind of do what is right for the long run for the markets and which is people come to the markets with the right expectation and then everyone’s gonna stick around. that’s what we need in the Indian capital market.

So, we need some regulatory framework, but it can’t be in such a way that no one in India can talk about stock markets at all. It can’t be that as well.  

The consultation paper, what it’s trying to do is kind of remove some of these incentives, which potentially are conflicted. Should an finfluencer be generating commissions from whatever he/she is talking about? Maybe not. Because, like Munger says, “Show me the incentive, and I’ll show the outcome.” Maybe removing that incentive is not probably a bad thing for this to exist in a format that we all think will fit in the long run. But for sure, we need finfluencers—people who go out and talk about markets, educate, and all of that. I mean, there is no doubt about it at all.

Sandeep: Let me take a stab at this. In the past thirty years, this is probably the first time I’ve seen where you had a huge foreign investor outflow around six or eight months ago, and the Indian markets are pretty stable because you saw a huge amount of retail and DII investments happening at the same time. So we never saw the crash that most of the Western World saw six or seven months back.

So I think a lot of credit needs to go to domestic investors. How much of that is coming from influencers? I don’t know how much is causation and how much correlation, but I would think at least we should give them a little bit of credit, if not more, for bringing you this whole capital markets outlook.  

I think broadly, they need to learn two things: one is diversification, and the other is kind of the magic of compounding.  I don’t think most people need to know too many other things. A lot of the stuff that we see on social media focuses on the short-term, intraday trades, and other stuff.

So I think people need to realize the difference between good and bad in terms of taking away the good, which is that investing in long-term equity risk can be really good for your portfolio versus people trying to make money in 24 hours.

Abid: One more thing which I wanted to understand is, SEBI can regulate everybody in India, the intermediaries like all brokers, RAs, and RIAs everything is covered, but then there’s a key part of this, which is that the influencers are not exactly operating only in regulated markets. I mean, how many times have we heard of a crypto company going belly up or investors losing money in this, and effectively, the Indian regulators at least the capital market regulators have no say in crypto.

So what if this particular regulation causes an exodus of all the existing finfluencers en masse to something like crypto or betting on horses, or who knows what people can bet on? What if it comes back as something much more problematic? What do you think of that?

Sandeep: It is something which people have to learn the hard way. Like I said, people have to first throw the money in the ocean to realize it’s not going to come back. 

People can invest in meme stocks, NFTs, crypto, etc., and again, crypto is not one undefined mass; there are kind of relatively better opportunities within that, like Bitcoin and a lot of what they call all kinds of altcoins or shitcoins. People will have to learn it the hard way. I don’t think there’s an easy way beyond investor education to teach them about these two simple concepts that I just mentioned. 

People will kind of get into excess. We’ve probably lived in the biggest bubble in our lifetimes, and that bubble is slowly bursting. It’s still not burst, but it is deflating for sure, so I think people will have to learn it the hard way.

Nithin: If you look around, I don’t know if it’s good or not, but you need to say that our government is also acting on it, right? Like in all of these taxes that were introduced to crypto, gaming, etc., or people who are moving money out of India to invest using CFD platforms, the RBI has put up a list of all CFD platforms, saying that if you trade on this, it becomes a FEMA violation.

Abid: Just for our users’ clarity, CFD means Contract for Difference, which is basically trading in all these foreign currencies like the Pound and Sterling with all these forex trading platform ads that we keep seeing, you’re essentially talking about that, correct?

Nithin: Yeah, the RBI has put up a bunch of 40–50 platforms, saying that if anyone trades on them, it’s a FEMA violation. Can this business suddenly move to other asset classes because there are restrictions on influencers? There are already some regulations, taxes, etc., that have been put in place, so it can’t happen now. Can it be something new, like horse racing or something? I don’t know. Can something new mushrooms? It will, but if you look at how the government’s been reacting, hopefully, we’ll have very quickly someone going to get up and plug that hole.

Abid: Sandeep and Nithin, would you like to add any closing words to this?

Sandeep: Yeah, I think at some point investors will have to figure out that there is a kind of registered and protected world and there’s the Wild West out there, and I think they’ll have to be discerning and differentiate between the two and know that there is accountability, etc. within the world which SEBI regulates. I would think that even if this paper were to come to fruition, it will probably apply to 0.001% of all finfluencers and not to everybody.

At the end of the day, the investor’s discernment will be key to protecting their assets, and we’ve seen five lakhs per investor’s loss, which is actually quite a large amount if you think of the average investment that people make.

I hope better sense prevails and people learn about the easy but, in a way, difficult educational investment that is long-term and goes through particular registered intermediaries to be relatively safe. So, until people either learn it the hard way or through investor education, I think SEBI will have a limited role.

Abid: Nithin? 

Nithin: I really like Sandeep’s quote on SEBI’s job is to remove ignorance and not stupidity. So, it’s actually true.

I’ve used every opportunity, as I’ve been trading in the market for 25 years now. Not at Zerodha, but before, as an individual trader, I’ve always been involved in some way, interacting with traders, building communities, etc. One thing that I use every opportunity to talk about is that it’s really, really hard to be an active trader and make money.

It’s really the hardest place in the world to make easy money. Sometimes, I even say that it’s probably easier to make money buying lottery tickets than trading the markets because when you buy a lottery ticket and have a large outcome, you’re not going to use all that money to buy more lottery tickets. You will probably go do something with it, but in trading, even if you had a large outcome and you made it in the wrong way, you would probably give it all back to the markets because you know you’re not going to stop trading when you have a large outcome.

Yeah, I think people need to just internalize that there is no other way around this. Should everyone trade the markets? I’m a little conflicted as a broker, but I think people should give a shot at learning trading because it teaches you money lessons like no other book in life can. It will teach you a way to understand yourself and how you behave under fear, greed, and all of that, and this lesson is very important. If today I’m a decent businessman, I give a lot of credit to my trading experience because I think I have learned more about myself trading the market than any other book that I have read.

So, there are a lot of upsides to trading the market, but I think the most important thing about trading is to quickly realize if it’s meant for you or not. I think a lot of people get carried away and try to throw good money at bad money. I think the biggest trade in trading is really to stop trading. It’s to know when to give it a shot; if it doesn’t work, have a time stop or a money stop and don’t do it after that, and I think anyone who claims that it’s easy to make money trading the market is a bad influence. Just stay away from that person.

Abid: Or, he’s good at Photoshop.

Nithin: I can’t think of too many people who are consistently making money trading to talk about it publicly. I haven’t come across anyone because people who trade and make good money usually like to be private and are very fearful about telling someone else about strategies that are making money. It doesn’t work like that.

The crux of the problem is the wrong expectations from the market. The only way to solve this is to eventually avoid stupidity and getting carried away by the assumption that it’s easy to make money.

Abid: So, as it always goes, buyer beware, I guess. Thank you so much, Nithin and Sandeep, for joining this. I hope this is as useful for everybody who watched it and as much fun as it has been for us. Thank you, people.