Can Financial Influencers Recommend Stocks? Understanding SEBI’s New Guidelines
Learn about SEBI’s new rules for finfluencers, including stock recommendation bans, investment education restrictions, and broker responsibilities.
On January 26, the Securities and Exchange Board of India (SEBI) introduced a new set of rules aimed at tightening the reins on financial influencers—commonly referred to as “finfluencers.” These guidelines specifically address whether these influencers can recommend stocks, and here’s what every investor should know about these changes.
The Rise of Finfluencers
Finfluencers have become a prominent source of advice on stock trading, personal finance, mutual funds, and other financial topics. They leverage platforms like YouTube and Instagram to create engaging content that attracts large audiences, often resulting in significant revenue generation. In addition to sharing advice, some finfluencers offer online courses on investment strategies.
With the advent of user-friendly trading apps developed by stockbrokers, stock trading has become more accessible than ever. The proliferation of smartphones, affordable data plans, and digital payment systems such as UPI has encouraged a surge of new investors into the stock market. However, many of these new investors lack formal education in investing, turning instead to YouTube videos and similar resources for guidance.
This reliance on finfluencers has raised concerns, prompting SEBI to step in with stricter regulations, effective from January 29, 2025, to manage their growing influence.
Breaking Down SEBI’s Guidelines for Financial Influencers
- Approval Required for Stock Recommendations: Finfluencers, along with unregistered research analysts and investment advisers, are now barred from recommending or advising on stocks unless they have SEBI’s explicit authorization. Furthermore, they cannot make claims about the returns or performance of any securities.
- Investment Education Restrictions: Providing stock tips disguised as investment education on social media is prohibited. If a stock is mentioned in educational content, its price must be at least three months old and lower than its current market value.
- Restrictions for SEBI-Approved Brokers: Entities approved by SEBI, such as stockbrokers, are prohibited from using the services of finfluencers or compensating them for their advice, whether directly or indirectly. These rules took effect on August 29, 2024. Any SEBI-regulated entity that violates these guidelines will be considered non-compliant.
- Consequences for Non-Compliance: Finfluencers and SEBI-approved institutions breaching these rules may face penalties, including suspension or cancellation of licenses. They could also be subject to substantial fines and stricter enforcement actions.
Stockbroker Responsibilities for Unused Funds
SEBI’s circular also outlines responsibilities for stockbrokers concerning unused funds in clients’ trading accounts. Brokers are required to transfer any unused funds to clients’ bank accounts each quarter, typically on the first Friday of January, April, July, and October. If a client has not made any trades for 30 days, the funds must also be transferred.
Clients who prefer not to have their funds transferred must inform their broker through a running account authorization, specifying the amount to retain.
These regulations are designed to create a more transparent and controlled market environment, safeguarding investors from unverified advice and enhancing the overall integrity of the financial market.