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Fly-by-night stock market advisers



Unauthorized businesses continue to thrive amid rampant illegal practices by self-styled advisers. Sebi has woken up to the reality, but a lot more needs to be done

 

There are many who indulge in dubious activities, confident they will never be caught by regulators. In a vast country like ours, investigations take a long time. Operators take advantage of the long-winded legal process and the limited capacity available with regulators, to set up businesses that are illegal and exploitative.If an affected party does not lodge a complaint, nothing can technically happen. We can only pray the audacity of the operators proves to be their undoing. That's exactly what happened to two of the thousands who are in the "get-richquick-using-my-stock-trading-tip" business.

Sebi passed an order against two such entities offering "investment advice" and collecting fees for the same, without mandatory registration under Sebi (Investment Advisers) Regulations, 2013. The order clearly says that both entities were offering advice and tips to trade, which was barely supported by any research.A formal broking model requires formal structures for research, back-office and compliance, apart from adequate fund base for lending and margin requirements. The growing interest in stock trading has created another model that has finally come under the regulator's radar.This is a more reckless model that simply sends tips through SMSes and emails. Investors sign up for these "services" and pay a fee. Many who sign up are quite aware that these services cannot be trusted. But, because making a quick buck is the objective, no one in this business model actually cares about risk, legality or process. The model is based on the simple idea that money can be made if tips come from those "in" the market. Therefore, operators can hold themselves out as "specialists" who know what is going on. The ability to stare at online trading screens for hours and pass off a few chance victories as "strategies", is how this model works. There is nothing much to differentiate this market from the market for bets, since both hope to get lucky and have no recourse in case of a loss. The difference, however, is that these operations happen blatantly, and use bank and demat accounts and KYC processes. They are thus more audacious than the murky cash deals of illegal betting.

The Sebi investigation that led to the order found a lot of undesirable features. But with the investor, these entities held forth as "advisers" and offered guarantees of returns. Their marketing materials were filled with tall claims about their successful track record in providing "advice". Investors who have dealt with these entities do not have any legal recourse or any redressal of complaints, since these are unregulated "advisers". The operations were nationwide and subscriptions were flowing into bank accounts from investors across the country. Sebi has used the provisions of the Sebi (Investment Adviser) Regulations to issue the order asking them to stop holding out as "advisers" and also issued a show-cause notice to stop them from transacting in securities.

The stories about mis-selling of insurance and mutual fund products have been highlighted in the media for a long time. However, the rampant practice of luring investors to trade in the stock market has not received the attention it deserves. The NSE Factbook 2014 indicates that there were 68 lakh Internet trading accounts. This is a little over 50% of the 1.35 crore demat accounts with NSDL. The traded value of `6.2 lakh crore in these accounts in 2014 is about 22% of the total trade in the capital market segment. Allowing for institutional trades, that still leaves us with a sizeable number of retail investors who open Internet trading accounts with brokers, and get into equity, commodity and derivative trades. While many investors may be willing subscribers to these services, the Sebi order is the first step to end this abominable practice. The lure of a quick buck is very tough to shrug off, but allowing operators to milk the eager investor, is wrong in law. If lottery tickets harm employment markets and betting harms the fairness of a game, uninformed trading harms the equity cult.

Sebi's order may not change all this overnight. But it is an important step towards pointing out that someone offering "advice" to the public should be able to demonstrate to the satisfaction of the regulator, the background, history, track record, business structure and competence of his business.

Such advisers should be distinct and different from someone who only mobilises investors by selling a quick idea. While disgorging the latter of his disproportionate income, the regulator should encourage the former to build sustainable and legal businesses. Sebi is expected to develop and regulate the securities markets. The commendable order against poor quality investment advice is a good example of regulation. Enabling a thriving advisory profession is an exercise in market development, and should receive equal attention.

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