December 8, 2023

In the world of finance, social media influencers have carved a niche for themselves, guiding their followers with stock recommendations and trading insights. These “finfluencers” have amassed substantial followings on platforms like Telegram and social media channels. However, a recent revelation points to a concealed reason behind their reluctance to register as Research Analysts (RAs) with the Securities and Exchange Board of India (SEBI).

The argument against registration goes beyond trading restrictions tied to recommended stocks. Industry insiders have unearthed a significant concern — finfluencers engaged in shady practices may want to avoid exposing their profit and loss statements to SEBI. The act of registration would compel these influencers to disclose their trading activities, laying bare their potentially illicit operations.

SEBI mandates registered RAs to provide details of their trades on request, ensuring compliance with trading regulations. This scrutiny aims to prevent any actions that violate trading rules, such as executing trades shortly after recommending a security. The purpose is to maintain market integrity and prevent manipulation.

Two notorious practices in question are the “pump-and-dump” scheme and “front-running”, both involving illiquid stock options or moderately liquid options. In the pump-and-dump scheme, influencers manipulate stock prices by artificially inflating them through misleading recommendations. On the other hand, the front-running practice involves misusing advance knowledge of market orders to gain an advantage.

Using platforms like Telegram, influencers can reach thousands of followers, potentially profiting off their recommendations. For instance, by purchasing options at a slightly higher price and urging followers to buy at an elevated cost, influencers reap profits while followers suffer losses. If multiplied across subscribers, these profits can escalate quickly.

Another cunning scam involves managing clients’ money. Influencers use their narratives to attract clients to their illegal money-management schemes. They manipulate illiquid stock options, inducing clients to trade at inflated prices while pocketing the difference. When the market value falls, clients bear the losses, unaware of the manipulation.

Additionally, a lesser-known tax evasion scam exploits profit transfers. Individuals can “transfer” profits to influencers who have incurred losses, creating an appearance of net losses and evading taxes. Using complex trades, individuals facilitate these transfers, often involving out-of-the-money options.

The shadowy world of finfluencers reveals how unchecked practices can exploit financial markets and harm unsuspecting investors. As SEBI tightens regulations to curtail such activities, the financial community must remain vigilant and prioritize ethical trading practices.

In conclusion, the revelation behind finfluencers’ reluctance to register with SEBI uncovers a web of hidden practices designed to exploit the financial ecosystem. The need for tighter regulations and proactive oversight has never been more evident. Investors must stay informed, and regulatory bodies should strengthen their efforts to ensure market integrity and safeguard the interests of all participants.

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