SEBI’s efforts to regulate the securities market

Source: The post SEBI’s efforts to regulate the securities market has been created, based on the article “Tightening the norm” and the article “Free market needs free speech” published in “Indian Express” on 21st November 2024

UPSC Syllabus Topic: GS Paper 2-Statutory, regulatory and various quasi-judicial bodies.

Context: The article discusses SEBI’s efforts to regulate the securities market. It highlights SEBI’s proposals to curb manipulation in SME IPOs, including stricter norms like increased lock-in periods for promoters and better fund monitoring. SEBI also seeks to regulate finfluencers and digital platforms, raising concerns over free speech and jurisdictional overreach.

For detailed information on New SEBI Rules to Curb F&O Frenzy and Protect Small Investors read this article here

Why is SEBI focusing on SME IPOs?

SEBI is addressing concerns about manipulation in small and mid-cap IPOs. Recent SME IPO data shows that 159 companies raised ₹5,700 crore in 2023-24, compared to 31 in 2021-22. SEBI proposed stricter norms, including:

1. Increasing the minimum application size to attract informed investors.
2. Raising the minimum investor base from 50 to 200 for better liquidity.
3. Requiring promoters to lock-in their shares for five years to ensure accountability.
4. Restricting IPO funds from being used to repay promoter loans.
5. SEBI suggests appointing monitoring agencies for IPOs above ₹20 crore to ensure proper fund utilization. It has warned about promoters inflating business operations to boost stock prices. These measures aim to protect retail investors and maintain market integrity.

Why is SEBI targeting finfluencers on digital platforms?

1. SEBI is concerned about misleading securities-related content shared by finfluencers on platforms like YouTube and WhatsApp.
2. Misleading content can manipulate investors’ decisions, impacting market integrity.
3. SEBI aims to regulate these platforms, requiring them to block false information, blacklist violators, and report regularly. For example, SEBI penalized unregistered finfluencers for sharing deceptive content and settled some cases with heavy penalties.
4. SEBI proposes that financial intermediaries only associate with registered finfluencers to ensure accountability.

What concerns arise from SEBI’s move to regulate finfluencers?

1. Disruption to Price Discovery: SEBI’s regulation of speech could harm the price discovery process, which benefits from a mix of optimistic, pessimistic, and neutral views. For example, In the Adani-Hindenburg episode, short-sellers, Adani promoters, and analysts (including finfluencers) provided contrasting opinions, helping investors make informed decisions.
2. Existing Regulations Are Adequate: SEBI already penalizes unregistered finfluencers under its existing powers. For example, it uses laws against fraudulent and manipulative practices and mandates that investment advisors and analysts register with SEBI.
3. Jurisdictional Overlap:Digital platforms like YouTube and WhatsApp are regulated by MeitY under the IT Act. SEBI’s involvement may lead to conflicts over jurisdiction.
4. Threat to Free Speech:SEBI’s proposals risk curbing free speech in the securities market, a fundamental right. The marketplace of ideas allows investors to evaluate different views and build trust.
5. Parliamentary Oversight is Necessary:SEBI’s attempt to expand its powers through a circular bypasses parliamentary approval. Expanding jurisdiction over non-securities entities requires legislative endorsement to avoid overreach.

Question for practice:

Discuss SEBI’s proposed measures to regulate SME IPOs and their impact on market integrity and retail investors.