Under amendments to SEBI (Intermediaries) Regulations, 2008, Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations), 2012, and SEBI (Depositories and Participants) Regulations, 2018, SEBI had prohibited persons regulated by SEBI from associating with persons who, without any registration, provide investment advice or recommendations, or make any claim of return or performance.
However, there would be no prohibition so long as “the association is through a specified digital platform.”
In this context, a ‘Specified Digital Platform’ (“SDP”) is one “which has a mechanism in place to take preventive as well as curative action, to the satisfaction of [...]” SEBI.
In furtherance of the above, on October 22, 2024, SEBI sought comments on a draft circular, wherein it had proposed a framework for regulating SDPs (“Draft SDP Framework”). A broad definition of ‘Digital Platform’ has been proposed, which would effectively include any platform that enables any form of communication between two or more persons.
In terms of the Draft SDP Framework, in order for a digital platform to ‘be recognised’ by SEBI as an SDP, certain preventive and curative measures would have to be put in place. A digital platform will be required to comply and seek such recognition within three (3) months from the date the finalised circular will be issued. The preventive and curative measures are summarised below:
Preventive Measures
Policy for co-operation with SEBI
These measures are aimed at preventing fraud, impersonation and unregulated claims. SDPs would firstly be required to have a policy for sharing of data with SEBI, as and when it may require. Further, the policy must provide that the SDP would act on inputs received by SEBI.
Our views:
Although the data that SEBI may seek must be in relation to the securities market, it could still encompass a broad range of data, including personally identifiable information, private messages, etc. More importantly, compliance with the above may not be possible for entities that offer end to end encryption.
Ability to identify and analyse advertisements and content
SDPs must possess the tools and abilities to identify and analyse advertisements and content, and “should deploy advanced artificial intelligence and machine learning tools”, to analyse whether the content or advertisement is related to the securities market, and whether it is being made by a registered intermediary or not. Further, the SDP must have a feature to auto-check the registration status of an intermediary from the list published by SEBI/AMFI/Stock Exchanges. A badge or label must be provided to distinguish between registered and unregistered entities.
Further, the SDP must be able to identify whether the content or advertisement contains any claims regarding returns or performance, and whether the making of such claim by the concerned person is permitted by SEBI. It must also be capable of identifying if there is any redirection to another medium for further communication or action, “thereby effectively functioning as an advertisement with a call to action”, or if the content or advertisement is exclusively for providing educational services in the securities market.
Our views:
The deployment of additional resources to meet SEBI’s unique demands may result in an increase in compliance costs for Digital Platforms contemplating registration as SDPs. Further, based on the tools deployed, there exists a possibility of legitimate content or advertisements being considered to be violative, thereby creating additional burden and delays which would increase costs for all parties involved.
Introduction of certain policies
Policy on Impersonation in Securities Market
This policy aims to combat impersonation of SEBI officials, regulated entities, and their agents. An SDP is required to have a strict policy to address any cases of impersonation, ensuring these protections are clearly outlined.
Policy on Entity Authorization for Securities Market Content
This policy shall seek to restrict unauthorized entities from operating on the platform, allowing only SEBI-registered intermediaries, exempt entities under SEBI regulations, and individuals providing investor education without recommendations or performance claims.
Verified Label or Badge System for SEBI-Regulated Persons
SDPs are required to have this policy to distinguish SEBI-registered entities from unregistered ones, allowing users to identify and report unverified entities easily.
Effective Action Based on Policies
Finally, SDPs must have a policy requiring it to take prompt action against users involved in fraud, impersonation, unregistered activities, or unauthorized claims to enforce compliance and uphold market integrity.
Curative Measures
Curative actions address gaps in preventive measures to restore investor confidence and uphold market integrity. SDPs should implement the following curative measures:
Analysis of content or advertisement
This measure aims to identify and address violative content or entities on the SDPs. To achieve this, SDPs are required to implement policies and systems, equipped with advanced Artificial Intelligence and Machine Learning tools, to analyze content and advertisements effectively. This enables prompt corrective action on any non-compliant materials, ensuring adherence to regulatory standards.
Escalation
SDPs should establish a mechanism for escalation of unlawful content / advertisements and regulated entities to ensure effective reporting of unauthorized activities related to the securities market. This mechanism must allow SEBI, SEBI-regulated individuals, and Market Infrastructure Institutions (MIIs) to report or escalate any unauthorized content or entities on the SDPs. Additionally, platform users should have the ability to flag misleading content or unauthorized entities, helping generate intelligence for further examination and regulatory review.
Actions to be taken in respect of unlawful content or advertisement
SDPs must have a policy to promptly verify and address reported content or advertisements to SEBI’s satisfaction, acting within a specified Turn Around Time (TAT). This applies to content flagged by SEBI, SEBI-regulated individuals, MIIs, and user-generated intelligence. Actions required include taking down or blocking the reported content, advertisement, post, or profile; preventing the sharing of flagged materials; deactivating links or videos; and blacklisting repeat offenders.
Our views
Meeting SEBI’s specific compliance requirements would demand targeted system overhauls, policy adjustments, and close regulatory alignment. Established platforms would thus have to weigh the potential revenue from being recognised as an SDP against the operational investments necessary to align with SEBI’s stringent criteria.
Given the wide scope of SEBI’s digital platform definition, how smaller platforms will compete against larger, resource-rich incumbents remains uncertain. Thus, the broad definition and rigorous compliance requirements could create a consolidated landscape where only well-capitalized players can viably participate in securities-related digital content, thereby impacting the digital platform / social media platform market. Further, several websites and applications that fall under the definition of Digital Platform, are not necessarily based out of India, or have any corporate presence in India. Furthermore, other ambiguities like the exact benchmarks for preventive and curative measures and the criteria SEBI will use to determine a platform’s compliance “satisfaction” should be clarified.
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