Regulators often overstate the seriousness of the work they do to defend every measure adopted in regulations, however flawed
There was one subject other than the corporate governance fracas at Bombay House that grabbed the attention of social media in the last fortnight — the Securities and Exchange Board of India’s (Sebi) consultative paper seeking to restrict free speech in the Indian capital market.
Sebi’s consultative paper proposes that “no person shall be allowed to provide trading tips, stock specific recommendations to the general public through short message services (SMS), email, telephonic calls, etc. unless such persons obtain registration as an investment adviser or are specifically exempted from obtaining registration”. Further, “no person shall be allowed to provide trading tips, stock specific recommendations to the general public through any other social networking media such as WhatsApp, ChatOn, WeChat, Twitter, Facebook, etc. unless such persons obtain registration as an Investment Adviser or are specifically exempted from obtaining registration” Regulations are proposed to be amended to provide that such expression of opinion
would constitute securities fraud.
The consultative paper has been out for public comment for a while. However, it caught the attention of critics only recently, and the critique has gone viral. Indeed, they are also those who support any measure from folks in authority on the ground that anything from authority should be assumed to be backed by divine wisdom. They speak in favour of proposals since investor protection as an objective is a lofty ideal. Therefore, one must examine if Sebi’s proposals would pass muster under the Indian Constitution.
guarantees freedom of speech and expression. Such freedom is subject to “reasonable restrictions”. For Sebi’s interventions to be constitutionally valid, the restrictions sought to be imposed on making public comments on securities must stand the test of being reasonable.
Assume a commentator makes remarks on television news channels that the shares of a company that has taken an inexplicable, unexplained business decision would fall. Or for that matter, assume someone who believes that a business decision is right merely because it a decision taken by men of stature will lead to the securities price going up. Under Sebi’s proposed law, tweeting such a view, posting it on Facebook, or broadcasting it on Blackberry Messenger
would be illegitimate, unless the person doing so is registered with Sebi
as an investment adviser.
Now, everyone with a view may not be in the business of providing investment advice. But the law would require registration as an investment adviser to be able to legitimately express a point of view.This would mean that the commentator would need to subject herself to a regulatory requirement and get licensed to carry out a business that she in fact does not carry on — that of providing investment advice for a living. Worse, if one were to express an opinion, one would be committing a securities fraud regardless of the veracity and accuracy of the opinion. The liability would be civil monetary penalty of up
to Rs 25 crore, a term in jail of up
to 10 years, a criminal fine of up
to Rs 25 crore, or remedial directions in the form of a direction to shut up
unless registered with Sebi
to provide investment advice. In other words, the law would have a “chilling effect” on the freedom of speech and expression — hardly a measure that could be considered reasonable.
Almost everyone on an Indian street has a view on the outcome of every possible election — whether it is the elections in the US
or in UP. Now, picture a law that would criminalise expressing an opinion
on whether it would be Mayawati who would become the next chief minister, or if a certain faction of the Yadav clan in the Samajwadi Party
would gain power, unless registered as a psephologist, or for that matter, unless registered as an official member of a political party.
Those who defend curtailment of free speech in the securities market would jump to say that financial markets are different from electoral markets. In the former, people lose real money when they get influenced by the expression of opinion. In the latter they may at worst get bad governments if influenced by prejudiced opinions. First, getting a bad government could be worse than losing some money that can be recouped later from the same markets. Second, what is a fair opinion
and what is a motivated fraudulent false statement is always a question of fact. Registration with an authority would not change that. In election petitions, courts consider if political candidates have adopted corrupt electoral practices. Likewise, Sebi
(and therefore the courts) consider if a person who made a statement about securities did so fraudulently, knowing it to be false.
Regulators often overstate the seriousness of the work they do to defend every measure adopted in regulations, however flawed. The lofty heights assigned to investor protection can indeed be assigned to every area of regulation — be it food, electricity, competition, drugs and cosmetics, financial data aggregation, or even plying of taxis. The objective of regulation can be lofty but the measures to meet the lofty objectives still need to be reasonable in order to be constitutionally valid. Misplaced and overstated concerns can kill the “good” in the name of working towards the “best”. It is not wise to burn a house down to protect it from the rats that infest it. It is not wise to inflict forceful nasbandi to achieve population control.
It is wise of Sebi
to have sought public comment on such a problematic proposal. One can only hope that the reactions received in the consultation process make one point clear to the regulator – there is no short cut to fighting real fraud in the market. That fight involves examining the statements and comments made, determination of whether it was motivated by fraud and scrutinising circumstances that would point to intent to cheat the market by making a false statement. Registration as an investment adviser can never reduce this burden.
This column was published Without Contempt in Business Standard on November 8, 2016