SEBI tries to roll back technology

(To prevent the dissemination of manipulative stock tips, SEBI is trying to prevent the use of modern means of communications)

Market regulator SEBI has proposed that equity analysis on all modern means of communications be banned if it comes from persons or companies it hasn't authorised.

This is what a consultation paper from the regulator says: ...it is proposed that: a) No person shall be allowed to provide trading tips, stock specific recommendations to the general public through short message services (SMSs), email, telephonic calls, etc. unless such persons obtain registration as an Investment Adviser or are specifically exempted from obtaining registration. b) 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.

Please read that carefully. It appears that in terms of communication technology, SEBI proposes to draw the line at a point about 150 years ago. Telephones (invented in 1876) are to be banned but the telegram (invented in 1837) is to be permitted. The written word transmitted by physical means, (invented about 5000 years ago) will also be permitted, as will be face-to-face speech, which was invented perhaps 200,000 years ago.

The consultation paper states that such activities will be forbidden under the Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market Regulations. Think of what this means. If you're interested in equities and you send a WhatsApp to someone about a stock, then that activity by itself, regardless of the content of the message or whether or not you derive any benefit from it, will be a violation of rules and liable to be punished by SEBI.

Why is the regulator doing this? As the consultation paper explains, 'It is observed that, many persons are engaged in providing/sending the trading tips/securities specific recommendations, etc., using various electronic modes such as bulk short message services (SMSs), e-mails, blogs, internet or through any other social networking media such as WhatsApp, ChatOn, WeChat, Twitter, Facebook, etc. The general public is getting attracted or lured by such trading tips, securities specific recommendations and their investment decisions are being influenced by such messages which solicit investments and/or promise unrealistic returns in the securities market.'

So that's the reason. 'Many persons' are sending stock tips through modern means of communication, therefore no one can use these means of communications to write anything that might be taken as a stock recommendation. And since the telephone is mentioned, to speak anything also. I think it's pretty clear that this approach to regulation is a result of an extremely imbalanced view of the pros and cons of the internet and social media. There's a large amount of genuinely high quality and thought provoking equity analysis available on social media. There's also a lot of motivated trash. This is true not only of equity research but of any field of knowledge. To ban the transmission of all such content because some of it is motivated and fraudulent is definitely a case of throwing the baby out with the bathwater. It would also be a case of an overly broad rule which could be used to harass those blogging or tweeting genuine analysis or commentary about equity investments.

Which brings us to another problem in the proposed rules, which is the implicit assumption that entities regulated by SEBI do not attempt any manipulation. Nothing could be further from the truth. There are (and always have been) any number of brokers who are rigging up the prices of individual stocks at any point of time. They put out just as indefensible tips but are nowadays smart enough to dress these up as research.

The whole episode reminds of the dire warnings that one used to hear in the 80s from some in the government about allowing the general public to communicate wirelessly. Mobile communications, it was said, would be a great boon to criminals. Eventually, mobile telephony started and became almost universal. Do mobile telephones facilitate crime? Of course they do--all criminals use mobile phones. However, the advantages that mobile phones bring to society at large are so huge that it does not matter. In fact, the traceability of mobile phones has become a great tool for the police to investigate criminals. SEBI should appreciate the fact that social media is somewhat like that. In today's world it's pointless to try and prevent and limit people from communicating.