SEBI Plan to Curb Stock Tips on Social Media Denies Me My Rights

Everybody wants to become a censor because censorship is the most powerful weapon in a democracy, argues JR Varma.

More than three years ago, as a member of the Financial Sector Legislative Reforms Commission (FSLRC), I wrote a note of dissent in the FSLRC report. It argued that an expansive definition of financial services "creates the risk of regulatory overreach". I also wrote that it “creates scope for needless harassment of innocent people without providing any worthwhile benefits".

The dissent note said that "regulatory self-restraint... is often a scarce commodity". At that time, most people thought that I was paranoid and that regulators can generally be trusted to behave sensibly.

Last week, the Securities and Exchange Board of India (SEBI) put out a “Consultation Paper on Amendments/Clarifications to the SEBI (Investment Advisers) Regulations, 2013” which shows that my fears were not at all misplaced. The document proposes that:

• No one will be allowed to provide trading tips and stock-specific recommendations to the general public through SMSs, emails, telephone calls etc unless he or she is registered as an investment adviser or is specifically exempted from obtaining registration.
• No one will be allowed to provide trading tips and stock-specific recommendations to the general public through any other social networking media such as WhatsApp, Twitter, Facebook etc unless he or she is registered as an investment adviser or is specifically exempted from obtaining registration.

If everybody needs a licence from SEBI to post any stock-specific information on any social media, the regulator will quickly become one of the richest regulators in the world with a market capitalisation rivalling that of Facebook.

Let me deliberately give a non-Indian example of the kind of thing that SEBI now wants to prevent. Last week, Aswath Damodaran wrote a post on his widely respected blog, Musings on Markets, arguing that Deutsche Bank was now undervalued.

He said he had bought the bank’s stocks himself and also wrote:

I have set up my valuation spreadsheet to allow for you to replace my assumptions with yours. If you are so inclined, please do enter your numbers into the shared Google spreadsheet that I have created for this purpose and let’s get a crowd valuation going!

This is social media at its best trying to ‘dis-intermediate’ the analysts who are licensed by the regulator. The blog post was also posted on Twitter (with more than a hundred re-tweets), on Facebook (with more than a hundred likes) and on YouTube (with more than 3000 views). This is the kind of carefully reasoned analysis that SEBI now wants to shut down. Thankfully, Damodaran, teaches at NYU Stern, safely out of reach of SEBI's censorship.

Everybody wants to become a censor because censorship is the most powerful weapon in a democracy. It is so in India and it was so in ancient Rome. In ancient Rome, the Censor was one of the most powerful and feared officials. (More than two millennia after his death, we still refer to the great Roman writer Cato as “Cato the Censor” and not by the numerous other military and civilian offices that he held).

It is therefore extremely important in a democracy to suppress the desires of regulators to become censors. A financial regulator is there to defend the right to property. And any day, anywhere, the right to free speech overrides the right to property.

If there is a conflict between the right to life and the right to free speech, we can have a debate about what reasonable restrictions can be placed on free speech. But the right to property can never be a ground for stifling free speech.

(The author is a professor at the Indian Institute of Management, Ahmedabad. This article was earlier published on BloombergQuint. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)