SEBI Circular on Blogs giving Stock Market Advice

Securities & Exchange Board of India (SEBI) on 23 March 2011 issued a circular regarding stock tips and information published by brokers and sub-brokers. The circular  was issued after Anil Ambani complained to SEBI that false rumors circulated in the stock market have negatively affected his group companies stock prices. Now, though I consider the issue of the circular as a good move, I have my doubts on the effectiveness of the same. Let me discuss the reasons below.

First, rumormongering alone cannot change market sentiment about an established business group. Where there is smoke, there usually is a fire. Anil Ambani’s ADA Group has recently been in news for all the wrong reasons. The negative sentiment in the market can be a culmination of these incidents. It started with SEBI charging Anil Ambani and  few senior officials of the group for insider trading. The group didn’t accept the charge however, paid a penalty of Rs 50 crore. Secondly, Anil Ambani’s interrogation by CBI and PAC in respect to 2G telecom license scam investigation has acted as a red-alert to investors. Last but not the least, ADAG projects relating to power plants haven’t taken off and are behind schedule. Overall, these issues have raised questions on Anil Ambani’s leadership and delivery skills.  Obviously,  Anil Ambani is piqued, and is grumbling over the turn of events.

Hence, my first question is  – Did SEBI use the right reasons for issuing the circular?

Next, coming to the contents of the circular, points 1 and 3 are on interest.

Point 1 below highlights the problem.  Brokers and sub-brokers are giving unauthenticated views on shares on blogs, chat-forums and other internet mediums.

“1. It has been observed by SEBI that unauthenticated news related to various scrips are circulated in blogs/chat forums/e-mail etc. by employees of Broking Houses/Other Intermediaries without adequate caution as mandated in the Code of Conduct for Stock Brokers and respective Regulations of various intermediaries registered with SEBI.”

In all probability with my skepticism intact, I would say SEBI’s allegation is true. My question is that – Is SEBI saying that the information floated by merchant bankers, investment analysts, brokers and sub-brokers in media is authentic. I have my doubts on this. In the beginning of my career I had worked in primary markets division of a merchant bank. I can honestly vouch for the fact, that merchant bankers and brokers had access to authentic and inauthentic information, and the real facts were hardly ever available in detail in newspapers. A small individual investor would rarely have access to reliable information.

To accentuate my point, see the cases of Enron and Parmalat. In both cases, the investment analysts and bankers suspected wrongdoing but ignored the red flags for personal benefit. It is a well-known fact that in some cases owners and senior management have resorted to providing false information in press releases to play the stock market and book profits. Yes, the argument is that SEBI has guidelines to contract these fraudulent activities, but have they been effective?

With such a history, is it right to hold the internet community responsible for providing inaccurate information? Is this just the bloggers-these-days lament?

The point 3 of the circular discusses the internal controls stockbrokers need to implement in respect of their employees activities. Read below and tell me whether these can are effective measures to curtail rumors?

“3. In view of the above facts, SEBI Registered Market Intermediaries are directed that:

  •  Proper internal code of conduct and controls should be put in place.
  • Employees/temporary staff/voluntary workers etc. employed/working in the Offices of market intermediaries do not encourage or circulate rumors or unverified information obtained from client, industry, any trade or any other sources without verification.
  • Either access to Blogs/Chat forums/Messenger sites etc. should be restricted under supervision or access should not be allowed.
  • Logs for any usage of such Blogs/Chat forums/Messenger sites (called by any nomenclature) shall be treated as records and the same should be maintained as specified by the respective Regulations which govern the concerned intermediary.
  • Employees should be directed that any market related news received by them either in their official mail/personal mail/blog or in any other manner, should be forwarded only after the same has been seen and approved by the concerned Intermediary’s Compliance Officer. If an employee fails to do so, he/she shall be deemed to have violated the various provisions contained in SEBI Act/Rules/Regulations etc. and shall be liable for actions.”

 I appreciate the idea of Intermediary Compliance Officer whetting the information before it is published in an organization’s blog. Secondly, the concept of maintaining access rights logs definitely provides evidence to trap the guilty.

However, my point is what if the stock broking organization employee  has malafide intentions s/he doesn’t need to use the company blog. All the employee needs is a client list and maintain his/ her personal blog to share information. The clients and others can be requested to subscribe to the blog. With appropriate clauses in blog policy, the blogger cannot be held responsible for providing incorrect business advice and influencing the market.

Will the next step of SEBI be to issue guidance notes on personal blogging or should the stock broking organizations have internal policies on the same? This in my mind is an open issue, and I think we will see some more action in this space. Let us see how things take shape.