SEBI Alerts Investors About Online Trading Frauds, But Is This Enough?

The rise of investment tech in the country has only streamlined financial activities and boosted public markets. However, it’s still hard for an average individual to parse through the plethora of online platforms and find those who are offering authentic information and legitimate investment opportunities. 

Scammers and unauthorised entities are now leveraging online messaging apps, social media platforms and other avenues to dupe investors via fake investment schemes and trading platforms. Many of them pose as SEBI-registered entities, promising stock market access without the need for official KYC, which becomes an attractive proposition for unsuspecting investors.

In response to numerous complaints about deceptive trading platforms falsely claiming ties with registered foreign portfolio investors (FPIs) or foreign institutional investor (FII) sub-accounts, the Securities and Exchange Board of India (SEBI) recently issued an advisory cautioning against such practices

The regulator issued a warning alerting investors that fraudulent trading platforms are using online courses, seminars and mentorship programmes to lure potential investors through social media platforms as well as WhatsApp or Telegram. 

Those in the investment tech ecosystem believe the circular was long overdue. 

Speaking with Inc42, Nikhil Aggarwal, CEO of alternative investment platform Grip Invest, said the prevalence of fraudulent platforms has been a concern for a long time. 

This latest advisory follows the first caution by SEBI earlier in February which had noted a trend of ‘unscrupulous entities’ and online platforms falsely claiming to be registered with the markets regulator. At the time, it cautioned that investments offering high returns usually involve high risk, including fraud risk. 

“Many of these propositions come across as attractive and do prompt users to delve deeper resulting in sharing of personal information and even worse, fraudulent transactions. SEBI’s action to sound the alarm is appreciated to bring more awareness to investors,” Aggarwal added.

In its latest advisory, the markets regulator flagged fraudulent practices where individuals posing as SEBI-registered FPIs deceive individuals into downloading apps, promising stock market access without the need for an official trading or demat accounts. Such operations commonly involve the use of mobile numbers registered under false names to orchestrate their schemes.

Siddarth Pai, founding partner at 3one4 Capital & co-chair of the regulatory affairs committee at IVCA (Indian Private Equity & Venture Capital Association), said SEBI’s intervention is important but industry associations must also take action to inform the general public. 

“The public must be made aware of these issues. Many often take the names of the regulated entities to beguile unassuming investors to take positions in various financial products. This can cause significant damage to the credibility of due process,” Pai told Inc42. 

How Can Investors Guard Against Fraudulent Trading Platforms?

As a first step, investors should verify if the registration number of every entity registered with SEBI matches the details available with the markets regulator, believes Grip Invest’s Aggarwal.

Additionally, investors must ensure that they are communicating with the official handles of SEBI-registered platforms on social media platforms like X, LinkedIn, and Whatsapp, which are usually denoted by a tick sign. 

“As investors, we know that KYC is mandatory for all fintech platforms. When investors see that such steps are missing, they should view this as a red flag rather than as a convenience,” he adds.

The FPI investment route is not available to resident Indians, except for limited exceptions as per SEBI (Foreign Portfolio Investors) Regulations, 2019. SEBI has not granted any relaxations to FPIs regarding securities market investments. 

The majority of the 10,800 authorised FPIs in India are funds and they are mandated to use the FPI route to invest in shares of companies listed in India. Besides registering with SEBI, FPIs need to comply with its disclosure requirements. 

For instance, an FPI is limited to holding a maximum of 10% in a listed company. Exceeding this limit results in the FPI being categorised as foreign direct investor and that comes with broader restrictions. 

Critical Need For A Nationwide Financial Literacy Initiative

From the 1992 Harshad Mehta saga to today’s crypto scams, India has seen a number of frauds over the years which have resulted in investors losing their money.

Of late, the approach of self-proclaimed investment gurus promising quick, multifold returns has changed. The investment advisory space is now occupied by individuals often referred to as ‘financial gurus’ or ‘furus’ or ‘finance influencers‘. Unlike formal investment advisory services, finfluencers connect with their audience on informal platforms like X, WhatsApp, and Telegram. 

According to SEBI data, India has 1,300+ registered investment advisors catering to 80 Mn+ investors. But unregistered finfluencers have grabbed the limelight using the power of social media and messaging apps. 

In recent months, finfluencers have been accused of peddling misinformation to push stocks where they have vested interests. Besides, there are also allegations of kickbacks from companies for promoting their stocks, manipulating investors with fake proof of growth, and charging individuals for these fake advisory services.

With increased social media engagement and the booming creator economy, creators are under scrutiny for questionable tactics. Despite SEBI penalising some influencers, fines are limited, and there’s an entire underbelly operating off the radar. The question remains whether there will be a nationwide initiative to enhance financial literacy.

Experts that we spoke to said in addition to enhancing investor awareness, SEBI should collaborate with law enforcement agencies to investigate and take legal action against those involved in fraudulent trading activities.

Durgesh Singh, partner at IndiaLaw LLP, backed Pai’s notion that more action is needed on the ground to catch fraudulent activities. After all, SEBI is a capital market regulator and has a limited role in crime prevention. It is more focussed on regulating financial activity and providers. 

“Cybercrime and online frauds like this fall under the state subject and the state is primarily responsible for prevention, detection, investigation and prosecution of such crimes. SEBI on its part can cooperate and help investigating authorities. Further, it can play an active role in educating the public and bring awareness about such crimes,” Singh added. 

While SEBI keeps cracking its whip on erring individuals from time-to-time, it seems to be behind the curve when it comes to catching up with the ever-evolving methods of fraudsters in the online world. While the regulator can surely up its game when it comes to cracking down on these scammers, retail investors also have a responsibility to stay alert and double check before making investment decisions to protect their hard-earned capital.