SEBI’s Social-Media Regulatory Overreach

Prof Jayant Varma points how SEBI is overdoing its regulation mandate. It has recently asked all stock advisers/tippers using all possible social mediums (whatsapp, Twitter, FB etc) to be first registered with SEBI before getting into advisory mode.

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 which argued that an expansive definition of financial services “creates the risk of regulatory overreach” and “creates scope for needless harassment of innocent people without providing any worthwhile benefits”. I also wrote 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 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.

…..

Let me deliberately give a non Indian example of the kind of thing that SEBI now wants to censor. Last week, Aswath Damodaran wrote a post on his widely respected blog, Musings on Markets, arguing that Deutsche Bank was now undervalued. He stated that he had bought it 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 is at its best trying to disintermediate the analysts who are licensed by the regulator. The blog post was also posted on Twitter (with more than a hundred retweets), on Facebook (with more than a hundred likes) and onYoutube (with more than 3,000 views). This is the kind of carefully reasoned analysis that SEBI now wants to shut down. Thankfully, Aswath 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 where 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 thwart 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.

This last emphasised bit is really interesting. Never really thought stock tipping as freedom of speech…

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