Misinformation and the investor

Retail investors face dual challenges: dealing with widespread misinformation campaigns and managing the influence of prominent financial personalities.

Recently, the Supreme Court reserved its judgment on investigations involving the Adani Group. During the proceedings, the Court admonished the petitioners, emphasising that any investigations cannot rely on unregulated third-party reports such as those from the Organized Crime and Corruption Reporting Project (OCCRP) or the Hindenburg reports. The court ruling became even more significant as these entities are situated beyond the jurisdiction of India. The Court also expressed concern about conflicts of interest of the petitioners related to data points outlined by the OCCRP report. Interestingly, the petitioners based their arguments on information from reports published by organisations such as the OCCRP and Hindenburg Research.

Questions had also been raised regarding the credibility of the Securities and Exchange Board of India’s investigations. In response to these concerns, in February 2023, the Supreme Court had ordered an expert committee to probe into the matter. In response, the court underscored that Sebi as the securities market regulator cannot, during investigations, rely on information from media or third-party organisations.

The court expressed concern about the volatility in the markets. Earlier this year, immediately after the Hindenburg Report, there were substantial losses incurred by minority shareholders, including both institutional and retail investors, due to a market downturn. The court also expressed concern that certain reports and articles were being strategically disseminated to influence regulatory decisions, raising the issue of potential manipulation.

In line with the above observations, there is an urgent need for additional measures to protect minority investors from the impact of rumors, targeted campaigns, or conspiracies against listed companies. It is imperative to establish robust safeguards to shield minority shareholders from the adverse effects of market rumors and false allegations.

With daily transactions totaling billions of rupees on the stock markets, there exists a compelling need for protection of one of the most vulnerable yet pivotal investor segments—the minority shareholders. It becomes crucial to insulate retail investors, who lack institutional resources, from the corrosive impact of rumor mongering, misinformation, and orchestrated false attacks targeting listed companies. Ensuring the safety of minority shareholders from such threats is not only paramount for their individual interests but also indispensable for sustaining the stability and vitality of the Indian stock markets. In an era of fake news and deepfakes it is imperative to consider only authentic information becomes central for investors, companies and regulators. Thus, the implementation of robust measures to guarantee the veracity of information emerges as a fundamental step in cultivating trust and confidence within the financial ecosystem.

Investor misinformation and market rumors involve spreading false or misleading information to manipulate stock prices or influence market sentiments. This can come from sources like social media, published reports, print media, or individuals seeking to profit from resulting market changes. The impact includes erratic market movements, poor investor decisions, financial losses for unsuspecting investors, and disruptions in market activities. To protect investors, having an active regulator and robust surveillance is crucial. Various Sebi regulations aim to enhance oversight and enforcement around corporate disclosure and investor information. Sebi takes proactive actions against wrongdoers, including issuing warnings, penalties, license suspension, or initiating criminal prosecution.

Retail investors face dual challenges, contending with both misinformation campaigns and the influence of financial personalities. On one front, they become targets of rumors and harmful campaigns against listed companies. Simultaneously, they are exposed to financial influencers who exploit social media, blogs, YouTube, podcasts, and other online platforms to share potentially misleading advice and information for personal gain. Not all financial influencers possess the same level of market expertise or integrity. Many leverage their online presence for financial gains, including through sponsored content, affiliate marketing, product endorsements, online courses, and consulting services.

In their investing and trading journey, followers of financial influencers should exercise discretion and critical thinking when considering advice from them. Being aware of potential conflicts of interest and verifying information before making financial decisions based on their recommendations is crucial for responsible investment practices.

To come into effect from February 1, 2024, Sebi has issued a new regulatory framework for companies, focusing on the top 100 listed companies, to extend to the top 250 listed entities from April 1, 2024. Under this mandate, companies are obligated to mandatorily verify and confirm, deny, or clarify any circulating market rumors. Sebi has placed the responsibility on corporations to promptly address market rumors within a specified timeframe. This move is designed to bolster credibility and prevent negative market reactions by ensuring quick and accurate dissemination of information.

However, considering the recent Supreme Court observations and increasing proliferation of fake information and market rumors, companies and the regulator may find it difficult to implement, comply with and enforce these regulations. It is essential for investors and companies to exercise vigilance, verify information, and take informed decisions.

Shriram Subramanian, Founder and MD, InGovern Research Services, penned this piece for Financial Express.

Views are personal and do not represent the stand of this publication.