April 23, 2024

Investments & Exits

SEBI Warns Fintechs That Restrict Client Exits

On Wednesday, SEBI Chairperson Madhabi Puri Buch warned Fintechs about imposing exit barriers on their clients. She said that the Securities and Exchange Board of India does not support fintech companies that put obstacles in the way of clients leaving their services.

Buch referred to it as the “Abhimanyu Complex” and further added: “If a business strategy is predicated on the concept that once a client is in, there would be no way for them to leave, we may not appreciate it. Your company strategy is not likely to be accepted by the regulator if it depends on creating exit obstacles. We adhere to this fundamental belief.” Speaking to attendees at the Global Fintech Fest, she stated, “We believe that if a client enjoys the ease of entry, they also have the choice to exit.”

In order to lessen the consequences, the SEBI chairperson also stated that the regulatory authority has plans to build a facility equivalent to ASBA for the secondary market. This facility will be identical to the framework developed for initial public offerings (IPOs).

Currently, IPO investors employ ASBA or leverage the app backed by the blocked amount feature, which prevents funds from leaving an investor’s bank account until the firm has allotted the required number of shares. Previously, funds were taken out of the bank account at application time and returned if the units were not allocated.

“We are currently looking closely at a secondary market very much similar to ASBA. We believe if it’s possible in the primary market, it should be possible in secondary market as well. The money shouldn’t leave your bank account if you purchase shares and need to settle. Money will be taken in the proper manner after it is resolved with T+1.

“Since the objective is to lessen structural vulnerability, SEBI may consider closing down such businesses in the near future if their business model shows higher chances of concentration risks or structural vulnerability.”

Further stressing on the issues of transparency of information, Buch added that it was important that businesses provide mandatory disclosures. “The investor should come to a well-informed decision. They should be furnished with the necessary information. How can someone make a better decision without adequate information? Hence, transparency is important”, she concluded.

SEBI is neither in favour of nor against any business, provided the disclosures are transparent, and there is nothing that could mislead the investors, Buch added.

Quoting a scenario, she explained, “If any business says that a specific algo can provide 35% returns, SEBI will want to talk to those entities to confirm if they can actually deliver on their claims. If we are not able to verify this claim, then the model is basically flawed and would not be approved by the regulators.” She also warned that if any business model is going to place anonymity as its prime value proposition, the business will not last.

 

On September 2, Sebi mentioned it wants to put an end to the common practice of marketing past profits and returns.

Since September 9, when Sebi instructed stock brokers that they couldn’t use platforms that talked about past or expected profits, these kinds of promotions reduced. But strategy writers still use their Telegram channels for marketing their profit and loss numbers. Now, SEBI has ordered exchanges to make sure the issued circular is followed to the letter and in spirit and to send a report within a time frame of 60 days. SEBI will levy penalties on those who don’t follow the order, the statement said.

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