SEBI’s New Advertisement Code: Dil Khol Ke Advertise Kar?

– Prerna Roy | corplaw@vinodkothari.com

Advertisement of products and services is one of the key requirements of any business, including for capital markets intermediaries such as Stock Brokers, OBPPs, Research Analysts, Mutual Funds and Asset Management Companies etc. If a business does not advertise, prospective customers may never become aware of its products and services. At the same time, given the complexity of the products and services offered by these market participants, and the risks it exposes the retail customers to, these advertisement and marketing materials are regulated by SEBI.  In this context, these SEBI-regulated entities are presently being governed by separate advertisement frameworks, resulting in a fragmented regulatory framework and differing compliance requirements. Further, strict compliance requirements attract in the form of prior approval requirements for all communications issued by these entities currently. 

With the objective of promoting ease of doing business, regulatory consistency, consolidation of frameworks while continuing to focus on investor protection, SEBI has issued a consultation paper on the Common Advertisement Code for Specified SEBI-Regulated Entities. Through the proposed Code, SEBI seeks to ease the process of advertising by SEBI-regulated intermediaries by removing prior approval requirements and introducing a common framework, while continuing to maintain accountability, transparency and investor protection.

Read more: SEBI’s New Advertisement Code: Dil Khol Ke Advertise Kar?

Key Proposals 

1. Permitting Celebrity endorsements 

Presently, the regulatory framework generally prohibits celebrity endorsements by SEBI-regulated entities, except in case of MFs and AMCs, where the same is permitted at the industry level, subject to prior approval from SEBI (Para 11.9.5 of the SEBI Master Circular for Mutual Funds).

The proposed Code seeks to permit celebrity endorsements for all specified SEBI-regulated entities, subject to prior approval from SEBI or the relevant supervisory body. Such approval would be required for celebrity endorsements at the brand/entity level.

The Code identifies the following supervisory bodies for this purpose:

• Stock Exchanges – Stock Brokers, including Online Bond Platform Providers;
• Depositories – Depository Participants;
• Investment Advisers Administration and Supervisory Body (IAASB) – Investment Advisers;
• Research Analysts Administration and Supervisory Body (RAASB) – Research Analysts;
• Association of Mutual Funds in India (AMFI) – Mutual Funds and Asset Management Companies; and
• Association of Portfolio Managers in India (APMI) – Portfolio Managers.

2. Clarifying the scope of Advertisement 

Presently, there is no distinction between advertisements containing promotional content and general financial literacy content. As a result, even financial literacy content is required to comply with the regulatory framework governing advertisements.

The proposed Code seeks to distinguish between advertisements and non-advertisement communications by providing an illustrative list of communications that would not constitute advertisements. These include, inter alia, reports shared with existing clients, product/service information, regulatory communications, responses to client queries, basic factual information about the regulated entity, and non-promotional product demonstrations.

Thus, no approval/ reporting requirements would apply to communications that are purely educational or investor-awareness oriented and do not contain any promotional content relating to the products or services of a regulated entity, as such communications fall outside the scope of the proposed Code.

3. Replacing Prior approval requirements by post advertisement reporting

Presently, the regulatory framework requires regulated entities to obtain prior approval from SEBI or the relevant supervisory body before issuing any advertisement. The proposed Code seeks to replace this requirement with a post-advertisement reporting framework, under which advertisements must be reported promptly and, in any event, no later than 24 hours from their issuance to SEBI/ relevant supervisory body.

4. Permitting Rankings and rating in advertisements 

Presently, there is a complete prohibition on the use of ratings or rankings in advertisements depicting performance.

The proposed Code seeks to permit specified regulated entities to use ratings/rankings in advertisements, provided such ratings/rankings are assigned by a Past Risk and Return Verification Agency (PaRRVA).

Notably, any entity recognised as a PaRRVA shall, in consultation with SEBI and industry bodies, develop a methodology for rating/ranking specified regulated entities. Such ratings/rankings must disclose their methodology, clarify that they are only one factor for investor consideration, and be based on a study or survey covering all relevant market participants to ensure objectivity and comparability.

5. Prohibition on usage of dark patterns

Presently, none of the existing frameworks expressly prohibit the use of dark patterns, such as false urgency, subscription traps, or forced actions.

The proposed Code seeks to expressly prohibit the use of dark patterns specified in Annexure I to the Guidelines for Prevention and Regulation of Dark Patterns, 2023, issued by the Central Consumer Protection Authority.

Recent amendments issued by the RBI also focus on prohibiting use of dark patterns and mis-selling by RBI regulated entities such as banks and NBFCs. Read our article on the same here

6. Abbreviated Disclosures for Short-Format Messaging allowed

Presently, mandatory disclosure requirements apply to all forms of advertisements. These disclosures, including disclaimers thereto, are lengthy in nature and take up a lot of space. The proposed Code seeks to relax this requirement for short-format communications such as SMS and push notifications. Where space constraints do not permit inclusion of the prescribed details and disclaimers, a hyperlink to such information on the regulated entity’s official website may be provided. The website, in turn, shall contain the detailed disclosures as required (refer Para 7(4) of the proposed Code). 

Conclusion

This is a significant move by SEBI and is expected to promote ease of doing business while addressing the multiplicity of regulatory frameworks that often leave regulated entities wondering, “kya karen kya na karen, yeh kaisi mushkil haye.” By introducing a common and harmonised advertisement framework, SEBI seeks to bring greater clarity, consistency and regulatory certainty. Overall, the Consultation Paper is a welcome step in the present-day scenario.