Did PM Modi and Amit Shah break any Sebi rule by predicting stock market rally after elections? Legal experts weigh in

Predictions of a post-election stock market rally made by Prime Minister Narendra Modi and cabinet minister Amit Shah ahead of the elections, which has now become a political issue with Congress leader Rahul Gandhi linking it with the stock market crash on D-Day, do not violate Sebi rules, according to legal experts.

"The statements made by PM Modi and Amit Shah are inherently political in nature. Unless it is demonstrated that these statements were made with 'commercial considerations' or in reference to specific 'stocks', they cannot be deemed violative of the SEBI (Investment Advisers) Regulations, 2013," Sumit Agrawal of Regstreet Law Advisors & former SEBI officer told ETMarkets.

According to Regulation 2(1)(l) of Investment Advisers Regulations, 2013 of Sebi, "investment advice means advice relating to investing in, purchasing, selling or otherwise dealing in securities or investment products, and advice on investment portfolio containing securities or investment products, whether written, oral or through any other means of communication for the benefit of the client and shall include financial planning."


It also says that any such advice given through newspaper, magazines, any electronic or broadcasting or telecommunications medium, which is widely available to the public shall not be considered as investment advice for the purpose of these regulations.

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Lawyers observe that PM Modi's statement cannot be treated as one given by an investment advisor.

"Investment advisor means any person, who for consideration, is engaged in the business of providing investment advice to clients or other persons or group of persons and includes any person who holds out himself as an investment adviser, by whatever name," according to Sebi rules.

Sebi's former executive director and top securities lawyer Sandeep Parekh said in a social media post that the statements were neither investment advice, nor was the PM acting as an investment advisor.

"PM Modi was being optimistic about a victory and he expected the markets would reflect the absolute majority causing a euphoria in the markets on the 4th June. This is not a standard of a fraudulent statement, but of optimism. Optimism is the very basis of the entire market. Half the market buys equities in the hope that prices will go up," says Parekh of Finsec Law Advisors.

According to him, whatever the Prime Minister said is expressly “permitted in Sebi's regulations”.

Regulatory guidelines safeguard general comments made in good faith, whether made publicly or privately.

Section 4 (a) of Investment Advisers Regulations clearly says that any person who gives general comments in good faith in regard to trends in the financial or securities market or the economic situation where such comments do not specify any particular securities or investment product shall not be required to seek registration as an advisor.

"Interestingly, SEBI's position on this legal issue has been inconsistent over the last two decades, ranging from investigating and penalizing certain entities to merely issuing warnings. Although SEBI has, on occasion, asserted that motive is not required for general reckless comments by corporate or market figures to be considered violative, the Securities Appellate Tribunal (SAT) has set aside such orders. In the United States, the SEC and courts have addressed cases aimed at curbing 'reckless and careless statements,' in relation to the stock market, emphasizing the duty of care for influential individuals," said Agrawal.

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What PM Modi, Amit Shah said

Last month, when asked by a TV channel whether the market will hit a new high after elections, Amit Shah had said that, "You can buy before June 4, it (the market) will shoot up". In a similar vein, PM Modi had also said: “You will see that within one week after June 4, the day election results are to be declared, market participants will get tired” while hinting that the market will hit fresh record highs.

Rahul Gandhi’s allegations

After the ruling BJP fell short of getting a simple majority on June 4, the stock market ended nearly 6% lower. Rahul Gandhi called it a "Rs 30 lakh crore stock market scam" as the Sensex hit record high on June 3 on exit poll euphoria but fell the next day.

While demanding a Joint Parliamentary Committee (JPC) probe into last week's boom-and-bust cycle in the successive days, the Congress MP questioned why both Modi and Shah had given "investment advices" during their mid-poll interviews and predicted major stock market boom on the election result day.

The market, however, eventually recovered all its losses within the next 3 days. In the meantime, a plea has also been filed in the Supreme Court seeking probe into the June 4 market crash.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)