In this week's newsletter, we talk about SEBI's crackdown on fantasy stock gaming, RBI's record transfer to the government, finfluencers  and more.

If you'd like to receive our 3-min daily newsletter that breaks down the world of business & finance in plain English - click here.

SEBI's crackdown on fantasy stock gaming explained

Investing in the stock market is risky business.

You could buy a stock with the hope that its price will go up in a few days. But that bet could go haywire if the stock sways downward. You could panic and exit your investment, only to find out that despite suffering a loss you still had to shell out a significant amount in broker fees, stock exchange fees, taxes and other charges.

But what if you could trade in the stock market without the risk of losing so much money?

It’ll give you the same experience as a stock trading platform, feature the same stocks that are listed on popular exchanges like NSE (National Stock Exchange) and BSE (formerly Bombay Stock Exchange) and even have similar price movements and volatility. Just that if your trade becomes a dud, you don’t lose the whole amount that the stock was worth. You just lose a small entry fee. Oh, and if your stock constantly does well, you could stand a chance to win stuff like gold coins, a Mercedes, Apple products or even huge cash prizes.

That’s what fantasy stock gaming apps and platforms do. They just charge a tiny entry fee, smaller than what your broker would charge you to trade in the real stock market. And all you have to do is predict if the price of a stock will go up or down in the next 60 seconds. Or even trade virtually with fake money to earn points which you could redeem for these fancy rewards later on. So the only loss you make if things don’t go your way is that small entry fee.

And just like fantasy sports, this trend is picking up too.

But there’s a problem.

These virtual trading apps use real time data from regulated stock exchanges like the NSE and BSE. Simply put, they buy data like stock prices, buy and sell quotes, etc. from authorised vendors to make sure that their platform feels like the real thing.

And SEBI doesn’t seem to like the sound of that. It believes that using data from a stock exchange’s feed to gamify the markets is as good as misusing it and can even hurt investor interest.

That’s exactly why it threw a spanner in the works. A few days ago, it rolled out a circular barring third parties like stock gaming platforms from getting their hands on such data.

But here’s the thing. This isn’t a sudden decision that SEBI came up with out of the blue. It has had an eye on these platforms for a long time now.

In fact, in 2016 it even wanted to ban such platforms for good. Thanks to celebrity endorsed fantasy stock games like Samco Securities’ India Trading League, that former Indian cricketer Kapil Dev promoted or even Raj Kundra backed Stock Race. If that name doesn’t ring a bell, you'd know him better as the former co-owner of IPL’s (Indian Premier League) Rajasthan Royals cricket team and Bollywood celebrity Shilpa Shetty’s husband. But that proposal sort of fell apart. And SEBI decided to just forewarn investors that it didn’t approve of such stock market games.

But hey, how are websites like Moneybhai (by Moneycontrol) or even the BSE itself offering virtual trading games, you ask?

Look, SEBI doesn’t have a problem with platforms using market data for virtual trading per se. The issue is simply the involvement of real money.

Platforms charging their users to play a virtual trading game are literally piggybacking on cheap or low cost market data to build their own business model. And that can be detrimental to users simply because while these games earn money from increased user interest, SEBI doesn’t regulate them. So they don’t have an obligation to give users formal disclaimers about how risky real money based virtual trading can be.

Besides, users who constantly win these games might also misconstrue their victories for skill to trade in the real stock market. And unfortunately, SEBI can’t give them any sort of recourse or compensation if their winning streak doesn’t continue when they deal with actual stocks.

That’s precisely why SEBI wants to restrict these folks from fetching real time data from the stock markets.

It’s a lot like what the US Securities and Exchange Commission did to a virtual stock trading website called Stock Battle in 2015. This game allowed participants to build virtual portfolios for a small entry fee. If they won, they’d get prizes depending on the pool created out of all other participants' entry fees.

No sooner had the SEC learnt of it than it ordered the platform to discontinue the way it operated. It would only allow the virtual trading game to continue if it agreed to run as a registered entity. But Stock Battle realised that they didn’t have the funds to do that. Even if they managed to get funded, it wouldn’t be a scalable business model simply because fetching data from US Stock Exchanges can be an expensive affair, unlike India where stockbrokers get it for free and other third parties can pay authorised data vendors a reasonable monthly subscription to fetch data. This meant that Stock Battle had to eventually shut shop.

Sadly, SEBI’s new rules may not just mark the end of paid virtual fantasy stock gaming platforms, but even spell doom for educational fantasy stock gaming platforms that operate for free. Because while they can still access data, they’ll only be able to get it one day later. And what use is delayed data when you already know what happened to the market yesterday right?

Does that make SEBI’s move counterproductive for investor education? Only time will tell.

RBI's ₹2.1 Lakh Crore transfer to the government!

₹2.1 lakh crore.

This is the money RBI (Reserve Bank of India) is expected to transfer to the government. And we are sure at this point you’re asking yourself.

Where did this money come from?

And why is the RBI transferring this money to the government?

So let’s begin with the first question. The source of the funds.

Technically, speaking, this shouldn’t be too hard to answer. RBI is a bank. And like all banks, RBI does a fair bit of lending. And when they lend money, they generate income by charging an interest on the principal. Some of this money is categorised as surplus.

RBI also routinely buys and sells government bonds. And when you buy and sell stuff, you can sometimes walk away with a profit. So there’s that.

RBI also invests some of its money in foreign assets. These generate income too and finally; RBI has the exclusive right to issue currency in India. While printing money doesn’t directly generate a profit, there is this idea called seigniorage. It’s the difference between the face value of money and the cost to produce it. For example, it costs less to print a 100-rupee note than its face value of 100 rupees. And therein lies more profit.

Put together RBI has many ways to make money.

So it shouldn’t be a surprise that the RBI can simply give away ₹2.1 lakh crore to the government.

The more challenging question is — Why is RBI transferring this money to the government?

Is the RBI trying to appease the government during an election year? Or even worse, raiding the RBI’s coffers and undermining the central banks’ authority.

Well, here’s the thing.

Back in 2019, there was indeed widespread speculation that the government was trying to force the RBI to part with its reserves unilaterally by invoking an obscure clause in the RBI Act. However, better sense prevailed. Instead, the government decided to do away with any plans of raiding the RBI’s reserves and instituted a panel to determine whether the RBI was, in fact, sitting on needless cash. They said that they would act only based on the recommendations of the panel.

The idea was to put together an independent committee, headed by accomplished non-partisan individuals and get them to look into this matter of “surplus reserves”. It proceeded with the help of an external committee headed by Bimal Jalan, a former RBI governor. The committee looked at the RBI’s reserves, evaluated the rainy-day fund i.e. part of the reserves RBI would need, just in case things go wrong. And finally, after accounting for all contingencies recommended transferring whatever remained on top.

And ever since then, the RBI has been using these recommendations to work the transfer. In fact, this time, the board was even more conservative while deciding on their rainy-day fund (contingency fund). So there’s no reason to believe that the government has any role to play in deciding the kind of money RBI transfers from its kitty.

Second, you have to realise that the RBI isn’t in the business of making money. Any profit they generate is simply incidental. Their primary objective is to foster “price stability” — to tame inflation. And through it, they support long-term economic growth. Any profit they make in the process is just a byproduct of their operations, not the primary goal.

However, once there’s excess reserve in their account you can make a compelling argument that the RBI should transfer the surplus to the government so that the government can then spend this money elsewhere.

So how will the government use this money?

Well, it’s hard to say. For starters, even the government is surprised by the quantum of transfer. We know this because when they were preparing the budget last year, they assumed the RBI would transfer about ₹1 lakh crores. This is more than double that sum. So this will definitely lift up their spirits.

That being said the government will likely use this money to pare down debt. So far, they’ve been borrowing a lot of money to support India’s growth objectives. However, going overboard with debt will send the wrong message and last year they promised to work on this. Also, some people are hoping that this money could force the government to rethink taxes. If there’s not enough pressure on the government to generate revenue through taxes (because of the surplus), maybe common people will end up parting with less.

Will it happen?

We don’t know. But we hope that the money is put to good use.

Today’s Discussion💡: Finfluencers

Finfluencers need no introduction. They not only help people understand finance but also sway people’s perceptions with their financial advice. But here’s the thing, they’re not authorised advisors. Sure, they can increase financial literacy. But telling people which stock to invest in or assuring them guaranteed returns doesn’t fall within its scope.

But influencers have become such an integral part of our lives that every piece of advice they give seems genuine. And the proof lies in the many YouTube pump-and-dump schemes that have been pulled up in the recent past.

The government & SEBI want to curb the menace and have figured out the obvious culprit ― regulations for finfluencers. And they’ve been continuously warning these folks that the regulations could be here any time soon.

But finfluencers already seem to be feeling the heat of these regulations without any official set of rules targeting them.

You see, a couple of months ago the SEBI tightened the advertisement code and barred investment advisors and research analysts from promising fixed returns or even using adjectives like ‘№1, Top or Best Investment Advisor/Research Analyst’ in their ads. But that may not have been such a blow to the new age finfluencers. Not all of them are registered financial advisors. So they only had to worry about adding disclaimers to their advice.

But SEBI’s Chairperson Madhabi Puri Buch also hinted about something that might be of some concern to these people.

Finfluencers are supposedly renting out research analysts, consulting them and publishing their advice online. This way finfluencers can put the onus of the advice on these registered analysts. And while they make money, they also give these folks a cut.

Now, this might not be to SEBI’s liking. But until there is enough clarity on what is and what isn’t legal, finfluencers might be able to find ways to steer clear of any fines or action from the regulator. After all, if someone isn’t eligible to become an authorised investment advisor, you can’t stop someone from hiring a research analyst no?

Unless the law actually prohibits it. So can SEBI’s new regulations (whenever they come) do the trick? Well, it’s anybody’s guess.

#AskFinshots️🙋🏽‍♀️:

This week's question is from Elizabeth T. from Delhi University. She asked—

"How big of a role does luck play in the stock markets?"

Here's what Pawan, our co-founder had to say—

"See, usually ‘nothing is as good or as bad as it seems’. And these aren’t my words. Morgan Housel in his book ‘The Psychology of Money’ describes luck and risk as siblings.

This means that you could work really hard for an exam but fail nevertheless. So efforts don’t really define the outcome of any task. This also applies to investments.

There could be times when you invested in the market with careful research. You may have even had the perfect mix of assets in your portfolio. But that doesn’t guarantee 100% success.

You could encounter risks beyond your control. Luck may not always be in your favour. What’s important is that you understand that failure is a part of the journey and no amount of effort or meticulous planning can always materialise into a win.

Just know that risks can knock on your door uninvited and always have a plan B. In short, learn that luck won’t always be on your side and manage your risks smartly instead of weeping over your losses."

Hope that answered your question :)

Have a question for us at Finshots & Ditto? Write to us at colleges@joinditto.in and we'll try to get back to you with an answer!

And that's all for today folks! If you learned something new, make sure to subscribe to Finshots for more such insights :)

📢Finshots is now on WhatsApp Channels. Click here to follow us and get your daily financial fix in just 3 minutes