SEBI clarifies on Research Analysts Regulations

Sebi addresses analysts’ concerns, clarifies regulations

The move follows representations made by brokerages, asset management companies and law firms, seeking clarity on the applicability of the new guidelines.

by Ashish Rukhaiyar, Anirudh Laskar 10/12/14, Mint


The Securities and Exchange Board of India (Sebi) has clarified that individual research analysts associated with registered brokerages and fund managers of mutual fund houses would not require a separate registration under the latest guidelines regulating research analysts.

The move follows representations made by brokerages, asset management companies and law firms, seeking clarity on the applicability of the new guidelines.

The new norms called Securities and Exchange Board of India (Research Analysts) Regulations, 2014 took effect on 1 December.

Among other things, it states that entities and individuals wanting to recommend stocks as research analysts need to get registered after meeting the prescribed criteria regarding qualifications, capital adequacy, establishment of internal policies and procedures, firewalls against conflict of interest, sufficient and timely disclosures, among others. In a list of frequently-asked questions (FAQs) it released on Tuesday, the regulator said individuals employed as research analysts with a registered entity are not required to obtain a separate registration certificate.

The research entity which employs individuals as research analysts is, however, required to get a registration under the new regulations.

Sebi has given six months time for entities to get registered. An email sent to Sebi remained unanswered till the time of going to press, though it clarified most of the issues through the FAQs.

Prior to the clarifications, market participants and intermediaries had raised concerns about the need for individual analysts to register before issuing any stock recommendation.

Naresh Tejwani, president of the Association of National Exchanges Members of India (ANMI), an umbrella body of brokerages, felt that the guidelines should be made applicable only to individual analysts who are not associated with any registered intermediary.

“Brokers are already registered with Sebi and are subject to internal audits along with inspection by Sebi. During the consultation phase, we had requested Sebi to keep brokers out of the purview of this regulation. It can be made mandatory for the many so-called freelance analysts. Brokers have been kept out of regulations for investment advisors as well,” said Tejwani.

Further, Sebi has clarified that the definition of research report in the latest norms does not include comments on general market trends, broad-based indices, economic, political and market conditions.

Periodic reports or other communications prepared for unit holders of mutual funds or alternative investment funds, or clients of portfolio managers also will not fall under the category.

Statistical summaries of financial data of a company or technical analyses on demand and supply in a particular sector or index too are exempted from the scope of definition of research reports.

The new regulations would not be applicable on investment advisors, credit rating agencies, portfolio managers, asset management companies, fund managers of alternative investment funds or venture capital funds, Sebi clarified.

Amit Tandon, the founder and managing director of Institutional Investor Advisory Services (IiAS), a proxy advisory firm, said the capital market regulator seems to be ensuring that there is no discrimination in the treatment of investors.

“A wealth manager cannot suggest one investor to buy a particular stock and another investor to sell the same stock or asset. Similarly, for managers handling a fund-raising mandate for a particular company, Sebi wants to ensure that there is no foul play before the float, so that investors can take an informed and fair decision,” said Tandon.

Taking a strict view, Sebi has also clarified that the regulator can take penal action against erring research analysts in the form of cancellation of registration or debarment.

Sandeep Parekh of Finsec Law Advisors, a corporate law firm, is of the view that the regulations would impact the free flow of information and that Sebi could have just laid down a code of conduct rather than full-fledged regulations.

As per the guidelines, a research analyst or his associate cannot trade in a stock within 30 days before and five days after the publication of a research report on that particular stock.

While the intent of Sebi is believed to be to safeguard the interest of investors from any kind of biased or manipulative research reports, market intermediaries say the vast definition of analysts along with the other requirements could make it difficult for brokerages to carry out the routine advisory functions.

In a recent blog, Jayanth R. Varma, professor of finance and accounting at the Indian Institute of Management-Ahmedabad (IIM-A), said the regulations use a “very expansive definition” of a research analyst.

Regulations of this kind are a form of regulatory overreach that must be prevented by narrowly circumscribing the powers of regulators in the statute itself, said Varma, who has earlier worked with Sebi as an executive director.


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