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Sebi leash on research analysts

Mumbai, Nov. 29: If you have been peddling advice on stocks and other investment instruments to hapless and befuddled investors, the spotlight is finally on you.

The Securities and Exchange Board of India (Sebi) is putting in place rules to regulate research analysts and other purveyors of gratuitous investment advice.

The new 33-page draft rules were placed in public domain on Friday and are designed to protect investors who have burnt their fingers in a volatile market.

The new guidelines seek to regulate independent research analysts, intermediaries that employ research analysts and issues research reports, and research analysts giving recommendations in the public media such as TV channels, newspapers and websites.

First up: every research analyst will have to obtain a certificate of registration from Sebi. The certificate will be valid for five years, and an application for its renewal must be filed three months before it expires.

Individuals looking to register with the market regulator as research analysts must have a professional qualification or post-graduate degree or post graduate diploma in finance, accountancy, business management, commerce, economics, capital market, banking, insurance or actuarial science from a university or an institution recognised by the Centre or any state government or a recognised foreign university or institution or association.

Alternatively, they must be a graduate in any discipline with at least five year’s experience in research analysis, fund or asset or portfolio management, rating, investment banking or brokerage services.

The registration fee isn’t cheap. Every applicant will have to pay a non-refundable fee of Rs 50,000 along with the application for a grant or renewal of the certificate of registration. Once he gets the registration, individuals and firms will have to stump up another Rs 1 lakh. A body corporate will have to pay Rs 5 lakh.

The move to regulate research analysts is in line with a global trend where regulators have been trying to tackle the growing menace of a conflict of interest.

“Advice from investment analysts is (often) prone to conflicts of interest that may prevent them from offering independent and unbiased opinions,” Sebi said in its preface to the proposed guidelines.

“There is no guideline to identify and deal with conflict of interests by research analysts, who are not registered and regulated by Sebi at present. The absence of an exclusive and comprehensive regulation to deal with conflict of interests by research analysts poses regulatory gaps in the management and mitigation of possible conflicts of interest that may arise in their activities in securities market,” the regulator said.

The guidelines also propose minimum capital adequacy requirements for the applicants. Individuals and firms must have net tangible assets with a value of not less than Rs 5 lakh. Body corporates must have a net worth of not less than Rs 5 crore.

According to the proposed norms, an entity incorporated outside India willing to provide research services of Indian companies will have to set up a subsidiary in the country and make an application for registration through that subsidiary.

This suggestion has come after research reports on some listed Indian companies that were prepared by overseas entities sparked a huge fall in their share prices.

The draft norms stipulate that the research analyst or the intermediary should not deal in or trade any securities that he recommends or follows within 30 days before and 5 days after the publication of the report on the company or in a manner contrary to the recommendation.

Sebi also has powers to appoint inspecting authority to undertake inspection of the books of accounts, records and documents relating to the analyst or an intermediary if it receives any information or complaints from clients or any other person.

The guidelines also says that the research analyst cannot receive a pay bonus, salary or other form of compensation that is in any way linked to a specific merchant or investment banking transaction. The chinese wall between research wing and the investment banking department must be maintained. The research analyst shall not be subject to the supervision or control of any employee of the merchant/investment banking or brokerage departments.

Moreover, no personnel engaged in the merchant/investment banking or brokerage activities shall have any influence or control over the compensatory evaluation of a research analyst.

 
 
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