InGovern Comments on SEBI Proposed Research Analysts Regulation

We have sent the following comments and suggestions to SEBI on its proposed regulation for Research Analysts:

The full text can be read here: InGovern Comments on SEBI Regulation of Research Analysts

Clause Number Name Pertains to which regulation/ sub-regulation Proposed/ suggested changes Rationale
7 (1) Research Analysts which are body corporates shall have a net worth of not less than fifty lakh rupees Capital adequacy requirements This should be reduced to Rs. Twenty five lakhs This will bring it on parity with capital adequacy of investment advisors which are body corporates as proposed in SEBI Investment Advisors Regulations 2013.
15 (3) Research Analyst or the intermediary shall not purchase or receive any securities before the issuer’s initial public offering or further offering if the issuer is principally engaged in the same types of business as companies that the research analyst follows. Limitations on dealings by Research Analysts Need more detailing as there can dispute in “type of business” and coverage by research analysts and intermediaries.
16 (5) Research Analyst or the intermediary shall not directly or indirectly offer favourable research to a company or in respect of a security or public offer as consideration or inducement for the receipt of business or compensation. Restriction on research analyst compensation Favourable research of a certain industry/sector or a group of companies or a business group should be included. Invariably cross coverage from other group companies may influence research analysts.
17 (3) Research Analyst shall not research report for a period of 50 days from the date of completion of such offering or for 10 days for a secondary offering. Limitations on Publications of Research Reports It should also cover the period prior to the date of completion of an offering. A leading brokerage house recommended buying of Public Sector companies ahead of its investment banking division pitching for disinvestment mandates from GoI.
18 (3) If a research report contains either a rating or price target for a subject company’s security, and the Research Analyst or intermediary has assigned a rating or price target to the security for at least one year, the research report must include the graph of security’s daily closing prices for the period assigned or for a three-year period, whichever is shorter. Content in Research Reports The report should contain details of past stock price target recommendations made by the analyst along with actual performance of the security from the date of the past recommendation. This will give readers an insight into how good and fickle the research analyst is.
19 (3) (i) If the research analyst or a intermediary of the research analyst’s close relative has a financial interest in the debt or equity securities of the subject company, and the nature of such interest. Disclosures in Research Reports The definition of close relative should be more detailed. The definition of close relative should be compatible with other laws like that of related party defined in Companies Act and Insider Trading Act.
19 (3) (ii) If the research analyst or a intermediary or its employees serves as an officer of the subject company Disclosures in Research Reports The brokerage firm/ investment bank should list the officers of its parent bank who may be functioning as a Director on the Board of the subject company. This lists out any potential conflict of interest for the research firm.
19 (3) (viii) Any other material conflict of interest of the research analyst or intermediary that the research analyst or an associated person of the intermediary with the ability to influence the content of a research report knows or has reason to know at the time of the publication or distribution of a research report. Disclosures in research reports Material conflict of interest should be made more granular as it may be misinterpreted as to from whose perspective it is material. Materiality should be viewed from the individual research analyst’s perspective and not from the perspective of the firm the research analyst is an employee of.
20 (1) (i) When they provide analyses or comments in public media in their personal capacity, they shall disclose their name, their registration status if any, and the details of financial interest if any, at the time of provision of analyses or comments.
ii) When they respond in personal capacity to queries from audiences and journalists.
iii) When they communicate the research report or substance of the research report through the public media.
Recommendation in Public Media Public media should also include blogs, online discussions and online recommendations on popular website with great public following. The definition of public media is undergoing change rapidly into the online media.
21 Distribution of research reports Distribution of Research reports Unauthorized leakage of research reports into the online domain should be prevented by brokerage firms with tighter internal controls. There are many instances of availability of research reports of leading brokerage firms in the online domain. These are selective leakages.