Introduction
In the digital and globalised world, the transmission of information is quick that a piece of information published in a country can shatter the share market of another country in hours. As the impact of the recently published report by Hindenberg Research on alleged financial inconsistency in shares of the Adani Group, the report have resulted in the major setback, and have wiped away, $100 Billion worth of market capitalization of the Adani Group .This sheds light on the sheer impact that a research report can make on the economy of any country in general and the share market in particular. In this article we tend to analyze the regulatory framework in India regarding the research agencies that publish research reports, and the would understand the jurisdiction of Indian court in these matters and the possible remedy for the shareholders in case the report published by the research agency is dubious and mala-fide.
Regulatory Framework in India
The research analysts and research agencies are primarily regulated by the Securities and Exchange Board of India (Research Analysts) Regulations, 2014. “The regulations specify conditions for registration, certification, limitations on trading by research analysts, limitations on compensations of research analyst, various disclosures to be made during public appearance and during making recommendations through public media, code of conduct, records to be maintained, manner of conducting inspection, etc.”
Research entity is defined in regulation 2(v), as “An intermediatory registered with SEBI who is engaged in merchant banking or investment banking or brokerage services or underwriting services and issue research report or research analysis and other intermediaries to whom there is no specific exemption under RA Regulations are covered under the definition of research entity.”
Regulation 3 read with regulation 7 deals with the qualification and other requirements for the research entity and mandates for a certification of research analyst by SEBI under the said regulation.
Regulation 4 of regulations deals with the procedural requirement for person that are located in foreign territories and provides that any research analyst or research entity that wishes to publish a research report needs to get into an agreement with a research entity registered in India under the said regulations.
Regulation 16(2) provides that independent research analysts, individuals employed as research analyst by research entity, or their associates shall not deal or trade in securities that the research analyst recommends or follows within thirty days before and five days after the publication of a research report.
Is the Agreement Practically Enforceable?
Basically, the requirement of foreign based research agency to get into the business of the research entity for the purpose of carrying out research and publication regarding the listed companies in an Indian share market, is to get into an agreement with a SEBI registered research agency. Upon the agreement with Indian research entity, which is registered under SEBI Research Analyst Regulations,2014. Such agreement makes the foreign research entity qualified for the publication of the research report, on the basis of such reports, the transactions are carried out in the share market.
The liability of the research entity based in India, that is registered with SEBI, which enters into the transaction with the foreign research entity which, suppose publishes a fraudulent research report or engages in unfair trade practices, then the liability of such foreign based research agency would depend on terms of the agreement, if the agreement provides that for the liability of for the liability of foreign company, then the enforcement of the liability becomes a task in itself, and if the liability is shifted upon the company registered with SEBI.
The Valuation Paradigm
The agreement between the two research entities does not mandate for the minimum capital requirement for the firm, that engages in the transaction with foreign entity. This leaves the area vulnerable to be exploited. As in this case where the foreign- based research entity gets into share trading, in violation of requirement of SEBI (RA) Regulations, and makes undue profit of the valuation more than the valuation of the SEBI registered Indian firm, then the recovery of such profit or imposition of the penalty again is an issue. Therefore, we do not have a solid regulatory framework in place which fixes the liability of foreign based research agency in the case of fraud committed by such research agency.
The terms of the agreement remain opaque and does not have any disclosure requirements. The SEBI regulations does not mandate for any vicarious liability of the firm that is registered in India. The SEBI registered firm does not act as a guarantee in the case of liability of a foreign firm which it is in agreement with.
Jurisdiction of the Indian Courts
The Constitution of India, through Article 245, provides that, the territorial application of laws made by Parliament. Article 245(1) states that Parliament may make laws for the whole or any part of India, while Article 245(2) provides that a law made by Parliament can have extra-territorial operation and laws cannot be invalidated for being extra territorial in nature. In recent years, there has been an increase in the trend of enacting laws and regulations with the extra-territorial operation, with the US being the leader in this regard. India also has laws with the extra-territorial operation, such as the Foreign Exchange Management Act, 1999.The SEBI Act, 1992, but these legislations, does not have an explicit provision for the extra-territorial operation, but SEBI has used its powers to frame regulations with the extra-territorial operation.
There are provisions under the SEBI (LODR) Regulations, 2015 which provides for extra territorial Jurisdiction to SEBI, the validity of extra-territorial regulations made by the Securities and Exchange Board of India (SEBI) remains unclear. As there is an absence of explicit provisions in the SEBI Act empowering SEBI to make such regulations. There is not much legal framework and the constitutional validity of these regulations and further, there are limitations imposed by the Supreme Court of India. Also, the question that, whether Article 245(2) of the Constitution, which provides that a law made by Parliament shall not be deemed invalid, also applies to delegated legislation made by a regulator under the law enacted by Parliament.
The Supreme Court of India has not directly addressed the issue of the constitutional validity of extra-territorial regulations made by SEBI under delegated legislation. However, the Supreme Court has held that regulations made by a regulator under a parent statute have the same force and effect as an act passed by the competent legislature. As long as there is a real nexus with India, the delegated legislations framed by SEBI may also provide for extra-territorial applicability. The connection with India must be real or expected to be real and not illusory or fanciful. In SEBI v. Pan Asia Advisors Ltd and Anr., the question of extra territorial applicability of laws that are repugnant to the SEBI Act and other regulations was not examined by the Supreme Court which still remains a grey area.
Conclusion
The research analysts and research agencies are primarily regulated by the Securities and Exchange Board of India (Research Analysts) Regulations, 2014. The legal framework provides that, Foreign based research entities must, enter into an agreement with a SEBI registered research entity based in India for publishing research reports. Further, in the case of any violations committed by such foreign companies, the liability of the research entity in India depends on the terms of the agreement with the foreign entity. However, the agreement does not mandate for the minimum capital requirement of such SEBI registered firm, and does not provide for any disclosure requirements. The jurisdiction of Indian courts depends on the laws made by Parliament regarding the extra-territorial operation. However, the questions about the validity and effectiveness of the extra-territorial regulations made by SEBI and in the light of the limitations imposed by the Supreme Court of India on such regulations remains a major hinderance in the regulation of foreign based research entities, and remains a major loophole in the regulatory framework and is a cause of concern for the stakeholders.
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