Introduction
There has always been confusion on drawing a line in principle in offering Model Portfolio services by Research Analysts. Whether they are permitted to provide the Model Portfolio Services or not eligible to provide?
There’s one Settlement Order which was issued in May 6th 2022 wherein question was raised on providing model portfolio services by a Research Analyst. However, SEBI in its informal guidance issued on 5th April 2023, mentioned that making recommendation in respect a basked comprising more than one security is considered as Research Report as per Research Analyst Regulations.
Settlement Order
SEBI had mentioned in its Settlement Order that vide order no SO/GR/BM/2022-23/6631 dated May 6th 2022, stated that
“Applicant violated provisions of Regulation 2(u) read with clause 1, 2 & 8 of Schedule III of Code of Conduct prescribed under the RA Regulations, by selling model portfolio products to his clients / prospective clients, which is against the defined responsibility of Research Analyst. It was alleged that Applicant had not acted honestly and in good faith and had not ensured maintenance of appropriate standards of conduct and adherence to proper procedures”
Allegation made in the Show Cause notice was that products were offered as model portfolio products to its clients/ the prospective clients which had 10-20 stocks in the portfolio along with the weights at which the allocation was done and no option was provided to the clients/ prospective clients to invest in a particular security/scrip as the recommendations made were a portfolio-based and not security-based.
The applicant neither admitted nor denied the findings of SEBI and offered to settle the proceeding initiated against him and a settlement order was passed by the Adjudicating Officer. One should note that a Settlement Order is not a law and do not provide a complete picture of the situation and the regulation. This created ambiguity among the market participants, including the investors as online platforms were offering these services and investors using it.
Informal guidance was sought with respect to the Research Analyst services provided as mentioned below (relevant questions are considered)
Does making recommendation also include providing recommendations for a basket comprising of more than one security to the clients who avail RA services?
As per Regulation 2(u) of the SEBI (Research Analyst) Regulations, 2014 Research Analyst means
“research analyst” means a person who is primarily responsible for,-
i. preparation or publication of the content of the research report; or
ii. providing research report; or
iii. making ‘buy/sell/hold’ recommendation; or
iv. giving price target; or
v. offering an opinion concerning public offer, with respect to securities that are listed or to be listed in a stock exchange, whether or not any such person has the job title of ‘research analyst’ and includes any other entities engaged in issuance of research report or research analysis.
Explanation.-The term also includes any associated person who reports directly or indirectly to such a research analyst in connection with activities provided above
As per Regulation 2(w) of the SEBI (Research Analyst) Regulations, 2014
“research report” means any written or electronic communication that includes research analysis or research recommendation or an opinion concerning securities or public offer, providing a basis for investment decision and does not include the following communications:-
i. comments on general trends in the securities market;
ii. discussions on the broad-based indices;
iii. commentaries on economic, political or market conditions;
iv. periodic reports or other communications prepared for unit holders of mutual fund or alternative investment fund or clients of portfolio managers and investment advisers;
v. internal communications that are not given to current or prospective clients;
vi. communications that constitute offer documents or prospectus that are circulated as per regulations made by the Board;
vii. statistical summaries of financial data of the companies;
viii. technical analysis relating to the demand and supply in a sector or the index;
ix. any other communication which the Board may specify from time to time;
Relevant extract from the Informal guidance are:
Further, since the abovementioned regulations expressly uses the term ‘securities’, making recommendations in respect to a basket comprising of more than one security to the clients, shall also be covered within the definition under regulation 2(1)(w).
Informal Guidance mentioned that the recommendations on a basket comprising of more than one security fall under the ambit of the Research Analyst recommendations. However, one has to note that the Informal Guidance would be provided based on the facts and the conditions shared with SEBI for the guidance, any change in the facts might lead to change in the opinion. Also, the guidance doesn’t express the decision of the Board.
Conclusion: In the informal guidance, SEBI has drawn reference to the basket of securities vis-à-vis model portfolio as mentioned in the Settlement Order. What constitutes as a basket of securities and Model Portfolio and the differences between the both has to be examined. It becomes important to differentiate between a typical research report on securities containing a basket of securities and a curated portfolio of stocks available on an online platform. Also, drawing reference from the Show Cause Notice of the settlement Order, a recommendation on the security level or a scrip level has to be provided along with an option to invest.
****
Disclaimer: This article is for informational purposes only and is not intended as professional advice. The contents are based on the authors’ interpretation of regulations and guidance as of the date of publication. Readers are encouraged to consult professionals for advice tailored to their specific situations, and the authors and the firm disclaim any liability for actions taken in reliance on the information provided.
Author Bio
