CA Rajesh Pabari
The following few pages are summary of SEBI (Research Analysts) Regulations, 2014. Part 1 mainly includes important provisions from the introduction part and basic understanding of the regulations and related aspects.
Introduction: It’s not at all a surprise if the Regulator is asking a person to register with them if he is influencing investment decisions of the investor community. This regulation has not come out of the blue. There would have been a history of cases where analysts would have fooled investors resulting into their losses in the past.
The regulator wants to know whether the persons influencing the market are capable and competent enough to appear in front of the public and guide them where to invest and where not, which shares to buy and which ones to sell off.
In nutshell, the regulation requires that no person can act as a Research Analyst or Research Entity before obtaining a certificate from SEBI.
Existing Research Analysts: Entities or Analysts currently acting as such are allowed to operate as such till 29th May, 2015 (six months from the commencement of the SRAR, 2014) if they make an application for registration before 29th May, 2015 till the disposal of the application.
As per my calculation, the Regulations will come into force from 29th November, 2014 in India. (On 90th day from publication in Gazette)
Before moving further, it will be beneficial to go through the definition of Research Analysts.
Definition of “Research Analyst” is very much wide and amongst other things includes those entities and persons making recommendations in public media. The first line of the definition says “….a person who is primarily responsible for…”
What about newspapers? In my opinion newspapers will not be included and will not need to register because they are not primarily responsible for preparation or publication of the research report. But it will include newspapers, websites, and those who send SMSes for price targets and buy sell recommendations if they are doing on their own and not at the instance of some third party. Third party has to be registered with SEBI in such cases.
Exceptions:I don’t understand the logic of creating so many exceptions; however SEBI may come up with explanation for creating so many exceptions.
1. Investment Adviser(May be because they are already registered with SEBI for giving investment advices)
2. Credit Rating Agency(I don’t see any logic in creating this exception because role of Credit Rating Agency is far different from Research Analyst. So, I wondered when I saw this as exception. Apart from that, even employees and directors making public appearances are covered in exceptions. What is the need of excluding them? Are credit rating analysts and research analysts having the same standing, roles and responsibilities? Is this exception just for the kinds of report that Credit Rating Agencies in their normal course of business distribute or is it blanket exception to do anything that a Research Analysts does? We will wait for the clarifications to come)
3. Asset Management Company or Fund Managers
Q. What about person located outside India and in the business of issuing research reports?
Ans. They shall enter into an agreement with a research analyst or research entity registered under this regulations. Obviously, for providing the services of a research analyst or research entity.In such cases, responsibilities of the Indian party entering into agreement increases multifold. Analyzing the analysis provided by the foreign party itself becomes an internal task.
Q. What are the eligibility criteria for enrolling as a Research Analyst?
Ans.An individual registered as research analyst, individuals employed as research analyst and partners of a research analyst, if any, engaged in preparation and/or publication of research report or research analysis shall have the following minimum qualifications, at all time.
(I feel it’s too long time, but maybe SEBI felt its ok to provide TWO Years for obtaining the NISM certification, I am surprised why it should take two years for analysts to obtain NISM certification while at the same time it is a pre-requirement for the fresher analyst to enter the field of giving research papers and advices. Are the existing research analysts so much incompetent to clear it within even 4 to 6 months??? A big surprise for the investor community to accept the period of two years.)
Capital Adequacy Requirements:
|Entity||Requirement in Rs.|
|Individual or partnership firm||NET TANGIBLE ASSETS of value not less than ONE LAKH rupees|
|Body corporate or LLP||NETWORTH of not less than TWENTY FIVE LAKH rupees.”Net Worth” means the aggregate va lue of paid up share capital plus free reserves (excluding reserves created out of revaluation) reduced by the aggregate value of accumulated losses.|
Existing research analysts shall comply with the Capital Adequacy requirement within one year from the date of Commencement of Regulations.
Period of Validity of Certificate: Five years from the date of Issue
Renewal of Certificate: Apply three months before expiry of the Certificate.
Regulatory body for Research Analysts: Board may recognize any body or body corporate for the purpose of regulating Research Analysts. Board may specify that no person shall act as research analyst unless he is a member of a recognized body or body corporate.
MANAGEMENT OF CONFLICTS OF INTEREST AND DISCLOSUREREQUIREMENTS
Take an example of a conflict of interest. Suppose I am a Research Analyst giving recommendation for buying Securities of Company X and also holding shares of Company X (which may be a B group company not having much liquidity or market standing). I am providing services to 100 clients (let’s say many of them are HNIs), in such case if I recommend them buying the shares of Company X, what would be my responsibilities? What disclosures I should make before recommending a buy on the stock? What are the conflicts of interest?
As per the regulations, the research analysts and research entities are supposed to follow the below mentioned regulations specified in this regard.
|In case of IPO||Forty days after the securities are priced|
|In case of FPO||Ten days after the securities are priced|
Research analyst or research entity may publish or distribute research report or research analysis or make public appearance within such forty day and ten day periods, subject to prior written approval of legal or compliance personnel as specified in the internal policies and procedures.
Two things to note:
To be continued in part 2 of the Analysis.
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