Securities and Exchange Board of India (‘Board’ for short) in exercise of powers conferred by Section 30(1) of Securities and Exchange Board of India Act, 1992 (‘Act’ for short) read with Section 11(2) of the Act made the ‘Securities and Exchange Board of India (Research Analysts) Regulations, 2014 (‘Regulations’ for short) with effect from 01.09.2014 to put in place a framework to register and regular research analysts.
The Regulation contains 34 sections in 6 chapters with three schedules. Chapter I deal with preliminary issues like definitions.Chapter II deals with the registration of Research Analysts.Chapter III deals with the management of conflicts of interest and disclosure requirements.Chapter IV deals with inspection.Chapter V deals with the procedure for action in case of default.Chapter VI deals with the miscellaneous aspects.The First Schedule contains two forms viz., Form A and Form B.Second Schedule deals with the fees payable and manner of payment.The third schedule deals with the code of conduct for Research Analyst.
Research Analyst
Regulation 2(u) of the Act defines the term ‘Research Analyst’ as a person who is primarily responsible for-
- Preparation or publication of the content of the research report; or
- Providing research report; or
- Making ‘buy/sell/hold’ recommendation; or
- Giving price target; or
- Offering an opinion concerning public office
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.
This term also includes any associated person who reports directly or indirectly to such a research analyst in connection with activities provided above.
Research entity
Regulation 2(v) defines the term ‘research entity’ as an intermediary registered with Board who is also engaged in merchant banking or investment banking or brokerage services or underwriting services and issue research report or research analysis in its own name through the individuals employed by it as research analyst and includes any other intermediary engaged in issuance of research report or research analysis.
Qualification
The following are the qualification prescribed for Research Analyst:
- An individual and partners of a research analyst, shall have a professional qualification or post graduate degree or post graduate diploma in finance, accountancy, business management, commerce, economics, capital market, financial services or markets provided by:
- A University which is recognized by University Grants Commission or by any other commission/council/Board/body established under the Act of Parliament in India for the purpose; or
- An institute/association affiliated with such University; or
- An Institute/association/University established by the Central Government or State Government; or
- Autonomous Institute falling under administrative control of Government of India; or
- Professional qualification or post graduate degree of post graduate diploma which is accredited by All Indian Council for Technical Education, National Assessment and Accreditation Council or National Board of Accreditation or any other council/board/body set up under an Act of Parliament in India for the purpose; or
- A graduate in any discipline with an experience of at least five years in activities relating to financial products or markets or securities or fund or asset or portfolio management.
- In addition to the above qualification a NISM certification for research analysis as specified by the Board or other certification recognized by the Board from time to time. The Research Analyst or Research entity already engaged in this field shall ensure that it or the individual employed by it obtain such certification within two years from the date of commencement of these regulations. Fresh certificate must be obtained before expiry of the validity of the existing certification to ensure continuity in compliance with certification requirements.
Capital adequacy
Regulation 8 prescribes the capital adequacy as detailed below:
- A Research Analyst who is an individual or partnership firm shall have not tangible assets of value not less than ₹ 1 lakh;
- A Research Analyst who is body corporate or LLP firm shall have a net worth of not less than ₹ 25 lakhs;
- All existing Research Analysts shall comply with the capital adequacy requirements within one year from the date of commencement of these regulations.
- The term ‘net worth’ for the purpose of these regulations means the aggregate value of paid up share capital plus free reserves (excluding reserves created out of revaluation) reduced by the aggregate value of accumulated losses.
Registration of Research Analysts
Regulation 3 provides that from 01.09.2014 no personal shall act as a research analyst or research entity or hold itself out as a research analyst unless he has obtained a certificate of registration from the Board under these regulations. Any person acting as research analyst or research entity before the commencement of these regulations may continue to do so for a period of six months from such commencement or, it has made an application for a certification of registration with the period of six months till the disposal of such application.The following is the registration procedure:
- An application for grant of certificate of registration shall be made in Form A;
- Every individual applicant including partnership firms shall pay non refundable application fees of ₹ 5,000/- and others shall pay non refundable application fees of ₹ 50,000/-
- Applicants who are individuals or partnership firm shall pay a sum of ₹ 10,000/- as registration fee at the time of grant of certificate by the Board;
- A body corporate including LLP firm shall pay a sum of ₹ 5 lakhs as registration fee at the time of grant of certificate by the Board.
- The fee shall be paid by the applicant within 15 days from the date of receipt of intimation from the Board by a demand draft in favor of ‘Securities Exchange Board of India’ payable at Mumbai;
- The Board may require the applicant to furnish further information or clarification for the purpose of consideration of the application;
- The applicant or his authorized representative, if so required, shall appear before the Board for personal hearing;
- The Board shall take into account all the matters which are relevant for the grant of certificate of registration and in particular, the following:
- Whether the applicant is individual or a body corporate of LLP firm?
- Whether in case the applicant is an individual, he is appropriately qualified and certified as specified in regulation?
- Whether in case the applicant is a body corporate, the individuals employed as research analyst are qualified and certified as specified in regulation?
- Whether in case the applicant is a partnership firm or a LLP partners engaged in issuance of research report or research analysis are qualified and certified as specified in regulation?
- Whether incase the applicant is a research entity, the individuals employed as research analyst are qualified and certified as specified in regulation?
- Whether the applicant fulfills the capital adequacy requirements as specified in regulations?
- Whether the applicant, individuals employed as research analyst and partners of the applicant, if any, are fit and proper persons based on the criteria as specified in Schedule II of SEBI (Intermediaries) Regulations, 2008?
- Whether the applicant has the necessary infrastructure to effectively discharge the activities of research analyst?
- Whether the applicant or any person directly or indirectly connected with the applicant has in the past been refused certificate by the Board and if so, the grounds for such refusal?
- Whether any disciplinary action has been taken by the Board or any other regulatory authority against the applicant or any person directly or indirectly connected to the applicant under the respective Act, rules or regulations made there under?
- The Board on being satisfied that the applicant complies with the requirements specified in regulations shall send intimation to the applicant and on receipt of the payment of registration fees grant certificate of registration in Form B subject to such terms and conditions as the Board may deem fit and appropriate;
- The conditions of certificate are as below:
- The Research Analyst shall abide the provisions of the Act and these regulations;
- The Research Analyst shall forthwith inform the Board in writing, if any information or particulars previously submitted to the Board are found to be false or misleading in any material particular or if there is any material change in the information already submitted;
- Research Analyst registered under these regulations shall use the term ‘research analyst’ in all correspondence with its clients.
- The certificate of registration shall be valid for a period of 5 years from the date of its issue.
Refusal of registration
If the Board, after considering trhe application, is of the opinion that a certificate should not be granted to the applicant it may reject the application after giving reasonable opportunity of being heard.The decision of the Board to reject the applicant shall be communicated to the applicant within 30 days of such decision.Where an application for a certificate is rejected by the Board, the applicant shall forthwith cease to act as a research analyst.Nothing contained these regulations shall affect the liability of the applicant under the law.
Renewal of certificate
Three months before the expiry of the period of validity of the certificate, the research analyst may, if he so desires, make an application in Form A for grant of renewal of certificate of registration.Applicants whoa re individuals or partnership firms shall pay a sum of ₹ 10,000/- as renewal fee at the time of renewal of certificate by the Board.A body corporate including LLP shall pay a sum of ₹ 5 lakhs as renewal fee at the time of renewal of certificate by the Board.The application for renewal shall be dealt with in the same manner as if it were an application for grant of certificate.
Obligations of Research Analyst
The following are the obligations and responsibility of Research Analyst:
- He shall maintain an arms-length relationship between its research activity and other activities;
- He shall abide by code of conduct as detailed below:
- Research analyst or research entity shall act honestly and in good faith;
- They shall act with due skill, care and diligence and shall ensure that the research report is prepared after thorough analysis;
- They shall effectively address conflict of interest which may affect the impartiality of its research analysis and research report and shall make appropriate disclosures to address the same;
- They shall not engage in insider trading or front running or front running of its own research report;
- They shall maintain confidentiality of report till the report is made public;
- They shall observe high professional standard while preparing research report;
- They shall comply with the regulatory requirements applicable to the conduct of its business activities;
- They shall bear primary responsibility for ensuring the maintenance of appropriate standards of conduct and adherence to proper procedures.
- In case if change in control of the research analyst or research entity prior approval from the Board shall be taken;
- Research analyst or research entity shall furnish to the Board information and reports as may be specified by the Board from time to time;
- It shall be the responsibility to ensure that its employees or partners comply with the certification and qualification requirements at all times;
- The Research Analysts or research entity shall maintain the following records:
- Research report duly signed and dated;
- Research recommendation provided;
- Rationale for arriving at research recommendation;
- Record of public appearance.
- All records shall be maintained either in physical or electronic form and preserved for a minimum period of five years;
- Where records are required to be duly signed and are maintained in electronic form, such records shall be digitally signed;
- Research Analyst or Research Entity shall conduct annual audit in respect of compliance with these regulations from a Member of Institute of Chartered Accountants of India or Institute of Company Secretaries of India.
- Research Analyst or research entity shall have written internal polices and control procedures governing the dealing and trading by any research analyst for:
- Addressing actual or potential conflict of interest arising from such dealings or trading of securities of subject company;
- Promoting objective and reliable research that reflects the unbiased view of research analyst; and
- Preventing the use of research report or research analysis to manipulate the securities market.
- Research Analyst or research entity shall have in place appropriate mechanisms to ensure independence of its research activities from its other business activities.
Limitations on trading by research analysts
- Personal trading activities of the individuals employed as research analyst by research entity shall be monitored, recorded and wherever necessary shall be subject to a formal approval process;
- 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 30 days before and 5 days after the publication of a research report;
- Independent research analysts, individuals employed as research analysts by research entity or their associates shall not deal or trade directly or indirectly in securities that the reviews in a manner contrary to his given recommendation;
- Independent research analysts, individuals employed as research analysts by research entity or their associate shall not purchase or receive securities of the issuer before the issuer’s initial public offering, if the issuer is principally engaged in the same types of business as companies that the research analyst follows or recommends;
- The provisions (above second, third and fourth) shall apply mutatis mutandis to a research entity unless it has segregated its research activities from all other activities and maintained an arms-length relationship between such activities;
- Notwithstanding anything contained (above second, third and fourth) such restrictions to trade or deal in securities may not apply in case of significant news or event concerning the subject company or based upon an unanticipated significant change in the personal financial circumstances of the research analyst, subject to prior written approval as per the terms specified in the approved internal policies and procedures.
Compensation of Research analysts
- The Research entity shall not pay any bonus, salary or other form of compensation to any individual employed as research analyst that is determined or based on any specific merchant banking or investment banking or brokerage services transaction;
- The compensation of all individuals employed as research analyst shall be reviewed, documented and approved annually by Board of Directors/Committee appointed by Board of Directors of the research entity, which does not consist of representation from its merchant banking or investment banking or brokerage services divisions;
- The Board of Directors/committee approving or reviewing the compensation of individual employed as research analyst shall not take into account such individual’s contribution to the research entity’s investment banking or merchant banking or brokerage services business;
- An individual employed as research analyst by research entity shall not be subject to the supervision or control of any employee of the merchant banking or investment banking or brokerage services divisions of that research entity.
Research Report
The term ‘research report’ is defined by Regulation 2(w) as any written or electronic communication that includes research analysis or research recommendation or an opinion concerning securities of public offer, providing a basis for investment decision and does not include the following communications:
- Comments on general trends in the securities market;
- Discussions on the broad based indices;
- Commentaries on economic, political or market conditions;
- Periodic reports or other communications prepared for unit holding of mutual fund or alternative investment fund or clients of portfolio managers and investment advisers;
- Internal communications that are not given to current or prospective clients;
- Communications that constitute other documents or prospectus that are circulated as per regulations made by the Board;
- Statistical summaries of financial data of the companies;
- Technological analysis relating to the demand and supply in a sector or the index;
- Any other communication which the Board may specify from time to time.
Contents of research report
Research analyst shall take steps to ensure that facts in its research reports are based on reliable information and shall define the terms used in making recommendations and these terms shall be consistently used.It must be clearly defined the meaning of each such rating including the time horizon and bench marks on which a rating is based.If the report contains either a rating or price target for subject company’s securities and the research analyst has assigned a rating or price target to the securities for at least one year, such research report shall also provide the graph of daily closing price of such securities for the period assigned or for a three year period, whichever is shorter.
Disclosures in research report
A research analyst shall disclose all material information and about itself including its business activity, disciplinary history, the terms and conditions on which it offers research report, details of associates and such other information as is necessary to take an investment decision, including the following:
- The following shall be disclosed in the report and in public appearance with regard to ownership and material conflicts of interest:
- Whether the research analyst has any financial interest in the subject company and the nature of such financial interest;
- Whether the research analyst or its associates or relatives have actual beneficial ownership of 1% or more securities of the subject company at the end of the month immediately proceeding the date of publication of the report or date of the public appearance;
- Whether the research analyst has any other material conflict of interest at the time of publication of the report or at the time of public appearance.
(The term ‘public appearance’ is defined under Regulation 2(q) as any participation in a conference call, seminar, forum (including interactive and non interactive electronic forum), radio or television or internet or web or print media broadcast, authoring a print media article or other public speaking activity in public media in which a research analyst make a recommendation or offers an opinion concerning securities or public officer.It does not include a protected web cast, conference call or such other events with the clients, if all of the event participants previously received the research report or other documentation that contains the required applicable disclosures and that the research analyst appearing at the event corrects and updates during the public appearance any disclosures in the report that are inaccurate, misleading or no longer applicable)
- The following shall be disclosed in the report with regard to receipt of compensation:
- Whether it has received any compensation from the subject company in the past 12 months;
- Whether it has managed or co-managed public offering of securities for the subject company in the past 12 months;
- Whether it has received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past 12 months;
- Whether it has received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months;
- Whether it has received any compensation or other benefits from the Subject Company or third party in connection with the report.
- The following are to be disclosed in public appearance with regard to receipt of compensation:
- Whether it has received any compensation from the subject company in the past 12 months?
- Whether the subject company is or was a client during 12 months preceding the date of distribution of the report and the types of services provided.
The research analyst shall not be required to make a disclosure to the extent such disclosure would reveal material non public information regarding specific potential future investment banking or merchant banking or brokerage services transactions of the subject company;
- Whether the research analyst has served as an officer, director or employee of the subject company?
- Whether the research analyst has been engaged in market making activity for the subject company?
- Research analyst shall provide all other disclosures in report and public appearances as specified by the Board under any other regulations.
Recommendations in public media
The Research analyst or research entity including its director or employee shall disclose the registration status and details of financial interest in the subject company if he makes public appearance.If any person including a director or employee of an investment adviser or credit rating agency or asset management company or fund manager makes public appearance or makes a recommendation or offers an opinion concerning securities of public offers through public media, all the provisions of ‘Limitations on trading by research analysts’ and ‘compensation of research analysts’ shall apply mutatis mutandis to him and he shall disclose his name, registration status and details of financial interest in the subject company at the time of-
- Making such recommendation or offering such opinion in personal capacity;
- Responding to queries from audiences or journalists in personal capacity;
- Communicating the research report or substance of the research report through the public media.
Distribution of research reports
A research report shall not be made available selectively to internal trading personnel or a particular client or class of clients in advance of other clients who are entitled to receive the report.The Research analyst who distributes any third party report shall review that report for any untrue statement of material fact or any false or misleading information.The material conflict of interest of such third party research provider or he shall provide a web address that directs a recipient to the relevant disclosures.The same will not be applicable to a research analyst if he has no direct or indirect business or contractual relationship with such third party research provider.
Proxy Adviser
The term ‘proxy adviser’ is defined under Regulation 2(p) as any person who provide advice, through any means, to institutional investor or shareholder of a company, in relation to exercise of their rights in the company including recommendations on public offer or voting recommendation on agenda items.
Every applicant who is engaged in providing proxy advisory services shall pay non refundable application fees of ₹ 5,000/- with the application for grant or renewal of certificate of registration and a sum of ₹ 10,000/- as registration/renewal fee.
All the provisions relating to research analyst will be applicable to the proxy adviser.The employees of the proxy advisors engaged in providing proxy advisory services shall be required to have a minimum qualification of being a graduate in any discipline.Certification requirements with capital adequacy for proxy advisor shall be as specified by the Board.The period for compliance with capital adequacy shall be three years.
The proxy advisor shall additionally disclose the following:
- The extent of research involved in a particular recommendation and the extent and/or effectiveness of its controls and procedures in ensuring the accuracy of issuer data;
- Policies and procedures for interacting with issuers, informing issuers about the recommendation and review of recommendation.
Proxy adviser shall maintain the record of his voting recommendations and furnish the same to the Board on request.In case of any inconsistency or difficult in respect of applicability of provisions of these regulations to proxy advisers, the Board may issue such clarifications or exemptions as may be deemed appropriate.
Inspection by Board
The Board may suo motu or upon receipt of information or complaint, appoint one or more persons as inspecting authority to undertake inspection of the books of accounts, records and documents relating to the report for any of the following reasons:
- To ensure that the books of account, records and documents are being maintained in the manner specified;
- To inspect the complaints received from any person, on any matter having a bearing on the activities of a research analyst;
- To ascertain the provisions of the Act and these regulations are being complied with by the research analyst or research entity;
- To inspect into the affairs of research analyst or research entity in relation to research activities in the interest of the securities market or in the interest of investors.
Before ordering an inspection the Board shall give not less than 7 days notice to the research analyst or research entity.If the Board is satisfied that in the interest of investors no such notice shall be given, it may by an order in writing direct that the inspection of the affairs be taken up without any notice.During the course of inspection, the research analyst or research entity against whom the inspection is being carried out shall be bound to discharge its obligations.
The research analyst or research entity shall produce to the inspecting authorities such books, accounts and other documents in his custody or control and furnish him with such statements and information as the inspecting authority may require for the purpose of inspection.Such assistance shall be given to the inspecting authorities and shall extend all such co-operation as may be required in connection with the inspection and furnish such information as sought in connection with the inspection.
The inspecting authority have power to examine on oath and record the statement of any employee, director, partner or person responsible for or connected with the activities of research analyst or research entity or any other associate person having relevant information pertaining to such research analyst or research entity.The inspecting authority shall have power to obtain authenticated copies of documents, books, accounts of research analyst or research entity, from any person having control or custody of such documents, books or account.
The inspecting authority shall, as soon as possible, on completion of the inspection submit an inspection report to the Board.If directed to do so by the Board, the inspecting authority may submit an interim report.
The Board may after consideration of the inspection report and after giving reasonable opportunity of hearing to research analyst or research entity or its authorized representatives, without prejudice to any other action under the Act, issue such directions as it deems fit in the interest of securities market or the investors including requiring research analyst or research entity not to provide research recommendation for a particular period:
- Requiring the research analyst or research entity to refund any money collected as fees, charges or commission or otherwise to the concerned clients along with the requisite interest;
- Prohibiting the research analyst or research entity from operating in the capital market or accessing the capital market for a specified period.
