RESEARCH ANALYST UNDER SEBI

[Mr. M. GOVINDARAJAN]

Research Analyst

A research analyst is responsible for researching, analyzing, interpreting and presenting data related to markets, operations, finance, accounting, economics, customers and other information related to the respective field they worked in.  He is typically very quantitative, analytical, logical and good at managing numbers and data.  Research analyst exists in every industry especially in security market.  SEBI framed regulations for research analyst called as ‘SEBI (Research Analyst) Regulations, 2014, vide Notification No.  LAD-NRO/GN/2014-15/07/1414, dated 01.09.2014.  These regulations came into force with effect from 29.11.2014.

Regulation 2(1)(u) defines the expression ‘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 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.  This expression also includes any associated person who reports directly or indirectly to such a research analyst in connection with activities provided above.

Qualification

Regulation 7 prescribes the required qualifications to become a research analyst.   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 times-

•  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 recognized by University Grants Commission or by any other commission/council/board/body established under an 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 or 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.

Individuals employed as research analyst and partners of a research analyst, if any, shall have, at all times, a NISM certification for research analysts as specified by the Board or other certification recognized by the Board from time to time.

Capital adequacy

A research analyst who is individual or partnership firm shall have net tangible assets of value not less than ₹ 1,00,000/-.   A research analyst who is body corporate or limited liability partnership firm shall have a net worth of not less than ₹ 25,00,000/-.

‘Net worth’ for the purposes of this regulation means  as 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 analyst

To act as research analyst the concerned person has to obtain certificate of registration from SEBI.  The procedure involved in registration is as below-

• An application for grant of certificate of registration shall be made in Form A giving the following-

• General Information;
• Details of the applicant;
• Details of research services;
• Details of infrastructure;
• Other information/declaration/regulatory actions;
• Declaration Statement.

• The application shall be  accompanied by a non-refundable application fee as detailed below-

• For individuals or partnership firms: ₹ 5000;
• For proxy advisory firms: ₹ 5000;
• For Body Corporate including Limited Liability Partnerships: ₹ 50000.

• 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 representation.
• the Board shall take into account all matters which are relevant to the grant of certificate of registration and in particular the following-

• whether the applicant is an individual or a body corporate or limited liability partnership firm?
• whether in case the applicant is an individual, he is appropriately qualified and certified as specified in regulation 7?
• whether in case the applicant is a body corporate, the individuals employed as research analyst are qualified and certified as specified in regulation 7?
• whether in case the applicant is a partnership firm or a limited liability partnership, partners engaged in issuance of research report or research analysis are qualified and certified as specified in regulation 7?
• whether in case the applicant is a research entity, the individuals employed as research analyst are qualified and certified as specified in regulation 7?
• whether the applicant fulfills the capital adequacy requirements?
• whether the applicant, individuals employed as research analyst and partners of the applicant, if any, are fit and proper persons?
•  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 shall send intimation to the applicant and on receipt of the payment of registration fees as detailed below-

• For individuals or partnership firms: ₹ 10,000;
• For proxy advisory firms: ₹ 10.000;
•  For Body Corporate including Limited Liability Partnerships: ₹ 5,00,000/-,

 grant certificate of registration in Form B subject to such terms and conditions as the Board may deem fit and appropriate.

Conditions

The certificate granted shall be subject to the following conditions:

• the research analyst shall abide by 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;
• the research analyst registered under these regulations shall use the term ‘research analyst’ in all correspondences with its clients.

Validity

The certificate of registration granted under regulation 9 shall be valid till it is suspended or cancelled by the Board.

Refusal of registration

After considering the application, if the Board is of the opinion that a certificate should not be granted to the applicant, it may reject the application after giving the applicant a reasonable opportunity of being heard.   The decision of the Board to reject the application shall be communicated to the applicant within thirty 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:

Management of conflicts

Research analyst or research entity shall have written internal policies 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.

Limitations on trading

The 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.  They 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.  They shall not deal or trade directly or indirectly in securities that he reviews in a manner contrary to his given recommendation.  They 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.

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.

Publication of research report

The Research analyst or research entity shall not publish or distribute research report or research analysis or make public appearance regarding a subject company for which he has acted as a manager or co-manager at any time falling within a period of-

• Forty days immediately following the day on which the securities are priced if the offering is an initial public offering; or
• Ten days immediately following the day on which the securities are priced if the offering is a further public offering.

The 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.

A research entity that has agreed to participate or is participating as an underwriter of an issuer's initial public offering shall not publish or distribute a research report or make public appearance regarding that issuer before expiry of twenty five days from the date of the offering.

If they acted as a manager or co-manager of public offering of securities of a company they shall not publish or distribute a research report or make a public appearance concerning that company within fifteen days prior to date of entering into and fifteen days after the expiration/waiver/termination of a lock-up agreement or any other agreement that the research analyst or research entity has entered into with a subject company that restricts or prohibits the sale of securities held by the subject company after the completion of public offering of securities.   They may publish subject to prior written approval of legal or compliance personnel as specified in the internal policies and procedures.

They shall not participate in business activities designed to solicit investment banking or merchant banking or brokerage services business, such as sales pitches and deal road shows.

They shall not engage in any communication with a current or prospective client in the presence of personnel from investment banking or merchant banking or brokerage services divisions or company management about an investment banking services transaction.

They shall have adequate documentary basis, supported by research, for preparing a research report.  They shall not provide any promise or assurance of favorable review in its research report to a company or industry or sector or group of companies or business group as consideration to commence or influence a business relationship or for the receipt of compensation or other benefits.

They shall not issue a research report that is not consistent with the views of the individuals employed as research analyst regarding a subject company.  They shall ensure that the individuals employed as research analyst are separate from other employees who are performing sales trading, dealing, corporate finance advisory or any other activity that may affect the independence of its research report.

Disclosures

A research analyst or research entity shall disclose all material information 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.

Disclosure on ownership and conflicts of interest

• whether the research analyst or research entity or his associate or his relative has any financial interest in the subject company and the nature of such financial interest?
• whether they have actual/beneficial ownership of one per cent. or more securities of the subject company, at the end of the month immediately preceding the date of publication of the research report or date of the public appearance?
•  whether they have any other material conflict of interest at the time of publication of the research report or at the time of public appearance?

Disclosure in research report on receipt of compensation

• whether it or its associates have received any compensation from the subject company in the past twelve months?
• whether it or its associates have managed or co-managed public offering of securities for the subject company in the past twelve months?
• whether it or its associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months?
• whether it or its associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months?
•  whether it or its associates have received any compensation or other benefits from the subject company or third party in connection with the research report?

Disclosure in public appearance with regard to compensation

• whether it or its associates have received any compensation from the subject company in the past twelve months?
•  whether the subject company is or was a client during twelve months preceding the date of distribution of the research report and the types of services provided?

Research report

Regulation 2(1)(w) defines the expression ‘research report’ as  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-

• 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 holders 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 offer documents or prospectus that are circulated as per regulations made by the Board;
•  statistical summaries of financial data of the companies;
• technical 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.

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.

Distribution of research report

 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 research report.  The Research analyst or research entity who distributes any third party research report shall review the third party research report for any untrue statement of material fact or any false or misleading information.  They shall disclose any 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.

General responsibility

They shall maintain an arms-length relationship between its research activity and other activities.  They shall abide by Code of Conduct as specified in Third Schedule.   In case of change in control of the research analyst or research entity, prior approval from the Board shall be taken.  They shall furnish to the Board information and reports as may be specified by the Board from time to time.    It shall be the responsibility of them to ensure that its employees or partners, as may be applicable, comply with the certification and qualification requirements.

Maintenance of records

The following records are to be maintained under these regulations-

• research report duly signed and dated;
• research recommendation provided;
•  rationale for arriving at research recommendation;
• record of public appearance.

The records shall be maintained in physical or electronic form.  The records are to be preserved for a minimum period of 5 years.  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 shall be conducted. 

Compliance Officer

The Research analyst or research entity which isa body corporate or limited liability partnership firm shall appoint a compliance officer who shall be responsible for monitoring the compliance of the provisions of the Act, these regulations and circulars issued by the Board.

Inspection

The Board may cause the  inspection of the books of accounts, records and documents relating to research analyst or research entity.    The Board shall give not less than seven days notice to research analyst or research entity.  In the interest of investors the Board may not require to serve notice.

During the course of an inspection, the research analyst or research entity against whom the inspection is being carried out shall be bound to discharge its obligations-

• to produce to the inspecting authority 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 purposes of inspection;
• to give to the inspecting authority all such assistance and shall extend all such co-operation as may be required in connection with the inspection and shall furnish such information as sought by the inspecting authority in connection with the inspection;

The inspecting authority shall 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 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 accounts.

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,  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 commissions 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.

Liability

The Research analyst or research entity who-

• contravenes any of the provisions of the Act or any regulations or circulars issued there under;
• fails to furnish any information relating to its activity as a research analyst as required by the Board;
• furnishes to the Board information which is false or misleading in any material particular;
• does not submit periodic returns or reports as required by the Board;
• does not co-operate in any enquiry, inspection or investigation conducted by the Board;
• fails to resolve the complaints or fails to give a satisfactory reply to the Board in this behalf,

shall be dealt with in the manner provided under the Act or the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.

Exemption

The Board may, exempt any person or class of persons from the operation of all or any of the provisions of these regulations for a period as may be specified but not exceeding twelve months, for furthering innovation in technological aspects relating to testing new products, processes, services, business models, etc. in live environment of regulatory sandbox in the securities markets, subject to the applicant satisfying such conditions as may be specified by the Board including conditions to be complied with on a continuous basis.

Code of Conduct for research analyst

• Research analyst or research entity shall act honestly and in good faith.
• Research analyst or research entity shall act with due skill, care and diligence and shall ensure that the research report is prepared after thorough analysis.
• Research analyst or research entity 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.
• Research analyst or research entity or its employees shall not engage in insider trading or front running or front running of its own research report.
• Research analyst or research entity or its employees shall maintain confidentiality of report till the report is made public.
• Research analyst or research entity or its employees engaged in research analysis shall observe high professional standard while preparing research report.
• Research analyst or research entity shall comply with all regulatory requirements applicable to the conduct of its business activities.
• The senior management of research analyst or research entity shall bear primary responsibility for ensuring the maintenance of appropriate standards of conduct and adherence to proper procedures.