Research analysts a fraction of the number of brokers, says Sebi data

Do most brokerages not provide any research services at all? Numbers from the stock market regulator seem to suggest so.

The number of research analysts who have already undergone registration with the Securities and Exchange Board of India (Sebi) is 618. There are over 3,984 brokers. This works out to around one research analyst registration for every six brokers.

Uttam Bagri, chairman, Bombay Stock Exchange Brokers Forum, said many brokers may offer limited, incidental advice to individual clients, but refrain from providing research services to the public at large, which would lead to a low number of research analyst registrations.

“Stock brokers who provide pure execution services and/or investment advice only incidental to their broking business need not register with Sebi as a research analyst or investment advisor. At the end of the day, it is the individual business model and choice of each intermediary,” he said.

J N Gupta, founder and managing director of governance firm Stakeholders Empowerment Services, said institutional investors tend to consume the most research. So, brokerages catering to such investors would traditionally have a research arm. Those offering services to retail investors may not have the same capability, with only very large retail brokerages in a position to afford to offer research to such small clients. It is not economical for the rest to do so with brokerage rates being very low.

“A brokerage (has) a very low-income model,” he said. Rules allow incidental advice without registration.

The low numbers are despite years passing since the registration was made mandatory. The notification for the Sebi (Research Analysts) Regulations, 2014 came on September 1, 2014. The regulations came into effect from the December 1, the same year. The regulations require the organisation providing the service to clients to register itself. Individual research analysts within a brokerage do not require separate registration.

“Individuals employed as research analyst with an entity are not required to obtain registration certificate from Sebi. The research entity which employs individuals as research analysts is required to obtain registration certificate under RA (Research Analysts) Regulations,” according to a primer on the regulations available on the Sebi website.

This also means that one can get a clear picture on the proportion of brokerages that may actually offer research services. Assuming that every research analyst is affiliated with a brokerage would mean that at least 84.5 per cent of brokerages offer no research services at all. This comes even as emerging markets such as India are already seen to be under-researched.

The proportion of no-research brokerages may actually be higher.

A number of registered research analysts would be independent ones. This means that they are not affiliated with a brokerage. They only offer research to clients and don’t execute trades. Also, the regulations extend beyond equity markets. They cover fixed income securities. They also cover proxy advisory firms. The latter provide investors with advise on how they should vote on company resolutions. This would further depress the number of brokerages that also offer registered research analyst.

The brokerage industry, which arguably provides the bulk of research, has already been under pressure because of discount brokerages that offer trades for very low commissions or flat fees irrespective of the value of the trade.

Meanwhile, in the United States, a number of players have begun to offer zero brokerages. They include start-up Robinhood Markets, and JPMorgan Chase & Co, one of the world’s biggest financial institutions.