 "Sebi diktat on analysts no sweat for research houses")
Large investment banks and brokering houses say the curbs prescribed in the regulations are less stringent compared to the self-regulatory framework they have already put in place. For example, several brokerages have pre-trade approval systems in place for analysts. Also, some brokerages say they have a complete ban on analysts from dealing in shares they track. Going ahead, however, these entities will have to tweak their guidelines to align them with Sebi regulations.
This is what Sebi has said. Equity research analysts, both domestic and foreign, can give recommendations on stocks and sectors only after they obtain a certificate of registration from Sebi. The rationale behind the long-awaited framework is to have regulatory oversight on equity research done in the country to ensure that the advice given by analysts is in good faith and devoid of any vested interest, the regulator says.
The proposed Sebi (Research Analysts) Regulations, 2013, prescribe a minimum net worth and trading curbs, and put greater responsibility on analysts and intermediaries who provide equity research. They propose to introduce curbs on analysts while dealing in the securities they recommend.
Analysts or a brokerage will also not be allowed to deal in shares of companies a month before and five days after the publishing of research reports. Also, analysts will be barred from publishing or recommending a security traded by them in the previous 30 days.
The regulations also state that the compensation or bonuses of an analysts should not be tied to any specific investment banking or brokerage transactions. The regulations also bar an analyst or a brokerage from issuing research reports or making public appearances on companies where they act as investment bankers in IPOs or FPOs. The restriction will be for 50 days post completion of an IPO and 10 days post completion of a secondary share sale.
| ANALYST CATEGORIES & POSSIBLE CONFLICT OF INTEREST |
| SELL-SIDE: Who: Research analysts at brokerages Profile: Publish research reports on stocks and sectors. Such reports, typically, have a price target and recommendations such as buy, sell and hold Conflict of interest risk: High. Chances of conflict of interest are high as their organisation might be doing multiple functions such as broking, investment banking. For instance, a research analyst working with a bank might be asked to give a ‘buy’ recommendation on a stock of a company that is a corporate client of the bank BUY-SIDE: Who: Analysts at money managers such as mutual funds, insurance companies or portfolio managers Profile: Analysts do propriety research which is circulated to senior management, which uses it for executing trades Conflict of interest risk: Low. The probability of conflict of interest is low as it is mostly for self consumption. However, it is likely the neutrality of the reports might be impacted if the analysis is aligned to money managers’ goals INDEPENDENT: Who: These analysts are not associated with a brokerage or a full-service investment bank Profile: Such analysts typically have a subscription or fee-based revenue model Conflict of interest risk: Moderate. There is a fair chance of conflict of interest as the firm may ask independent analysts to provide positive views on it. There is a risk of vested interest when such analysts provide their views on the media OTHERS: Besides these, three broad categories, newspaper, news channels, wire agencies provide research analyses, either primary or an aggregation from various sources |
For instance, the six investment banks handling the PowerGrid offering will not be allowed to publish a research report on the company until 10 days after the FPO is completed. As far as applicability is concerned, the regulations are primarily aimed at individuals and entities whose main business activity is equity research. The new framework applies to all three -- sell-side, buy-side and independent research analysts. It also applies to entities which employ research analysts or distribute third-party reports. It also mandates foreign citizens, who wish to conduct research activity on Indian securities, to set up shop in the country.
In-house equity research teams at media houses have been excluded from registration, according to people close to the development. A Sebi official says journalists who give stock-specific views may not have to register, but they will have to provide disclosures on their stock holdings.
Sebi has also kept out investment advisors, fund managers, proxy advisory firms, private equity and hedge funds from registration under the research analyst regulations. However, the regulator has said if these entities “make commentaries or recommendations concerning securities or public offers through public media” they will have to adhere to tighter disclosure and record-keeping norms prescribed in the research analyst regulations.
Already most independent analysts who give advice for fees have registered under the Investment Advisor Regulations following a Sebi diktat earlier this year. They will now just have to follow the disclosure and other record-keeping norms.
Interestingly, the regulations mention public media comprising radio, television or print media, but leave out the web. Experts say advice provided by analysts through the internet should also have similar curbs as other media.