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The Securities and Exchange Board of India notified the Research Analysts Regulations earlier in the month. The regulations have sought to regulate analysts for the first time and attempt to address issues including eligibility, transparency and conflict of interest. The following are some key changes under the new framework:
Eligibility:
The basic eligibility criteria require a professional qualification, or post-graduate degree or diploma in finance or related fields. A graduate is also eligible to act as a research analyst, provided he has five years of experience in the financial markets. A certification will also be required.
Capital adequacy:
Sebi has put in place a networth requirement of between Rs 1 lakh and Rs 25 lakh, depending on whether the analyst is acting as an individual or a corporate entity or partnership.
Avoiding conflicts of interest:
Research analysts are not allowed to trade in the securities that they follow. The trading restriction is applicable 30 days before and five days after the publication of the research report. Also trades cannot be contrary to the recommendations of the report. They cannot provide analysis on securities that they are involved in bringing to the market for a fixed number of days after the pricing of the issue.
Compensation of research analysts:
Analysts cannot be paid on the basis of investment banking deals or brokerage transactions. Their compensation is to be reviewed by the board of directors of the research entity or through a separate committee appointed by this board. Investment banking and brokerage divisions cannot be represented on this committee. Research analysts should not report to employees of the investment banking and brokerage divisions.
Disclosures:
Research analysts must disclose financial interest in the company whether it is of the analyst, his relatives, or the entity for which he works. Any compensation received from the subject company in the past twelve months must also be disclosed.
Foreign research:
Entities based abroad can only provide research in India through a registered intermediary.
Proxy advisory firms:
Proxy advisory firms, which do not provide buy and sell recommendations, are also required to register with the regulator. These companies provide advice on governance issues and company resolutions. They will also be subject to net-worth requirements and provide reasoning for their reports, as well as disclose policies on getting responses from companies named in their reports.
