SEBI’s Proposal to Regulate Research Analysts

In a disclosure-based
regime for securities regulation, research analysts have a significant role to
play. When issuers and intermediaries are required to make extensive
disclosures as mandated by law, it gives rise to the risk of “information
overload”. The recipients of the information are unable to meaningfully
decipher the impact of such information, particularly where the emphasis is on
quantity rather than on quality of information. Research analysts play the role
of distilling the information using their expertise and making it available in
a form that both institutional and retail investors can meaningfully rely upon.
In other words, they provide informational intermediation.
While research
analysts perform a useful role in the securities markets, past experience suggests
that they are also prone to several conflicts of interests that may cloud the
independence of their analysis and output. This is because research analysts or
their related entities often provide other services to companies they cover in
their research analysis. The role of research analysts was also the subject
matter of great discussion
in the context of the Internet bubble over a decade ago. All of these have caught
the attention of securities regulators who have sought to extend their
oversight to research analysis.
In India, in the
past research analysts were not regulated. However, over the years, they have
come under the ambit of tangential regulation not directly intended at
addressing them. These include the SEBI (Prohibition of Insider Trading)
Regulations (and more specifically the model code of conduct for corporate
disclosures). Now, SEBI has proposed a new set of regulations to specifically
regulate research analysts in the Indian markets.
Last week, SEBI
issued a Consultation
Paper on Proposed Regulation of Research Analysts
for public comments,
along with the draft SEBI (Research Analyst) Regulations, 2013. They seek to
regulate independent research analysts, intermediaries that employ research
analysts and also research analysts providing recommendations in the public
media. Although not entirely clear from the draft regulations, this might
presumably cover announcements in the social media as well.
In order to bring
research analysts within SEBI’s ambit, they are required to register with it.
They must also provide necessary disclosures regarding conflicts of interest.
All of these are intended to enhance transparency and independence of the
analysis. However, certain types of entities such as investment advisers, asset
management companies, proxy advisory service providers and fund managers of
alternative investment funds are not required to be registered under these
regulations.

Comments
are due on the consultation paper and draft regulations by December 21, 2013.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • Kindly See Regulation 15 of SEBI (Intermediaries) Regulation, 2008 and also Regulation 15 of the SEBI (Investment Advisers) Regulation, 2013 which to a great extent will regulate the activities of an analyst.

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