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Sebi notifies norms for research analysts; reports must disclose possible financial gains

Tuesday, 2 September 2014 - 3:40pm IST | Place: Mumbai | Agency: dna webdesk

In a move to safeguard Indian markets from any manipulative research reports including by foreign entities, Sebi has notified norms for 'research analysts' to ward off any conflict of interest in their activities. Foreign entities acting as research analysts for Indian markets or India-listed companies would need to tie-up with a registered entity in India, while domestic players would also be subjected to strict disclosures and scrutiny.

The new norms, which would also cover 'proxy' advisors or those providing advisory services similar to research analysts, have been framed in the wake of various instances of 'mischievous' research reports having been circulated among the investors in the past to manipulate the overall market trends or share price of individual companies. These new norms would be called the Securities and Exchange Board of India (Research Analysts) Regulations, 2014.

"These regulations shall come into force on the 19th day from the date of their publication in the Official Gazette," Sebi said in a notification on Monday. As per the new norms, every individual or entity desiring to function as a research analyst would need to get registered after meeting the prescribed criteria regarding qualifications, capital adequacy, establishment of internal policies and procedures, firewalls against conflict of interest, sufficient and timely disclosures, among others.

The regulations also provide for penal actions that Sebi can take against erring research analysts. Such actions would include cancellation of registration, debarment, or penalties similar to any other market intermediary. The new norms seek to register and regulate research analysts as well as those entities that make recommendations related to securities and public offers such as brokerage houses, merchant bankers and proxy advisors. However, Investment Advisers, Credit Rating Agencies, Portfolio Managers, Asset Management Companies, fund managers of Alternative Investment Funds or Venture Capital Funds would not be required to be registered under these regulations.

The norms also prescribe limitations on trading by research analysts as well as certain restrictions with regard to publication of research reports and public appearances. The norms mandate that research reports have complete disclosures on financial interest and receipt of compensation, which will help investors to understand the actual or potential conflicts of interest and their likely impact on the quality of the research report published. Among others, the norms have provisions in relation to disclosures to be made in research reports, code of conduct, general responsibility and maintenance of records.

All existing research entities and individuals engaged in research activity would come under these regulations. Also, the research entity or proxy adviser has to segregate their research work from other activities. Further, entities would have to ensure that yearly audits are carried out with respect to complying with these regulations. With regard to foreign entities, Sebi has decided that they have to enter into an arrangement with registered research analysts. The registered entities would be allowed to distribute third party research reports as per the regulations, the official said. Earlier the proposal was that overseas entities would be required to incorporate or establish an Indian office to carry out the function of research analysts. Under the notified norms, the compensation of individual research analyst would be decided by the board of directors or committee of directors. The panel would not have any representation from the merchant banking, investment banking or brokerage services department. In June this year, Sebi's board had cleared the detailed norms for research analysts after receiving comments from more than 80 entities/individuals on the consultation paper which was issued by the market regulator in November last year. In July 2011, the board had approved a proposal that Sebi may look at regulating research analysts in the domestic securities market.


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