Recently, Indian securities market regulator, SEBI, came up with Securities and Exchange Board of India (Research Analyst) Regulations 2014 (RA regulations). These regulations came into force from December 1, 2014. RA regulations are targeted to put in place a framework for Indian security analysis industry. RA regulations mandate the registration of research analysts and organizations providing securities research, with SEBI. The registration is to be renewed every five years.
These regulations are aimed at bringing down the conflict of interest and improve the independence of research analysts. There have been cases reported in the media in the past where some analysts who recommended a buy on a particular stock, went ahead and sold the same stock from their portfolio immediately after their recommendation was aired on media. These are the typical cases of conflict of interest & fraud, which SEBI plans to curb by the way of these regulations.
These regulations cover wide range of aspects and contain guidelines about minimum qualification, continued education, written policies, trading guidelines, compensation of research analysts, maintenance of records, audit requirements etc. for both research firms and independent research analysts. RA regulations cover everyone who covers Indian securities whether she is based within India or abroad. Regulations are applicable for analysts as well as their associates who help in production & publication of research reports.
The regulations also contain penal clauses for non-compliance with the stipulated guidelines. Penalties vary from prohibition from publishing reports for some time, refund of client’s money and/or prohibition from operating in/accessing capital markets for a specified period.
RA regulations have been brought with many good intentions; however, the original regulations faced some opposition. This was mainly because the purview of these regulations was very broad. Clauses in the regulations seemed to make the SEBI registration mandatory before expressing any opinion about stocks whether it might be just a friendly advice or an investor’s personal experience.
Regulations did not differentiate between professional stock analysts selling research as paid service and others like newspaper columnists, TV journalists, stock critics or bloggers. RA regulations had put everyone on the same page.
The regulations seemed to be overreaching especially for internet users like Facebook or Whatsapp users, bloggers etc. To gauge the full extent of their implication, we should analyze it step-by-step, starting from who is a research analyst as per the regulations.
Research analyst means a person who is primarily responsible for:
- preparation or publication of the content of the research report; or
- providing research report;or
- making ‘buy/sell/hold’ recommendation; or
- giving price target; or
- offering an opinion concerning public offer.
It seemed fine, as many internet users who express opinion about stocks do not give price targets. Many others do not recommend buy or sell for stocks in their writings. However, one may get shocked after reading what providing research report means, as per the regulations.
“research report” means any written or electronic communication that includes research analysis or research recommendation or an opinion concerning securities or public offer, providing a basis for investment decision…”
The regulations state that anybody opining about stocks is a research analyst especially so when she expresses her opinion on public media or makes a public appearance. Regulations did not differentiate between professional paid advice and personal advice because of hobby or interest.
“public media” means any media source available to the general public and includes a radio, television, internet, web or print media;
“public appearance” means any participation in a conference call, seminar, forum (including interactive and non-interactive electronic forum), radio or television or internet or web or print media broadcast, authoring a print media article or other public speaking activity in public media in which a research analyst makes a recommendation or offers an opinion, concerning securities or public offer..
It meant that if anyone studies a stock or mutual fund or any other security and wishes to share her experiences & learning with others, she should first register with SEBI. The minimum qualifications for registration with SEBI are:
- A professional qualification or post-graduate degree or post graduate diploma in finance, business management or related field; or
- a graduation in any discipline with an experience of at least five years in activities relating to finance & markets AND
- a certification from National Institute of Securities Markets (NISM) especially designed for research analysts. The certification seems to have a validity of three years; therefore, the examination needs to be repeated every three years.
Many people active on internet are qualified finance professionals, who already meet these minimum qualifications. However, the hefty fee for registration is again a shock:
INR 5,000 (nonrefundable) at time of application and additional INR 10,000, if application for registration is approved. In total, INR 15,000…!
I cannot help but imagine various online groups, be it Facebook, Whatsapp, Google, Yahoo etc dedicated to Indian stock markets, where members keep discussing, expressing opinions and recommending stocks day in, day out. It seems SEBI expected all these internet users to get professionally qualified, take NISM certification and pay INR15,000 before they can discuss with others that Satyam Computers was a fraud or advise friends to sell “Kingfisher Airlines”.
Let us move a step ahead. Assume a person is passionate about stock markets and gets registered so that she can appear on online groups & forums and express her opinion on stocks. However, this is not all. RA regulations also stipulated that she should:
- have a net worth of minimum INR 1 lakh (0.1 million)
- have written internal policies and control procedures
- keep adequate documentary basis for her opinions (does that include Facebook comments!)
- keep signed copies of all her expressed opinions
- keep record for all such opinions for minimum five years
- have annual audits from a chartered accountant
- appoint a compliance officer to monitor her compliance to RA regulations.
That seems a lot to do for expressing opinion about securities on public media.
Frankly speaking, when I initially read SEBI (RA) Regulations, 2014, it gave me an impression of a highhanded regulation curtailing the free speech. If I lost money in Deccan Chronicle Holdings Limited, then, as per regulations, I could not go out and shout, “Deccan Chronicle is a bad investment. Friends, please get out of it!!” because before doing that, I need to pass a professional finance qualification, get NISM certification, pay INR 15,000, get an auditor and appoint a compliance officer.
However, SEBI also have realized this problem of internet users as it recently came out with clarifications about RA regulations. These clarifications include the following:
21. Whether the persons making recommendations through public media are required to obtain registration under RA Regulations?
No. Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations. However, whenever they make public appearance or makes a recommendation or offers an opinion concerning securities or public offers through public media, all the provisions of regulations 16 on limitations on trading and 17 on limitations on compensation shall apply mutatis mutandis to him and he shall disclose his name, registration status and details of financial interest in the subject company.
Further, if such person is also engaged in preparation and/or publication of research report or research analysis, he or the entity on whose behalf the he is acting as a research analyst, needs to get registered with SEBI.
Thus, SEBI has clarified the confusion around expression of opinion about stocks. It has kept the mandatory registration limited to its desired segment i.e. research analysts & organizations providing paid subscription based securities research.
Internet users are not required to register with SEBI before expressing opinion about stocks or other securities. However, regulations require them to disclose their registration status and their financial interest in that stock whenever they make a recommendation or offer a particular opinion about any stock. Regulation 16 states that the person cannot trade in that particular stock about which she expresses opinion for 30 days before and 5 days after expressing opinion or making recommendation. Regulation 17 relates to the compensation of research analysts, which is not relevant if she is not paid by company for providing research report.
However, the clarification provided still leaves a few questions unanswered like the second paragraph of the clarification. It mentions the requirement of registration for preparation of research report. In the original regulations, research report covered everything under the sun, where any opinion is expressed. Therefore, it seems that the clarification has become circuitous and leaves the reader back from where it started. However, one thing that stands out clearly is that for expressing opinion on public media, one does not need to go through the process of registration and its other requirements.
Therefore, internet users, Facebook members, bloggers etc. can breathe easy. They can express their views about stocks or mutual funds or other securities. Nevertheless, they should disclose the registration status with SEBI and their financial interests, which might give rise to any conflict to interest, clearly to the readers. Most of the writers have been doing it already as a prudent practice. Moreover, it has become a regulatory requirement now.
Do you provide opinion about stocks on public media? I suggest that you should read the RA regulations and SEBI clarification.
You may download the SEBI (Research Analyst) Regulations, 2014 (click here)
You may download the clarification FAQs published by SEBI (click here)