Mumbai: India’s capital market regulator is planning to bring all research analysis activities by various entities and brokerages under a regulatory framework, two persons with direct knowledge of the matter said.
The Securities and Exchange Board of India (Sebi) will frame rules that brokerages, which publish research reports on listed companies, will have to follow.
The objective is to ensure that such reports are prepared in an unbiased and transparent way and the authors of such reports make sufficient disclosures of their interests, addressing issues of potential conflict of interest.
Currently, a number of entities, including Sebi-registered broking firms, circulate research reports with projections of company’s stocks, valuations and fundamentals, but there are no guidelines for such reports. As a result, many such reports, market intermediaries say, are used to raise stock prices of companies.
The regulations—likely to be named Sebi (Research Analysis) Regulations, 2011— will regulate all research analysis activities that tend to influence investment decisions of the public at large. It may even make it compulsory for analysts who write such reports to be registered with Sebi.
It is not known when the proposal will become the norm. Current Sebi chairman C.B. Bhave is set to step down in mid-February and U.K. Sinha, head of UTI Asset Management Co. Ltd, is expected to take over.
An email sent to a Sebi spokesman on Friday did not elicit any response.
Most brokerages were not willing to comment on the proposal as Sebi has not yet made it public.
“Sebi is concerned that recommendations done through research reports often influence the investment decisions of the general public in favour of particular stocks,” said one of the persons quoted above, who spoke on condition of anonymity as the regulations are yet to be formalized.
The new rules may require analysts and their clients to ensure that they do not hold any position in a particular stock at the time of publishing the report.
Also, companies on which research reports are published could be asked to disclose to the stock exchanges all information they provide to analysts.
Finally, stock exchanges will be asked to make all such information available to all potential investors through their websites.
With the advent of the Internet, numerous research reports are widely available in the public domain and the sheer volume of these reports often make the investment process difficult for investors.
“Sebi wants to make sure that the recommendations in research reports are fairly justified in the context of the company’s actual financial health and its prospects,” said the second person, who also did not want to be named.
“Regulations will bring in more transparency. Many financial services firms do not maintain Chinese walls between their broking and other divisions, and this often results in publishing of biased and unfair research reports,” said an executive director at a large foreign financial services company. He declined to be named as he is not authorized to talk to the media.
Company managements often share private information with analysts during conference calls and such information is shared with specific client groups of these analysts, creating an asymmetry of information in the marketplace. “Regulations should ensure that the exchange of information is done across the market through stock exchanges and not selectively,” he added.
He, however, was unsure about the idea of getting analysts registered with Sebi.
A similar idea was mooted in 2008, when the market regulator had proposed regulations for improving the sales practice by the members of stock exchanges.
A discussion paper on the matter had said trading members must maintain a Chinese wall among their various activities, such as proprietary trading, investment banking, research and so on.
However, the discussion paper addressed a limited group of analysts—trading members—who are typically designated at broking firms to provide stock tips for the specific set of investors under the broking firms.
While proposing policy changes to improve sales practices by these trading members, Sebi wanted to ensure that clients under broking firms are not discriminated according to the commissions paid.
“Sebi possibly expects everyone to have a transparent process. Typically, issues arise when the broker has an investment banking or proprietary desk. We don’t have that issue as we don’t have prop desk, and we do not have investment banking,” a senior analyst with a local retail broker said, requesting anonymity.
In its 2005-06 annual report, Sebi had said it has been looking into the publishing of research reports on stocks by various entities.
“Such recommendations often attract the general investors’ attention and affect the investment decisions, more so on account of perceived knowledge and expert recommendation,” the Sebi report read.
In many cases, the market regulator observed that prior to dissemination of the reports, analysts and their associated entities build up a purchase position in the shares of a particular company. After publishing the reports, these entities sell the shares recommended in the report for buying.
“Many investors have burnt their fingers while blindly relying on publicly available research reports. Sebi should ensure strict guidelines on reports of smaller and lesser-known firms,” said an analyst at a midsize brokerage, who declined to be named as the matter is sensitive.
“With an increase in the number of retail investors in the equity markets, research reports would play a very important role, and that’s why some regulatory standards are necessary now,” he added.