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.