Chapter 13: Legal And Regulatory Environment

Chapter 13: Legal And Regulatory Environment – NISM-Series-XV Research Analyst Exam Study Notes Download PDF Book 

Regulatory Infrastructure in Indian Financial Markets

Regulatory infrastructure in the Indian Financial Markets refers to the systems and authorities that ensure market participants act responsibly. This ensures the securities market remains a key source of finance for both corporate and government entities, while also protecting the interests of investors. The overarching goal of regulators is to establish a fair and competitive marketplace with intermediaries providing high standards of service.

Topic Pointers:

1. Ensuring Responsible Behaviour: Regulators focus on ensuring that participants in the financial market act in a responsible manner.
2. Role of Securities Market: The securities market is vital for providing finance to corporations and the government.
3. Investor Protection: A key function of the regulatory framework is to protect the interests of investors.
4. Creation of a Fair Market: The objective is to create a marketplace that is both fair and competitive.
5. High Standard of Services: Intermediaries are expected to uphold high service standards, contributing positively to the market.
6. Regulatory Bodies and Their Functions: The notes mention briefs about various regulators. These bodies regulate and aid in the development of the Financial Market, each with specific roles in maintaining market integrity and efficiency.

Ministry of Finance, Government of India

The Ministry of Finance is a crucial ministry within the Indian Government, handling issues related to taxation, financial legislation, financial institutions, capital markets, state finances, and the Union Budget. It consists of five departments, each with specific responsibilities in the realm of economic and financial management.

Topic Pointers:

1. Department of Economic Affairs:
   • Role: Nodal agency for formulating and monitoring India’s macroeconomic policies.
   • Focus Areas: Monetary and fiscal policy, functioning of the Capital Market, including stock exchanges.
   • Responsibilities: Mobilisation of external resources, issuance of bank notes and coins, preparation of the Union Budget annually.
2. Department of Expenditure:
   • Function: Oversees the expenditure management of the Government of India.
   • Concerns: Administration of financial rules and regulations, service conditions of Central Government employees.
   • Additional Roles: Involvement in financial assistance to states and state borrowings.
3. Department of Revenue:
   • Responsibility: Management of Direct and Indirect Taxes.
   • Statutory Boards: Central Board of Direct Taxes (CBDT) and the Central Board of Excise and Customs (CBEC).
4. Department of Financial Services:
   • Coverage: Banks, Insurance, Financial Services by government agencies and private corporations, pension reforms, Industrial Finance, Micro, Small and Medium Enterprise.
5. Department of Disinvestments:
   • Focus: Policy approach to disinvestment and privatisation of Public Sector undertakings.
   • Financial Policy: Related to the utilisation of proceeds from disinvestment.

Ministry of Corporate Affairs

The Ministry of Corporate Affairs is primarily concerned with administration of the Companies Act and other allied Acts, rules and regulations mainly for regulating the functioning of the corporate sector as per law. It also oversees issuance of securities by companies under the Companies Act.

Topic Pointers:

1. Regulates corporate sector functioning under Companies Act
2. Through provisions and compliance oversight via Registrar of Companies (ROC)
3. Administers Competition Act 2002
4. Replaced Monopolies and Restrictive Trade Practices Act, 1969
5. Supervises professional bodies
   • Institute of Chartered Accountants of India (ICAI)
   • Institute of Company Secretaries of India (ICSI)
   • Institute of Cost and Works Accountants of India (ICWAI)
6. Administers other regulations
   • Partnership Act, 1932
   • Companies (Donations to National Funds) Act, 1951
   • Societies Registration Act, 1980

Reserve Bank of India (RBI)

The Reserve Bank of India (RBI) is the central bank of India, responsible for administering the country’s monetary policy. Its main aim is to manage the money supply in the economy to support economic growth and financial transactions, while avoiding inflationary trends. The RBI’s roles include regulating bank notes, maintaining monetary stability, operating the currency and credit system, and financial supervision.

Topic Pointers:

1. Monetary Authority Role:
   • Task: Formulate, implement, and monitor the monetary policy.
   • Goal: Maintain price stability and ensure adequate credit flow to productive sectors.
2. Regulator and Supervisor of Financial System:
   • Function: Set broad parameters for banking operations.
   • Objectives: Maintain public confidence in the banking system, protect depositors’ interests, and provide cost-effective banking services.
3. Manager of Foreign Exchange:
   • Responsibility: Administer the Foreign Exchange Management Act 1999.
   • Focus: Facilitate external trade and payment, and promote orderly development of the foreign exchange market.
4. Issuer of Currency:
   • Role: Issue, exchange, or destroy currency and coins not fit for circulation.
   • Objective: Ensure adequate currency and coin circulation.
5. Developmental Role:
   • Purpose: Perform promotional functions to support national objectives.
6. Banking Functions:
   • As Government’s Banker: Manage issuances of Central and State Government Securities.
   • Banker to Banks: Maintain banking accounts of all scheduled banks.

Securities and Exchange Board of India (SEBI)

SEBI is the regulatory authority for the securities market in India, established under the SEBI Act, 1992. Its primary function, as outlined in its Preamble, is to protect investors’ interests in securities, promote the development, and regulate the securities market, along with related or incidental matters.

Topic Pointers:

1. Primary Role:
   • Protect investors’ interests in securities.
   • Promote and regulate the securities market.
2. Regulatory Jurisdiction:
   • Extends over corporations in capital issuance and transfer of securities.
   • Encompasses all intermediaries and persons associated with the securities market.
3. Powers and Functions:
   • Conduct enquiries, audits, and inspections.
   • Adjudicate offences under the Act.
   • Register and regulate market intermediaries.
   • Penalise for violations of the Act, Rules, and Regulations.
4. Autonomy and Authority:
   • SEBI has full autonomy to regulate and develop an orderly securities market.
5. Key Functions:
   • Regulate business in stock exchanges and securities markets.
   • Register and regulate stock brokers, sub-brokers, etc.
   • Promote and regulate self-regulatory organisations.
   • Educate investors and train intermediaries.
   • Prohibit insider trading and fraudulent trade practices.
   • Regulate acquisition of shares and company takeovers.
   • Inspect stock exchanges, intermediaries, and associated persons.
6. Merger with Forward Markets Commission (2015):
   • Regulates commodities markets.
   • Oversees forward and futures trading in commodities.
   • Monitors market conditions, including demand, supply, and prices.
   • Advises government on granting/withdrawing recognition to associations.
7. Regulatory Measures for Commodities Market:
   • Set limits on open positions, circuit filters for price volatility.
   • Manage risk through margins.
   • Specify regulations for physical delivery of contracts and penalty for defaults.

Insurance Regulatory and Development Authority of India (IRDAI)

IRDAI regulates the insurance sector in India in accordance with the terms of the IRDA Act, 1999. IRDAI is the licensing authority for insurance companies and defines the capital and net-worth requirements for insurance companies. IRDAI’s mission is to regulate, promote, and ensure the orderly growth of the insurance sector, including the reinsurance business, while ensuring the protection of the interests of insurance policyholders. It ensures the adherence of insurance products to the rules laid down and defines the rules for the terms and conditions of insurance contracts such as sum assured, surrender value, settlement of claims, nomination and assignment, insurable interest, and others. It regulates the distribution of insurance products by laying down the qualification and training requirements of intermediaries and the payment of commission to distributors. IRDAI supervises the functioning of the Tariff Advisory Committee that determines the rates for general insurance products. It also lays down the modalities for investment of funds by insurance companies.

Topic Pointers:

1. Regulatory Authority:
   • IRDAI regulates the insurance sector in India.
   • It operates in accordance with the IRDA Act, 1999.
2. Licensing Authority:
   • IRDAI is responsible for licensing insurance companies.
   • It sets requirements for the capital and net-worth of insurance companies.
3. Mission:
   • IRDAI’s mission is to regulate, promote, and ensure the orderly growth of the insurance sector.
   • It includes regulating re-insurance businesses.
   • A key goal is to protect the interests of insurance policyholders.
4. Product Regulation:
   • IRDAI ensures that insurance products adhere to established rules.
   • It defines the terms and conditions of insurance contracts.
   • This includes specifications for sum assured, surrender value, settlement of claims, nomination and assignment, and insurable interest.
5. Distribution Regulation:
   • IRDAI regulates the distribution of insurance products.
   • It sets qualification and training requirements for intermediaries.
   • It also governs the payment of commissions to distributors.
6. Tariff Advisory Committee:
   • IRDAI oversees the functioning of the Tariff Advisory Committee.
   • This committee determines the rates for general insurance products.
7. Investment Regulation:
   • IRDAI lays down the modalities for investment of funds by insurance companies.

Pension Fund Regulatory and Development Authority (PFRDA)

The PFRDA is the authority responsible for regulating the pension sector in India under the PFRDA Act, 2013. It was established in October 2003 with specific responsibilities, including promoting old age income security, protecting the interests of pension fund scheme subscribers, and designing the structure of funds and constituents in the National Pension System (NPS). PFRDA is also responsible for registering various NPS constituents such as fund managers, custodians, Central record-keeping agencies, and trustee banks while defining their roles and responsibilities. Additionally, PFRDA deals with promoting and ensuring the orderly growth of the pension market, proposing relevant legislation, and carrying out delegated functions.

Topic Pointers:

1. Regulatory Authority:
   • PFRDA is the regulatory authority for the pension sector in India.
   • It operates under the PFRDA Act, 2013.
2. Establishment and Purpose:
   • PFRDA was constituted in October 2003.
   • Its primary purpose is to promote old age income security and protect the interests of pension fund scheme subscribers.
3. Designing National Pension System (NPS):
   • PFRDA is responsible for designing the structure of funds and constituents in the National Pension System (NPS).
   • NPS is a government-backed retirement savings scheme.
4. Constituents Registration:
   • PFRDA registers various constituents within the NPS, including fund managers, custodians, Central record-keeping agencies, and trustee banks.
   • It defines the parameters of their roles and responsibilities.
5. Broad Responsibilities:
   • PFRDA handles all matters related to promoting and ensuring the orderly growth of the pension market in India.
   • It has the authority to propose appropriate legislation for achieving its goals.
   • PFRDA also performs other functions delegated to it.

Insolvency and Bankruptcy Board of India (IBBI)

The Insolvency and Bankruptcy Board of India (IBBI) was established under the Insolvency and Bankruptcy Code 2016. IBBI serves as the regulator responsible for overseeing the insolvency process and insolvency professionals in India. It exercises regulatory oversight over insolvency professionals, insolvency professional entities, and insolvency professional agencies. IBBI’s primary responsibilities include creating and enforcing rules related to corporate insolvency resolution, corporate liquidation, individual insolvency resolution, and individual bankruptcy code. Additionally, it has been appointed as the authority for the regulation and development of valuers in India.

Topic Pointers:

1. Regulatory Authority:
   • IBBI is the regulatory authority established under the Insolvency and Bankruptcy Code 2016.
   • It oversees the insolvency process and insolvency professionals in India.
2. Oversight Scope:
   • IBBI has regulatory oversight over insolvency professionals, insolvency professional entities, and insolvency professional agencies.
   • This oversight ensures that these entities adhere to established rules and guidelines.
3. Rule Making and Enforcement:
   • IBBI is responsible for making and enforcing rules related to various aspects of insolvency, including corporate insolvency resolution, corporate liquidation, individual insolvency resolution, and individual bankruptcy code.
   • These rules provide a legal framework for the insolvency process.
4. Authority for Valuers:
   • IBBI has been appointed as the authority responsible for the regulation and development of valuers in India.
   • This role involves setting standards and guidelines for valuers in the country.

Important regulations in Indian Securities Market

Securities Contracts (Regulation) Act, 1956

The Securities Contracts (Regulation) Act, 1956 (SC(R)A) is a legal framework that grants direct and indirect control of various aspects of the securities market to the Securities and Exchange Board of India (SEBI). This act is designed to prevent undesirable transactions in securities by regulating activities related to securities dealing and trading. It covers a wide range of issues, including granting recognition to stock exchanges, corporatization and demutualization of stock exchanges, the power of the Central Government to request periodic returns from stock exchanges, the authority of SEBI to create or amend bye-laws of recognized stock exchanges, the ability of the Central Government (exercisable by SEBI as well) to supersede the governing body of a recognized stock exchange, the power to suspend the business of recognized stock exchanges, and the power to prohibit undesirable speculation.

Topic Pointers:

1. Regulatory Framework:
   • SC(R)A provides the regulatory framework for the securities market in India.
   • It entrusts control over various aspects of the market to SEBI.
2. Control Scope:
   • The act covers virtually all aspects of the securities market, including instruments, intermediaries, issuers, and investors.
   • It aims to maintain the integrity and efficiency of the market.
3. Prevention of Undesirable Transactions:
   • SC(R)A seeks to prevent undesirable transactions in securities by regulating the business of securities dealing and trading.
4. Key Provisions:
   • Granting Recognition: The act allows SEBI to grant recognition to stock exchanges, ensuring they meet regulatory standards.
   • Corporatization and Demutualization: It mandates the corporatization and demutualization of stock exchanges, separating ownership and trading rights.
   • Periodical Returns: The Central Government and SEBI have the authority to request periodical returns from stock exchanges to monitor their operations.
   • Bye-Laws: SEBI can make or amend bye-laws of recognized stock exchanges to align them with regulatory requirements.
   • Superseding Governing Body: The Central Government, and by extension SEBI, can supersede the governing body of a recognized stock exchange in exceptional circumstances.
   • Suspension of Business: The act grants the power to suspend the business of recognized stock exchanges if necessary.
   • Prohibition of Undesirable Speculation: It provides the authority to prohibit undesirable speculation in the securities market.

Securities and Exchange Board of India Act, 1992

The Securities and Exchange Board of India Act, 1992 (SEBI Act) was enacted “to provide for the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith or incidental thereto.” SEBI, in the broader sense, fulfils the functions outlined in this statement. However, the act also specifies various measures that SEBI can undertake, including:

Topic Pointers:

1. Protecting Investor Interests and Market Regulation:
   • The primary objective of the SEBI Act is to protect the interests of investors in securities.
   • It also aims to promote the development of and regulate the securities market.
2. Duties of SEBI:
   • Section 11(1) of the SEBI Act assigns the duty to SEBI to protect investor interests and regulate the securities market.
   • SEBI is empowered to take various measures to achieve this objective.
3. Key Measures and Powers:
   • Regulating Stock Exchanges: SEBI has the authority to regulate the business conducted on stock exchanges and other securities markets.
   • Registration and Regulation: SEBI can register and regulate entities such as stockbrokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers, depositories, depository participants, custodians, foreign institutional investors, and credit rating agencies.
   • Venture Capital and Collective Investment Schemes: SEBI regulates venture capital funds and collective investment schemes, including mutual funds.
   • Self-Regulatory Organizations (SROs): SEBI promotes and regulates Self-Regulatory Organizations in the securities market.
   • Prohibiting Fraudulent Practices: SEBI has the power to prohibit fraudulent and unfair trade practices related to the securities market.
   • Investor Education: SEBI is responsible for promoting investors’ education and training of intermediaries in the securities market.
   • Insider Trading: SEBI regulates and prohibits insider trading in securities.
   • Takeovers and Disclosure: SEBI regulates substantial acquisitions of shares and takeover of companies, ensuring adequate disclosure.
   • Information Disclosure: SEBI can require disclosure of information, conduct inspections, inquiries, and audits of various market entities.
   • Delegated Functions: SEBI can perform functions and exercise powers under the Securities Contracts (Regulation) Act, 1956, as delegated by the Central Government.
   • Fee Collection: SEBI can levy fees or other charges as part of its regulatory functions.
   • Research: SEBI conducts research to fulfil its regulatory and developmental objectives.
4. Enforcement:
   • SEBI is empowered to enforce disclosure of information and furnish information to agencies as necessary.
   • It can impose penalties and initiate adjudication proceedings against intermediaries and market participants for various violations.

Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015

The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 are regulatory guidelines established pursuant to Section 30 of the SEBI Act, 1992. These regulations define and govern insider trading in India. They lay out the framework for identifying insiders, prohibiting unauthorised disclosure of price-sensitive information, and regulating trading by insiders. The regulations are designed to prevent unfair trading practices and ensure fair treatment of all market participants.

Topic Pointers:

1. Definition of Insider:
   • An “insider” is defined as any person who is a “connected person” or one who possesses or has access to “unpublished price-sensitive information.”
2. Connected Person:
   • A “connected person” is broadly defined as anyone associated with a company, either directly or indirectly, in various capacities.
   • This includes individuals with frequent communication with company officers, contractual, fiduciary, or employment relationships with the company, or those holding positions allowing access to price-sensitive information.
3. Unpublished Price-Sensitive Information (UPSI):
   • UPSI refers to information related to a company or its securities that is not generally available.
   • Such information, upon becoming generally available, is likely to materially affect the price of the securities.
   • Examples of UPSI include financial results, dividends, changes in capital structure, mergers, acquisitions, changes in key managerial personnel, and more.
4. Prohibitions on Insider Communication:
   • Regulation 3(1) prohibits insiders from communicating, providing, or allowing access to UPSI related to a company’s securities to any person, including other insiders.
   • Exceptions are allowed for legitimate purposes, performance of duties, or discharge of legal obligations.
5. Prohibitions on Insider Trading:
   • Regulation 4 prohibits insiders from trading in securities listed or proposed to be listed on a stock exchange while in possession of UPSI.
   • Trades by insiders in possession of UPSI are presumed to be motivated by that information unless they can prove otherwise.
6. Disclosure Requirements:
   • Insiders must disclose their trades in a prescribed form.
   • Disclosure includes trading by immediate relatives and any other person for whom the insider makes trading decisions.
7. Appointment of Compliance Officer:
   • Organisations must appoint a compliance officer responsible for setting policies, monitoring adherence to codes of fair disclosure and conduct, and preserving price-sensitive information.
8. Chinese Wall Policy:
   • Organisations are required to implement a “Chinese Wall” policy to prevent the misuse of confidential information.
   • This policy separates “insider areas” with access to confidential information from “public areas” dealing with sales, marketing, and support services.
9. Analysts’ Disclosures:
   • Analysts preparing research reports for client companies must disclose their shareholdings or interests in those companies to the compliance officer.
   • Analysts are restricted from trading in securities of the listed company for thirty days after preparing a report.

SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulation, 2003 (amended in 2007, 2012, and 2013)

The SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations aim to prevent fraudulent, unfair, and manipulative trade practices in securities markets. These regulations are established under the authority granted by Section 30 of the SEBI Act, 1992. Regulation 2(1)(c) defines fraud inclusively, encompassing any act, expression, omission, or concealment designed to induce another person or their agent to engage in securities transactions, regardless of whether it results in wrongful gain or the avoidance of any loss. Some instances of fraudulent practices are explicitly cited within the regulations.

Topic Pointers:

1. Purpose of the Regulations:
   • The primary objective of these regulations is to prevent fraudulent, unfair, and manipulative practices in securities markets.
   • These practices can undermine the integrity and fairness of the market and harm investors.
2. Definition of Fraud:
   • Regulation 2(1)(c) defines fraud in an inclusive manner, covering various deceptive practices.
   • It includes acts, expressions, omissions, or concealments aimed at inducing others to engage in securities transactions, regardless of whether they lead to wrongful gain or loss avoidance.
3. Instances of Fraudulent Practices:
   • The regulations provide examples of fraudulent practices: a) Wilful misrepresentation of the truth or concealment of material facts to the detriment of another person. b) Suggesting facts that are untrue when the person making the suggestion does not believe them to be true. c) Actively concealing a fact by a person with knowledge or belief of that fact. d) Making a promise without any intention of fulfilling it. e) Making a representation, whether true or false, in a reckless and careless manner.
4. Amendments:
   • The regulations have been amended in 2007, 2012, and 2013 to keep them updated and aligned with the evolving securities market landscape and emerging fraudulent practices.

Prohibition of Certain Dealing in Securities

Chapter II of the regulations concerning the “Prohibition of Certain Dealing in Securities” focuses on prohibiting specific dealings related to buying, selling, or issuance of securities. This chapter also outlines instances of fraud in securities dealings, including the following:

Topic Pointers:

1. Prohibited Dealings:
   • Chapter II of the regulations prohibits certain dealings in securities, encompassing actions related to buying, selling, or issuing securities.
   • The purpose of these prohibitions is to maintain the integrity and fairness of the securities market.
2. Instances of Fraudulent Practices:
   • The regulations specify instances of fraudulent practices in securities dealings: a) Creating a false or misleading appearance of trading in the securities market through an act. b) Dealing in a security not intended to transfer beneficial ownership but to artificially inflate or depress its price for wrongful gain or loss avoidance. c) Advancing money to induce others to buy securities in an issue solely to meet the minimum subscription requirement. d) Paying, offering, or agreeing to provide money or its equivalent to induce others to trade in a security with the intention of manipulating its price. e) Engaging in any act or omission tantamount to manipulating the price of a security. f) Dealing in securities, publishing or causing the publication of untrue information or information believed to be false before or during securities transactions.
3. Preventing Market Manipulation:
   • The regulations aim to prevent market manipulation and deceptive practices that could lead to unfair advantages or harm to other market participants.
   • By specifying these instances of fraudulent practices, the regulations provide clear guidelines for what is prohibited in securities dealings.

Prohibition of Manipulative, Fraudulent, and Unfair Trade Practices

The regulations outline the prohibition of manipulative, fraudulent, and unfair trade practices in securities dealings. These practices are deemed to be violations when they involve specific actions or behaviours, which include creating false appearances, misleading actions, fraudulent inducements, and various other deceptive practices. The regulations aim to ensure the integrity and fairness of securities markets.

Topic Pointers:

1. Prohibited Practices:
   • The regulations define a range of practices that are considered manipulative, fraudulent, or unfair when dealing in securities.
   • These practices encompass actions such as creating false appearances, fraudulent inducements, spreading false information, circular transactions, and more.
2. Instances of Prohibited Practices:
   • The regulations provide a comprehensive list of instances, including but not limited to: a) Creating false or misleading appearances in the securities market knowingly. b) Dealing in securities not intended to transfer beneficial ownership but used to manipulate prices for wrongful gain or loss avoidance. c) Inducing others to subscribe to securities issues fraudulently. d) Disseminating false or misleading information through media. e) Misappropriation of client funds or securities held in a fiduciary capacity. f) Planting false or misleading news to influence securities sales or purchases. g) Mis-selling securities or services relating to the securities market. h) Illegal mobilisation of funds through collective investment schemes.
3. Exemptions and Clarifications:
   • The regulations provide certain exemptions and clarifications: a) Selling, dealing, or pledging stolen, counterfeit, or fraudulently issued securities is not considered a violation if the seller was a holder in due course or if such securities were previously traded through a bona fide transaction. b) The list of prohibited acts and omissions is not exhaustive, and any act or omission within the purview of regulation 3 can be considered a violation.
4. Market Participant Definition:
   • Market Participant encompasses any person or entity registered under Section 12 of the Act, along with their employees and agents.
   • This broad definition ensures that various entities involved in securities dealings are subject to these regulations.

Investigation under SEBI (Unfair Trade Practices) Regulations

Chapter III of the SEBI (Unfair Trade Practices) Regulations, 2003, pertains to the investigation of transactions involving unfair trade practices. The regulations outline the duties and actions that can be taken during an investigation by the Investigating Authority.

Topic Pointers:

1. Duties of Person Under Investigation:
   • Individuals or entities under investigation are obligated to: a) Produce books, accounts, documents, and furnish information requested by the Investigating Authority. b) Personally appear before the Investigating Authority when required and respond to their inquiries.
2. SEBI’s Actions During or After Investigation:
   • SEBI, in the interests of investors and the securities market, can issue various actions or directions during or after an investigation, as follows: a) Suspend trading of a security that is found to be involved in fraudulent or unfair trade practices on a recognized stock exchange. b) Restrict individuals’ access to the securities market and prohibit those associated with the securities market from buying, selling, or dealing in securities. c) Suspend any office-bearer of a stock exchange or self-regulatory organisation from holding their position. d) Impound and retain proceeds or securities related to transactions violating these regulations. e) Direct an intermediary or any person associated with the securities market not to dispose of or alienate assets involved in fraudulent and unfair transactions. f) Prohibit the person concerned from disposing of securities acquired in violation of these regulations.
3. Actions Against Intermediaries:
   • SEBI can take actions against intermediaries, including: i. Issuing a warning or censure. ii. Suspending the registration of the intermediary. iii. Cancelling the registration of the intermediary.

SEBI (Research Analyst) Regulations, 2014

The SEBI (Research Analyst) Regulations, 2014, amended in December 2016, were established to address conflicts of interest in the production and dissemination of research reports by investment analysts. These regulations aim to ensure objectivity and transparency in security research, thereby providing investors with more reliable information to make informed investment decisions.

Topic Pointers:

1. Importance of Research Analysts:
   • Research Analysts play a crucial role in the investment landscape by studying companies and industries, analysing data, and offering forecasts and recommendations on whether to buy, hold, or sell securities.
   • Investors often rely on the expertise and advice of research analysts when making investment decisions.
2. Conflicts of Interest Concerns:
   • Investment analysts’ advice is at times susceptible to conflicts of interest, which can compromise the independence and impartiality of their recommendations.
   • Regulatory authorities worldwide are concerned about addressing conflicts of interest in research reports produced by securities firms to protect investors and enhance market confidence.
3. IOSCO Principles:
   • The International Organization of Securities Commissions (IOSCO) has outlined principles to address conflicts of interest in research. These principles include:
     • Ensuring that analysts’ trading activities or financial interests do not bias their research and recommendations.
     • Preventing analysts’ research and recommendations from being influenced by their employing firms’ trading activities, financial interests, or business relationships.
     • Structuring reporting lines and compensation arrangements for analysts to minimise conflicts of interest.
     • Establishing internal procedures and controls within firms to identify, manage, or disclose actual and potential conflicts of interest involving analysts.
     • Eliminating or managing undue influence from issuers, institutional investors, and outside parties on analysts.
     • Ensuring clear, timely, complete, specific, and prominent disclosure of actual and potential conflicts of interest.
     • Holding analysts to high integrity standards.
     • Promoting investor education to manage conflicts of interest involving analysts.
4. SEBI (Research Analyst) Regulations, 2014:
   • These regulations were introduced to align with global best practices and address conflicts of interest in research reports.
   • They set requirements to enhance objectivity and transparency in security research, benefiting investors.
   • Key provisions of these regulations are designed to ensure that research analysts provide unbiased and reliable information to investors.

SEBI Regulation 3 – Application for Grant of Certificate

Regulation 3 of the SEBI (Research Analyst) Regulations outlines the requirements and procedures for obtaining a certificate of registration as a research analyst or research entity. It prohibits individuals from acting as research analysts or representing themselves as such without obtaining the necessary registration from SEBI. However, certain exemptions are provided for specific entities, such as investment advisers, credit rating agencies, asset management companies, and fund managers, provided they comply with Chapter III of these regulations.

Topic Pointers:

1. Prohibition on Acting as Research Analyst:
   • The regulation mandates that no person can function as a research analyst or present themselves as one without obtaining a registration certificate from SEBI.
   • This requirement is applicable from the commencement of these regulations.
2. Transition Period for Existing Analysts:
   • Individuals who were acting as research analysts or research entities before the commencement of these regulations are given a transition period of six months from the regulation’s commencement.
   • During this six-month period, they can continue their activities.
   • If they apply for a registration certificate within this period, they can continue until their application is disposed of.
3. Exemptions for Specific Entities:
   • Investment advisers, credit rating agencies, asset management companies, fund managers, or their directors or employees who issue or circulate research reports to the public are exempt from the registration requirement under Regulation 3.
   • However, they must comply with Chapter III of these regulations, which likely includes specific disclosure and compliance requirements.
4. Application Procedure:
   • Those seeking registration as research analysts must follow the application procedure specified in the First Schedule of these regulations.
   • They must also pay a non-refundable application fee in the manner specified in the Second Schedule.

SEBI Regulation 4 – Issuance of Research Report by Foreign Entities

Regulation 4 of the SEBI (Research Analyst) Regulations pertains to the issuance of research reports or research analysis by individuals or entities located outside India concerning securities listed or proposed to be listed on an Indian stock exchange. According to this regulation, any such foreign person must enter into an agreement with a research analyst or research entity registered under these regulations.

Topic Pointers:

1. Applicability:
   • Regulation 4 is applicable to any person or entity located outside India that engages in the issuance of research reports or research analysis regarding securities listed or set to be listed on an Indian stock exchange.
2. Agreement Requirement:
   • To comply with this regulation, foreign entities must establish an agreement with a research analyst or research entity that is registered under the SEBI (Research Analyst) Regulations.

SEBI Regulation 5 – Furnishing of Further Information and Personal Representation

Regulation 5 of the SEBI (Research Analyst) Regulations deals with the requirements related to furnishing additional information, clarification, and personal representation during the application process for registration as a research analyst.

Topic Pointers:

1. Request for Additional Information:
   • The SEBI board has the authority to request the applicant to provide further information or clarification regarding their application for registration as a research analyst. This additional information is essential for the board’s consideration of the application.

2. Personal Representation:
   • If deemed necessary by SEBI, the applicant or their authorised representative may be required to appear before the SEBI board for personal representation. This allows the applicant to provide further insights or clarifications regarding their application.

SEBI Regulation 6 – Consideration of Application and Eligibility Criteria

Regulation 6 of the SEBI (Research Analyst) Regulations outlines the criteria and factors that the Securities and Exchange Board of India (SEBI) takes into account when considering an application for the grant of a certificate of registration for research analysts. These factors are essential in determining the eligibility of applicants.

Topic Pointers:

• Applicant Type:
  • SEBI considers whether the applicant is an individual, a body corporate, or a limited liability partnership (LLP) firm. The applicant’s type impacts the eligibility criteria.
• Qualifications of Individuals:
  • If the applicant is an individual, SEBI evaluates whether the individual holds the appropriate qualifications and certifications as specified in regulation 7.
• Qualifications of Employees:
  • For applicants other than individuals, such as body corporates, partnership firms, or research entities, SEBI assesses whether the individuals employed as research analysts meet the qualification and certification requirements mentioned in regulation 7.
• Capital Adequacy:
  • SEBI checks whether the applicant fulfills the specified capital adequacy requirements as detailed in regulation 8.
• Fit and Proper Persons:
  • The board evaluates whether the applicant, individuals employed as research analysts, and partners (in the case of firms) are considered fit and proper persons. This assessment is based on the criteria specified in Schedule II of the SEBI (Intermediaries) Regulations, 2008.
• Infrastructure:
  • SEBI determines whether the applicant possesses the necessary infrastructure to effectively carry out the responsibilities and activities of a research analyst.
• Previous Refusals:
  • SEBI considers whether the applicant or any person connected to the applicant has been previously refused a certificate by the Board and the reasons for such refusal.
• Disciplinary Actions:
  • The board assesses whether any disciplinary actions have been taken against the applicant or any person connected to the applicant by SEBI or other regulatory authorities under relevant Acts, rules, or regulations.

SEBI Regulation 7 – Qualification and Certification Requirements

Regulation 7 of the SEBI (Research Analyst) Regulations specifies the minimum qualification and certification requirements for individuals registered as research analysts, individuals employed as research analysts, and partners of research analysts involved in the preparation and publication of research reports or research analysis.

Topic Pointers:

Qualification Requirements:

Individuals in the roles mentioned must hold one of the following qualifications:

• A professional qualification or post-graduate degree or post-graduate diploma in fields such as finance, accountancy, business management, commerce, economics, capital market, financial services, or markets. This qualification should be from a recognized university or institute affiliated with such a university, or from an institute/association/university established by the central government or state government or an autonomous institute under the government’s administrative control.
• A professional qualification, post-graduate degree, or post-graduate diploma accredited by recognised bodies like the All India Council for Technical Education (AICTE), National Assessment and Accreditation Council (NAAC), National Board of Accreditation (NBA), or other councils/boards/bodies established under an Act of Parliament in India for the purpose.
• A professional qualification obtained by completing a Post Graduate Program in the Securities Market (Research Analysis) from the National Institute of Securities Markets (NISM) with a duration of not less than one year.
• A graduate in any discipline with a minimum of five years of relevant experience in financial products, markets, securities, funds, or asset/portfolio management.

Certification Requirement:

Individuals registered as research analysts and their partners must hold a certification specified by the Board (SEBI) or any other certification recognized by the Board. This certification ensures that individuals meet the necessary standards for research analysis.

Transition Period:

Research analysts and research entities already engaged in issuing research reports or research analysis and seeking registration under these regulations are given a transition period. They must ensure that individuals employed as research analysts and/or their partners obtain the required certification within two years from the commencement of these regulations.

Renewal of Certification:

• It’s important to obtain fresh certification before the expiration of the existing certification to ensure continuous compliance with certification requirements.

SEBI Regulation 8 – Capital Adequacy Requirements

Regulation 8 of the SEBI (Research Analyst) Regulations outlines the capital adequacy requirements for different types of research analysts, including individuals, partnership firms, body corporates, and limited liability partnership firms.

Topic Pointers:

• Capital Adequacy for Individuals and Partnership Firms:
  • Individual research analysts and partnership firms acting as research analysts must maintain net tangible assets with a minimum value of at least one lakh rupees.
• Capital Adequacy for Body Corporate and Limited Liability Partnership Firms:
  • Research analysts that operate as body corporates or limited liability partnership firms are required to have a net worth of not less than twenty-five lakh rupees.
• Compliance Period for Existing Research Analysts:
  • All research analysts who were operating before the commencement of these regulations are given a grace period to comply with the capital adequacy requirement. They must meet the prescribed capital adequacy requirement within one year from the date of the commencement of these regulations.

Explanation:

• The term “net worth” for the purpose of this regulation refers to the aggregate value of paid-up share capital plus free reserves (excluding reserves created out of revaluation). This value should be reduced by the aggregate value of accumulated losses.

Example: Suppose an individual research analyst, Mr. A, decides to register under these regulations. To comply with the capital adequacy requirement, he needs to have net tangible assets worth at least one lakh rupees. Mr. A evaluates his financial position and ensures that he meets this minimum capital requirement to continue operating as a research analyst under SEBI regulations.

SEBI Regulation 9 – Grant of Certificate of Registration

Regulation 9 of the SEBI (Research Analyst) Regulations pertains to the issuance of a certificate of registration to eligible applicants by the Securities and Exchange Board of India (SEBI).

Topic Pointers:

• Eligibility Check:
  • SEBI conducts an evaluation of the applicant’s compliance with the requirements outlined in Regulation 6. These requirements cover various aspects such as qualifications, capital adequacy, infrastructure, and more.
• Satisfactory Compliance:
  • Upon a thorough examination and verification, if SEBI is satisfied that the applicant fully complies with the criteria specified in Regulation 6, they proceed to the next step.
• Intimation to Applicant:
  • SEBI formally notifies the applicant of their satisfaction with the compliance and their intent to grant a certificate of registration.
• Payment of Registration Fees:
  • As a part of the registration process, the applicant is required to pay the registration fees as specified in the Second Schedule of the regulations.
• Grant of Certificate:
  • Once the registration fees are received and the terms and conditions are met, SEBI issues a certificate of registration in the format provided in Form B under the First Schedule. This certificate authorises the applicant to operate as a registered research analyst.
• Subject to Terms and Conditions:
  • The certificate of registration is granted subject to the terms and conditions that SEBI deems fit and appropriate. These terms and conditions are typically designed to ensure compliance with regulatory standards and investor protection.

Example: Suppose a research analyst, XYZ Research Pvt. Ltd., applies for registration under SEBI’s regulations. After a rigorous evaluation process, SEBI determines that XYZ Research Pvt. Ltd. meets all the requirements specified in Regulation 6. SEBI then sends an intimation to XYZ Research Pvt. Ltd. and, upon receiving the registration fees, grants them a certificate of registration. This certificate allows XYZ Research Pvt. Ltd. to legally operate as a registered research analyst, subject to SEBI’s terms and conditions.

SEBI Regulation 10 – Period of Validity of Certificate

Regulation 10 of the SEBI (Research Analyst) Regulations deals with the duration of validity of the certificate of registration granted to research analysts.

Topic Pointers:

• Validity of Certificate:
  • The certificate of registration issued to a research analyst under Regulation 9 remains valid for a specified period.
• Duration:
  • The certificate of registration remains in force until it is either suspended or cancelled by the Securities and Exchange Board of India (SEBI).
• Suspension or Cancellation:
  • The validity of the certificate can be affected if SEBI takes regulatory actions such as suspension or cancellation against the research analyst due to non-compliance with regulations, misconduct, or other reasons as determined by SEBI.
• Continuous Compliance:
  • To ensure the continued validity of the certificate, research analysts must adhere to SEBI’s regulations and maintain compliance with the terms and conditions set by SEBI.

Example: ABC Research Consultants Pvt. Ltd. received a certificate of registration from SEBI under Regulation 9, allowing them to operate as a research analyst. This certificate remains valid unless SEBI decides to suspend or cancel it due to any regulatory violations or non-compliance by ABC Research Consultants Pvt. Ltd. Therefore, the duration of the certificate’s validity depends on their continued adherence to SEBI’s regulations and terms.

SEBI Regulation 11 – Renewal of Certificate

Regulation 11 of the SEBI (Research Analyst) Regulations pertains to the renewal of the certificate of registration for research analysts who were granted certification before the commencement of the Securities and Exchange Board of India (Research Analysts) (Amendment) Regulations, 2016.

Topic Pointers:

• Renewal Requirement:
  • Research analysts who were previously granted a certificate of registration by the Board (SEBI) before the introduction of the Securities and Exchange Board of India (Research Analysts) (Amendment) Regulations in 2016 need to renew their certificates.
• Deemed Renewal:
  • Such research analysts are deemed to have their certificates of registration renewed, subject to compliance with renewal requirements.
• Fee Payment:
  • To maintain their certification, these research analysts are required to pay a renewal fee, as specified in Schedule II of the SEBI (Research Analyst) Regulations.
• Transition to Amended Regulations:
  • The renewal process ensures that research analysts who were certified under earlier regulations transition smoothly to the amended regulations while maintaining their registration.

Example: XYZ Research Services, which had been granted a certificate of registration by SEBI prior to the amendment of the regulations in 2016, was deemed to have its certificate renewed. To continue operating as a research analyst, XYZ Research Services had to pay the prescribed renewal fee as per Schedule II of the SEBI (Research Analyst) Regulations. This renewal allowed them to transition to the amended regulations and continue their research analysis activities legally.

SEBI Regulation 12 – Procedure where Registration is Refused

Regulation 12 of the SEBI (Research Analyst) Regulations outlines the procedure to be followed when the Securities and Exchange Board of India (SEBI) decides to refuse the grant of a certificate of registration to an applicant.

Topic Pointers:

• Grounds for Refusal:
  • If, upon considering an application for a research analyst certificate under Regulation 3, SEBI concludes that the applicant should not be granted a certificate, it has the authority to reject the application.
• Opportunity to Be Heard:
  • Before rejecting the application, SEBI must provide the applicant with a reasonable opportunity to be heard. This allows the applicant to present their case or address any concerns raised by SEBI.
• Communication of Decision:
  • SEBI is required to communicate its decision to reject the application to the applicant within thirty days of making such a decision. This ensures transparency and timely notification.
• Ceasing Activities:
  • Once SEBI rejects an application, the applicant is mandated to cease acting as a research analyst immediately. This means they cannot engage in any research analyst activities following the rejection.
• Legal Liability:
  • The regulation clarifies that the rejection of the application does not absolve the applicant from any legal liabilities they may have under applicable laws. They are still accountable for any actions taken before the rejection.

Example : ABC Research Consultants applied for a research analyst certificate with SEBI to continue their research analysis activities legally. However, after careful consideration, SEBI decided to reject their application based on specific grounds. ABC Research Consultants was given a chance to present their case but, ultimately, SEBI communicated the rejection within thirty days. Consequently, ABC Research Consultants had to cease their research analyst activities immediately and remained legally accountable for any prior actions.

Insolvency and Bankruptcy Code (IBC)

The Insolvency and Bankruptcy Code (IBC) of 2016 is a comprehensive legislative framework that consolidates various laws related to the reorganisation and insolvency proceedings of companies, partnership firms, and individuals in India. It emphasises the timely resolution of insolvency cases. The IBC allows any creditor, including financial and operational creditors, to initiate insolvency proceedings against a company if the undisputed outstanding amount exceeds Rs. 1,00,000. The law defines a financial creditor as someone who receives consideration against the time value of money, essentially earning interest on the amount owed. Companies can also initiate insolvency proceedings if they default on payments.

Topic Pointers:

• Scope of IBC:
  • The IBC applies to the reorganisation and insolvency proceedings of companies, partnership firms, and individuals.
• Threshold for Initiating Proceedings:
  • Any creditor (financial or operational) can initiate insolvency proceedings against a company if the undisputed amount owed is more than Rs. 1,00,000.
• Financial Creditor Definition:
  • A financial creditor is an entity that receives consideration against the time value of money, typically in the form of interest on the outstanding amount.
• Role of Interim Resolution Professional (IRP):
  • Upon the initiation of insolvency proceedings, the adjudicating authority appoints an Interim Resolution Professional (IRP) to manage the company’s affairs.
  • The board of the company is considered dissolved, and all management personnel report to the IRP.
• Committee of Creditors:
  • The IRP compiles a list of outstanding amounts and forms the Committee of Creditors.
  • Operational creditors, although able to initiate insolvency proceedings, are not part of this committee.
• Insolvency Professional (IP):
  • The Committee of Creditors can either confirm the appointment of the IRP as the Insolvency Professional (IP) or select another person for the role.
• Timely Resolution:
  • IBC aims to resolve insolvency cases within 180 days from the initiation of the process, with the IP responsible for the proceedings.
  • Extensions may be granted in certain situations.
• Resolution Options:
  • The resolution process can result in the restructuring of the business, a takeover by another entity, or liquidation.
  • Liquidation is typically considered when no other viable option is available.

Example : ABC Corporation, facing financial difficulties and creditor pressure, had outstanding dues exceeding Rs. 1,00,000. As a financial creditor, XYZ Bank initiated insolvency proceedings under the IBC. An Interim Resolution Professional (IRP) was appointed to manage ABC Corporation’s affairs. The IRP formed the Committee of Creditors, which confirmed the appointment of the IRP as the Insolvency Professional (IP). The IP worked toward resolving the case within the mandated 180 days, exploring restructuring and takeover options before considering liquidation.

Code of Conduct for Research Analysts

The Code of Conduct for Research Analysts is defined in the Third Schedule of the Research Analyst Regulations. It outlines a set of ethical principles and standards that research analysts and research entities must adhere to in the course of their work. These principles aim to ensure honesty, integrity, and professionalism in the field of research analysis.

Topic Pointers:

• Honesty and Good Faith:
  • Research analysts and research entities are required to act honestly and in good faith in all aspects of their work.
• Diligence:
  • Research analysts and research entities must exercise due skill, care, and diligence in their work.
  • Research reports should be prepared after thorough analysis, ensuring accuracy and reliability.
• Conflict of Interest:
  • Addressing conflicts of interest is essential to maintain impartiality in research analysis and reports.
  • Analysts and entities should disclose any conflicts that may affect the objectivity of their analysis.
• Insider Trading or Front Running:
  • Research analysts, research entities, and their employees are prohibited from engaging in insider trading or front running.
  • Front running of their own research reports is also prohibited.
• Confidentiality:
  • Research analysts and entities, along with their employees, must maintain the confidentiality of research reports until they are made public.
• Professional Standards:
  • High professional standards should be observed by research analysts and entities during the preparation of research reports.
• Compliance:
  • Research analysts and entities must adhere to all regulatory requirements applicable to their business activities.
• Responsibility of Senior Management:
  • Senior management within research analyst entities bears primary responsibility for upholding appropriate standards of conduct and ensuring adherence to proper procedures.

Example: XYZ Research Entity is preparing a research report on Company ABC’s stock. They ensure that the report is diligently researched, disclosing any potential conflicts of interest that may affect their impartiality. Employees maintain the confidentiality of the report until it is publicly released, and the senior management oversees the entire process, upholding professional standards and compliance with regulatory requirements.

Management of Conflicts of Interest and Disclosure Requirements for Research Analysts

Chapter III of SEBI (Research Analyst) Regulations outlines the requirements and guidelines for Research Analysts to effectively manage potential conflicts of interest. It also defines the disclosure requirements that Research Analysts must adhere to in their work.

Topic Pointers:

• Management of Conflicts of Interest:
  • SEBI (Research Analyst) Regulations provide guidelines for Research Analysts to identify and manage potential conflicts of interest.
  • These conflicts could arise from personal interests, financial interests, or other affiliations that may affect the objectivity of research analysis.
• Disclosure Requirements:
  • Research Analysts are mandated to make specific disclosures to address potential conflicts of interest.
  • These disclosures are intended to inform investors and the public about any factors that could impact the impartiality of the research report.
• Ensuring Objectivity:
  • The regulations aim to ensure that Research Analysts maintain objectivity and integrity in their analysis.
  • Adequate disclosures help investors make informed decisions based on the research provided.

Example : A Research Analyst working for a financial institution is tasked with analysing a company’s stock, in which the institution holds a significant stake. To manage the conflict of interest, the analyst must disclose the institution’s ownership of the stock in the research report. This disclosure allows investors to consider the potential bias when evaluating the report’s recommendations.

Regulation 15: Establishing Internal Policies and Procedures for Research Analysts

Regulation 15 of SEBI (Research Analyst) Regulations outlines the requirements for research analysts and research entities to establish written internal policies and control procedures. These policies and procedures are essential for governing the dealing and trading activities of research analysts, with a focus on addressing conflicts of interest, promoting unbiased research, and preventing market manipulation through research reports.

Topic Pointers:

• Conflict of Interest Management:
  • Research analysts and research entities must develop written internal policies and control procedures to address actual or potential conflicts of interest arising from the dealing and trading of securities of subject companies.
  • These policies aim to ensure that research analysts’ activities are free from any conflicts that could compromise the impartiality of their research analysis.
• Promoting Objective Research:
  • Internal policies should be designed to promote objective and reliable research that reflects the unbiased views of research analysts.
  • These policies and control procedures help maintain the integrity and credibility of research reports, ensuring they are not influenced by personal or external interests.
• Preventing Market Manipulation:
  • Research analysts and research entities are required to establish mechanisms that prevent the use of research reports or research analysis for manipulating the securities market.
  • This ensures that research reports are used for their intended purpose, providing investors with accurate and unbiased information.
• Independence Assurance:
  • Research analysts and research entities must implement appropriate mechanisms to ensure the independence of their research activities from their other business activities.
  • This separation helps prevent conflicts of interest and ensures that research analysts can provide objective and impartial analysis.

Example : A financial institution employing research analysts must have written internal policies and procedures that outline how conflicts of interest are identified and managed. These policies also specify measures to maintain research analysts’ independence from other business functions, ensuring the integrity of their research reports.

Regulation 16: Limitations on Trading by Research Analysts

Regulation 16 of SEBI (Research Analyst) Regulations specifies limitations on the trading activities of individuals employed as research analysts by research entities. These regulations are designed to ensure the integrity, objectivity, and transparency of research analysts’ activities, preventing conflicts of interest and market manipulation.

Topic Pointers:

• Monitoring and Approval:
  • Personal trading activities of research analysts employed by research entities are subject to monitoring and recording.
  • In cases where necessary, these activities should undergo a formal approval process to ensure compliance with regulations.
• Trading Restrictions Before and After Research Publication:
  • Independent research analysts, individuals employed as research analysts, or their associates are prohibited from trading in securities recommended or followed in their research reports within thirty days before and five days after the publication of the research report.
  • This restriction prevents research analysts from taking advantage of their own recommendations and maintains fairness and transparency in the market.
• Consistency in Trading and Recommendations:
  • Independent research analysts and individuals employed as research analysts are not allowed to deal or trade directly or indirectly in securities that they review in a manner contrary to their given recommendation.
  • This regulation ensures that research analysts maintain consistency in their actions and recommendations.
• Restrictions on Pre-IPO Securities:
  • Independent research analysts, individuals employed as research analysts, or their associates are prohibited from purchasing or receiving securities of an issuer before the issuer’s initial public offering (IPO) if the issuer is engaged in the same types of business as companies that the research analyst follows or recommends.
  • This prevents any potential conflicts of interest and maintains the impartiality of research analysis.
• Application to Research Entities:
  • The provisions mentioned in sub-regulations (2) to (4) also apply, with necessary modifications (mutatis mutandis), to research entities.
  • Research entities must maintain an arms-length relationship between their research activities and other business functions unless they have segregated research activities from all other activities.
• Exceptions:
  • Exceptions to the trading restrictions may apply in the case of significant news or events concerning the subject company.
  • Unanticipated significant changes in the personal financial circumstances of the research analyst may also be considered for exceptions, subject to prior written approval as specified in approved internal policies and procedures.

Example : A research analyst who issues a positive research report on Company X is prohibited from buying Company X’s shares within thirty days before or five days after the publication of the report. This restriction ensures that the analyst’s trading activities do not influence the content of the report.

Regulation 17: Compensation of Research Analysts

Regulation 17 outlines rules and restrictions concerning the compensation of research analysts and aims to maintain independence and objectivity in their work.

Topic Pointers:

• Prohibition of Compensation Based on Banking Services:
  • Research entities are prohibited from providing any form of compensation, including bonuses and salaries, to individuals employed as research analysts, which is determined or based on specific merchant banking, investment banking, or brokerage services transactions.
  • This prohibition prevents conflicts of interest that could arise if analysts’ compensation were tied to these financial activities.
• Annual Compensation Review:
  • The compensation of all individuals employed as research analysts must undergo an annual review.
  • This review process is conducted and documented by the board of directors or a committee appointed by the board of directors of the research entity.
  • The committee responsible for compensation review should not include representatives from the merchant banking, investment banking, or brokerage services divisions.
  • The goal is to ensure that compensation decisions for research analysts are made independently and without influence from divisions involved in financial transactions.
• Exclusion of Contribution to Banking Services:
  • The board of directors or the appointed committee must not consider the individual research analyst’s contribution to the research entity’s investment banking, merchant banking, or brokerage services business when reviewing or approving compensation.
  • This provision maintains the separation of research analysts’ roles from those involved in banking services, preserving objectivity in research.
• Independence from Banking Services:
  • Individual research analysts employed by research entities should not be subject to the supervision or control of any employee working in the merchant banking, investment banking, or brokerage services divisions of the same research entity.
  • This separation ensures that research analysts can conduct their work without influence or pressure from departments involved in financial transactions.

Example: A research entity, ABC Research, conducts an annual compensation review for its research analysts. The board of directors’ compensation committee, which does not include members from the investment banking or brokerage services divisions of the firm, assesses and approves the analysts’ compensation. This process ensures that research analysts are not rewarded based on specific financial transactions and maintains their independence and objectivity in producing research reports.

Regulation 18: Limitations on Publication of Research Reports, Public Appearances, and Conduct of Business

Regulation 18 establishes restrictions and guidelines regarding the publication of research reports, public appearances, and the conduct of business by research analysts and entities, with the aim of maintaining objectivity and transparency in the research process.

Topic Pointers:

• Publication Restrictions after Involvement in Offerings:
  • Research analysts or research entities are prohibited from publishing or distributing research reports, making public appearances, or discussing subject companies they have acted as a manager or co-manager for within specific timeframes.
  • For initial public offerings (IPOs), the restriction period is forty days following the pricing date, and for further public offerings, it’s ten days following the pricing date.
  • Exceptions can be made within these periods, but only with prior written approval from legal or compliance personnel as specified in internal policies and procedures.
• Restrictions for Underwriters of IPOs:
  • Research entities participating as underwriters in an issuer’s IPO are restricted from publishing or distributing research reports or making public appearances regarding that issuer for twenty-five days from the offering date.
• Lock-up Agreement Restrictions:
  • Research analysts or entities who have been involved in public offerings must refrain from publishing research reports or making public appearances about the company within fifteen days before and after the expiration, waiver, or termination of a lock-up agreement.
  • Exceptions can be made within this period with prior written approval from legal or compliance personnel as specified in internal policies and procedures.
• Restrictions on Business Solicitation:
  • Research analysts or individuals employed as research analysts should not participate in business activities aimed at soliciting investment banking, merchant banking, or brokerage services, such as sales pitches and deal road shows.
• Communication Separation:
  • Research analysts should not engage in communication with clients about investment banking services transactions in the presence of personnel from investment banking, merchant banking, or brokerage services divisions or company management.
• Separation from Sales and Marketing:
  • Personnel from investment banking, merchant banking, or brokerage services divisions should not direct research analysts to engage in sales or marketing activities related to their divisions’ transactions.
  • Exceptions are made for investor education activities, including pre-deal research and sharing the research analyst’s views on transactions with sales or marketing personnel.
• Documentation Requirements:
  • Research analysts and entities must maintain adequate documentary evidence, supported by research, for preparing research reports.
• No Assurances for Favourable Reviews:
  • Research analysts or entities are prohibited from providing any promise or assurance of a favourable review in their research reports in exchange for business relationships, compensation, or other benefits.
• Consistency in Research Views:
  • Research entities must ensure that the research reports they issue are consistent with the views of the research analysts regarding the subject company.
• Separation of Research Analysts:
  • Research entities must keep research analysts separate from employees engaged in sales trading, dealing, corporate finance advisory, or other activities that could compromise the independence of research reports.
  • Feedback can be received from sales or trading personnel to assess the impact of research reports.

Example: A research analyst who acted as a manager for an IPO must refrain from publishing a research report on that company for forty days following the pricing date unless prior written approval is obtained. Additionally, research entities should separate research analysts from sales and trading personnel to ensure the independence of research reports.

Regulation 19: Disclosures in Research Reports

Regulation 19 outlines the mandatory disclosures that research analysts and research entities must make in research reports and public appearances to ensure transparency and provide investors with material information necessary for making investment decisions. These disclosures cover ownership, conflicts of interest, compensation, affiliations, and other relevant details.

Topic Pointers:

• Disclosure of Ownership and Conflicts of Interest:
  • Research analysts and entities must disclose ownership and material conflicts of interest in research reports and public appearances.
  • Disclosures must include whether the research analyst/entity, their associates, or relatives have any financial interest in the subject company and the nature of such interest.
  • It should be disclosed if the research analyst/entity, their associates, or relatives own one percent or more securities of the subject company at the end of the preceding month before the research report’s publication or public appearance.
  • Any other material conflicts of interest at the time of publication or public appearance should also be disclosed.
• Disclosure of Compensation:
  • Research reports must include disclosures related to compensation:
    • Whether the research analyst/entity or their associates received compensation from the subject company in the past twelve months.
    • If they managed or co-managed public offerings for the subject company in the past twelve months.
    • Whether they received compensation for investment banking, merchant banking, or brokerage services from the subject company in the past twelve months.
    • If they received compensation for products or services other than investment banking, merchant banking, or brokerage services from the subject company in the past twelve months.
    • Any compensation or benefits received from the subject company or a third party in connection with the research report.
• Disclosure of Public Appearance Compensation:
  • In public appearances, researchers must disclose whether they or their associates received compensation from the subject company in the past twelve months.
  • If the subject company was a client during the twelve months before the distribution of the research report, the types of services provided should be disclosed.
  • Certain disclosures can be omitted if they would reveal material non-public information regarding potential future investment banking, merchant banking, or brokerage services transactions of the subject company.
• Additional Disclosures:
  • Researchers must disclose whether the research analyst served as an officer, director, or employee of the subject company.
  • Disclosure of any market making activity for the subject company by the research analyst or entity.
• Regulatory Requirements:
  • Researchers are obligated to provide all other disclosures specified by the Board under any other regulations.

Example: In a research report, a research analyst must disclose if they, their associates, or relatives have a financial interest in the subject company, whether they received compensation from the company in the past year, and if they served as an officer or director of the company. These disclosures aim to provide investors with a clear understanding of potential conflicts of interest and affiliations that could affect the research report’s objectivity.

Regulation 20: Contents of Research Report

Regulation 20 outlines the specific requirements for the content of research reports produced by research analysts or research entities. It emphasises the importance of reliable information, consistent terminology, and clarity in research reports, particularly when employing rating systems.

Topic Pointers:

• Reliable Information:
  • Research analysts and entities must ensure that the facts presented in their research reports are based on reliable information. This ensures the accuracy and credibility of the research.
• Definition of Terms:
  • Terms used in making recommendations must be clearly defined in the research report.
  • These defined terms should be consistently used throughout the report to avoid confusion.
• Rating System Definitions:
  • If a research analyst or entity employs a rating system in their reports, they must provide clear definitions for each rating.
  • These definitions should include details about the meaning of each rating, the time horizon for the rating, and the benchmarks or criteria on which the rating is based.
• Price Target and Rating History:
  • If a research report includes a rating or a price target for the securities of the subject company, and the research analyst or entity has assigned a rating or price target to those securities for at least one year, additional information is required.
  • The research report must include a graph depicting the daily closing price of the securities for the period during which the rating or price target was assigned.
  • The graph should cover either the period of the assignment or a three-year period, whichever is shorter.

Example: In a research report, a research analyst must define any terms used in their recommendations and provide clear explanations for each rating they assign to securities. If the analyst has been rating the securities for over a year, the report should also include a graph showing the daily closing prices of those securities over the assigned period. These requirements ensure transparency and consistency in research reports, aiding investors in understanding the basis for the analyst’s recommendations.

Regulation 21: Recommendations in Public Media

Regulation 21 outlines the requirements and disclosures that research analysts, research entities, and individuals from other financial services sectors must adhere to when making public appearances or offering recommendations through public media. It emphasises the need for transparency and disclosure of financial interests.

Topic Pointers:

• Disclosure of Registration and Financial Interest:
  • Research analysts, research entities, directors, or employees must disclose their registration status when making public appearances.
  • If they have a financial interest in the subject company being discussed, the details of this financial interest must also be disclosed.
• Applicability of Regulations 16 and 17:
  • Individuals who are not research analysts but are associated with entities like investment advisers, credit rating agencies, asset management companies, or fund managers must comply with the provisions of regulations 16 and 17 when making public appearances or offering recommendations through public media.
  • These regulations cover aspects such as limitations on trading, compensation, and disclosures.
• Disclosure Requirements for Various Situations:
  • When making recommendations or offering opinions in a personal capacity, individuals must disclose their name, registration status, and details of financial interest in the subject company.
  • When responding to queries from audiences or journalists in a personal capacity, similar disclosures are required.
  • If communicating the substance of a research report or the research report itself through public media, these disclosure requirements apply.

Example: If a director of an asset management company appears on a television show and offers an opinion about a specific stock, they must disclose their registration status and any financial interest they have in the subject company during the appearance. These disclosures help ensure transparency and provide viewers with information about potential conflicts of interest.

Regulation 22: Distribution of Research Reports

Regulation 22 provides guidelines for the distribution of research reports. It emphasises fairness and transparency in the dissemination of research reports, especially when third-party reports are involved. The regulation also addresses the disclosure of conflicts of interest.

Topic Pointers:

• Equal Distribution to Clients:
  • Research reports must not be selectively provided to internal trading personnel, specific clients, or a particular class of clients before being made available to other clients who are entitled to receive them.
• Review of Third-Party Research Reports:
  • If a research analyst or research entity distributes a third-party research report, they are required to review it for any untrue statements of material fact or false or misleading information.
• Disclosure of Material Conflicts of Interest:
  • When distributing third-party research reports, research analysts or entities must disclose any material conflicts of interest associated with the third-party research provider.
  • Alternatively, they can provide a web address that directs recipients to relevant disclosures regarding conflicts of interest by the third-party research provider.
• Exception for Business Relationships:
  • The requirements outlined in sub-regulations (2) and (3) do not apply if the research analyst or research entity has no direct or indirect business or contractual relationship with the third-party research provider.

Example: A brokerage firm distributes a third-party research report about a technology company to its clients. Before distributing the report, the brokerage firm reviews it for accuracy and checks for any potential conflicts of interest associated with the third-party research provider. If any conflicts exist, they are disclosed to the clients or a web link is provided for accessing relevant disclosures. This ensures that clients receive fair and unbiased information.

Regulation 23: Additional Disclosures by Proxy Adviser

Regulation 23 outlines additional disclosure requirements for proxy advisers and extends various provisions from earlier chapters of the regulations to ensure transparency and accountability in proxy advisory services. It also specifies minimum qualifications for employees and sets a compliance timeline for capital adequacy.

Topic Pointers:

• Application of Regulations:
  • All the provisions of Chapters II, III, IV, V, and VI of the regulations apply mutatis mutandis (with necessary changes) to proxy advisers.
  • Employees of proxy advisers providing proxy advisory services must have a minimum qualification of being a graduate in any discipline.
  • Certification requirements for such employees will be specified by the Board.
  • Proxy advisers are given three years for compliance with capital adequacy requirements as provided in sub-regulation (3) of regulation 8.
• Additional Disclosures:
  • Proxy advisers must disclose the extent of research involved in a specific recommendation.
  • They should also disclose the extent and effectiveness of their controls and procedures to ensure the accuracy of issuer data.
  • Proxy advisers must outline their policies and procedures for interacting with issuers, informing issuers about recommendations, and reviewing those recommendations.
• Record Maintenance:
  • Proxy advisers are required to maintain records of their voting recommendations.
  • These records should be furnished to the Board upon request, ensuring transparency and accountability.
• Clarifications and Exemptions:
  • In case of any inconsistency or difficulty regarding the applicability of these regulations to proxy advisers, the Board may issue clarifications or exemptions as deemed appropriate.

Example: A proxy advisory firm, which provides voting recommendations to institutional investors, is required to disclose the extent of research conducted before making a particular recommendation. They must also outline their procedures for ensuring the accuracy of issuer data and their policies for engaging with companies regarding these recommendations. Additionally, the firm needs to maintain a record of its voting recommendations and make them available to the regulatory authority upon request. These measures enhance transparency and accountability in the proxy advisory industry.

Regulation 24: General Responsibility

Regulation 24 outlines the general responsibilities of research analysts and research entities. It emphasises the need for maintaining an arms-length relationship between research activities and other activities, compliance with the specified Code of Conduct, and the importance of informing the regulatory authority in case of a change in control. Additionally, it highlights the requirement to provide information and reports to the regulatory authority and ensures that employees or partners meet certification and qualification requirements under regulation 7.

Topic Pointers:

• Maintaining Arms-Length Relationship:
  • Research analysts and research entities are required to maintain an arms-length relationship between their research activities and other business activities. This separation helps ensure the independence and integrity of research.
• Adherence to Code of Conduct:
  • Research analysts and research entities must adhere to the Code of Conduct specified in the Third Schedule of the regulations. This code outlines ethical and professional standards that research professionals should follow.
• Approval for Change in Control:
  • In the event of a change in control of a research analyst or research entity, prior approval from the regulatory authority (the Board) is mandatory. This requirement aims to ensure that changes in ownership do not compromise the integrity and quality of research.
• Submission of Information and Reports:
  • Research analysts and research entities are responsible for furnishing information and reports as specified by the regulatory authority (the Board) from time to time. This reporting helps regulatory authorities monitor compliance and maintain transparency in the industry.
• Employee Compliance with Certification and Qualification Requirements:
  • It is the responsibility of research analysts and research entities to ensure that their employees or partners (as applicable) comply with the certification and qualification requirements under regulation 7. This ensures that individuals involved in research meet the necessary professional standards.

Example: A research entity must maintain a clear separation between its research activities and other business operations, such as trading or investment banking. It is also obligated to strictly adhere to the Code of Conduct outlined in the regulations. If there is any change in control, the entity must obtain prior approval from the regulatory authority. Additionally, the entity needs to provide requested information and reports to the regulatory authority to demonstrate compliance with regulations. Lastly, the entity must ensure that all its research analysts meet the certification and qualification requirements specified in the regulations. These measures collectively uphold the integrity and quality of research in the financial industry.

Regulation 25: Maintenance of Records

Regulation 25 outlines the requirements for research analysts and research entities to maintain records related to their research activities. These records include signed and dated research reports, research recommendations, the rationale for arriving at those recommendations, and records of public appearances. These records must be preserved for a minimum period of five years. If electronic records require signatures, they must be digitally signed. Additionally, research analysts and entities must conduct an annual audit of their compliance with these regulations by a qualified professional from recognized institutions.

Topic Pointers:

Types of Records to Be Maintained:

• Research analysts and research entities are required to maintain several types of records, including:
  • Duly signed and dated research reports.
  • Records of research recommendations provided to clients.
  • Documentation of the rationale used to arrive at research recommendations.
  • Records of any public appearances made by research analysts.

Preservation of Records:

• All records must be preserved for a minimum period of five years. This requirement ensures that historical research data is available for regulatory review and maintains transparency.

Digital Signatures for Electronic Records:

• If records are maintained in electronic form and require signatures, they must be digitally signed. This enhances the security and authenticity of electronic records.

Annual Compliance Audit:

• Research analysts and research entities must conduct an annual audit to assess their compliance with the regulations. This audit must be performed by a qualified professional who is a member of recognized institutions such as the Institute of Chartered Accountants of India or the Institute of Company Secretaries of India.

Example: A research entity must maintain a comprehensive set of records related to its research activities. These records include signed and dated research reports, records of recommendations made to clients, a clear rationale for those recommendations, and documentation of any public appearances by research analysts. These records must be preserved for a minimum of five years. If any of these records are maintained in electronic form and require signatures, they must be digitally signed to ensure their authenticity. Additionally, the entity must conduct an annual compliance audit by a qualified professional from recognized institutions like the Institute of Chartered Accountants of India or the Institute of Company Secretaries of India. These measures ensure transparency, accountability, and the availability of historical research data for regulatory review.

Regulation 26: Appointment of Compliance Officer

Regulation 26 requires research analysts or research entities that are body corporates or limited liability partnership firms to appoint a compliance officer. The compliance officer is responsible for monitoring and ensuring compliance with the provisions of the Act, these regulations, and circulars issued by the Board.

Topic Pointers:

Mandatory Appointment:

• Research analysts or research entities that are structured as body corporates or limited liability partnership firms are obligated to appoint a compliance officer.

Responsibilities of the Compliance Officer:

• The compliance officer has the primary responsibility of monitoring and ensuring compliance with various regulatory provisions, including those outlined in the Act, these regulations, and circulars issued by the Board.

Example: A research entity that operates as a body corporate or limited liability partnership firm is required to appoint a compliance officer. This compliance officer plays a crucial role in overseeing and ensuring that the entity complies with all relevant regulatory provisions, including those specified in the Act, these regulations, and circulars issued by the Board. This appointment helps maintain transparency and adherence to regulatory standards.

Regulation 32 (Chapter V): Liability for Action in Case of Default

Regulation 32 outlines the liability of research analysts or research entities in case of default. It specifies the actions that may lead to liability, which include contravening provisions of the Act, regulations, or circulars, failing to provide required information, furnishing false or misleading information, not submitting periodic reports, non-cooperation in Board investigations, and failure to resolve complaints to the satisfaction of the Board. Such defaults will be dealt with according to the provisions of the Act or the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.

Topic Pointers:

Actions Leading to Liability:

• Research analysts or research entities can be held liable if they engage in certain actions, including contravening regulatory provisions, failing to provide information as required, furnishing false information, failing to submit periodic reports, non-cooperation during Board investigations, and inability to resolve complaints satisfactorily.

Consequences of Default:

• The regulation doesn’t specify the exact consequences but refers to dealing with such defaults according to the provisions of the Act or the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.

Example: If a research analyst or research entity fails to provide accurate information, cooperates inadequately during a Board investigation, or breaches regulatory provisions, they may be subject to liability. The specific consequences of such defaults are determined based on the applicable provisions of the Act or the Securities and Exchange Board of India (Intermediaries) Regulations, 2008, which may include penalties or other regulatory actions. It’s crucial for research analysts and entities to adhere to the regulations to avoid potential liabilities.

Exchange Surveillance Mechanisms: GSM and ASM

Exchange surveillance mechanisms, such as the Graded Surveillance Measures (GSM) and Additional Surveillance Measures (ASM), are implemented by stock exchanges in collaboration with SEBI to ensure transparent and fair trading in securities. These mechanisms aim to protect the interests of investors and maintain market integrity by monitoring stocks based on specific criteria and imposing restrictions or additional rules when necessary to prevent unethical trading practices that could distort prices and harm other traders.

Topic Pointers:

• Objective of Surveillance Mechanisms:
  • The primary objective of exchange surveillance mechanisms like GSM and ASM is to safeguard the integrity of the market and protect the interests of investors.
• Market Transparency:
  • Stock exchanges provide a platform for transparent trading, enabling the fair determination of security prices. However, some traders may engage in unethical practices that can manipulate prices.
• Surveillance Criteria:
  • Surveillance mechanisms are based on predefined, objective criteria that help identify securities or traders engaging in suspicious activities. These criteria may include abnormal price movements, trading volumes, or other unusual patterns.
• Imposing Restrictions:
  • When a security or trader is flagged by the surveillance system, stock exchanges and SEBI may impose certain restrictions or additional rules on trading in that security. This is done to prevent further market disruption.
• Protection of Investor Interests:
  • These mechanisms are essential for ensuring that all investors are treated fairly and that the market remains free from manipulation and fraudulent practices.

Example: Imagine a scenario where a particular stock experiences an unusually large and rapid increase in its trading volume and price. Such a situation might trigger the surveillance mechanisms like GSM and ASM. In response, stock exchanges, in collaboration with SEBI, may take steps to investigate and, if necessary, restrict trading in that stock to protect the interests of other traders and maintain market integrity. These surveillance mechanisms play a crucial role in preventing market manipulation and unethical trading practices.

Graded Surveillance Measures (GSM)

Graded Surveillance Measures (GSM) are a set of surveillance and monitoring mechanisms implemented by stock exchanges and SEBI to address securities with low market capitalization or net worth that do not align with their business fundamentals. GSM is designed to alert and advise investors to exercise caution when dealing with such securities and to encourage market participants to conduct thorough due diligence. Under GSM, stock exchanges and SEBI may impose various restrictions on these securities, including trade for trade (delivery-based trading) categorization, surveillance deposits, price band adjustments, increased margin requirements, and price freezes. Members of the exchange and trades involving these stocks are also closely monitored.

Topic Pointers:

• Objective of GSM:
  • GSM aims to enhance investor awareness and protection by identifying and addressing securities with low market capitalization or net worth that do not align with their underlying business fundamentals.
• Criteria for Inclusion in GSM:
  • Companies are shortlisted for GSM based on specific criteria, including low net worth (less than or equal to Rs 10 crores) and low net fixed assets (less than or equal to Rs 25 crores), trading at a negative price-to-earnings (PE) ratio or at a PE multiple that is 2x the PE of the benchmark index. However, certain exceptions apply to securities already under suspension, PSUs, index constituents, recent IPOs, derivatives-traded securities, those with significant institutional holding, and those undergoing mergers or demergers.
• Surveillance Mechanisms Under GSM:
  • Once a security is placed under GSM, it may be subjected to various surveillance measures, including trade for trade categorization (delivery-based trading only), requirement for surveillance deposits, adjustments to the price band, increased margin requirements, and freezing of the price on the upside.
• Continuous Monitoring:
  • GSM securities and trades involving them are closely monitored to detect any irregularities or unusual trading patterns that could harm investors or market integrity.

Example: Suppose a company with a market capitalization below Rs 25 crores is identified as trading at a PE ratio greater than 2x the PE of the benchmark index. Such a company may be placed under GSM. As a result, trading in its shares might be restricted to delivery-based trading, and additional margin requirements may be imposed to protect investors. This demonstrates how GSM is applied to securities that do not align with their business fundamentals to safeguard investor interests and market integrity.

Additional Surveillance Measures (ASM)

Additional Surveillance Measures (ASM) is a security screening process used in financial markets. Unlike the regular surveillance system (GSM) that assesses securities based on their valuation, ASM identifies and shortlists securities based on price and volume variations. It also considers the percentage of volume traded by the top 25 clients in certain cases. ASM’s criteria are influenced by market capitalization and price-to-earnings (PE) ratio.

Topic Pointers:

• Purpose of ASM:
  • ASM identifies and shortlists securities in financial markets.
  • It focuses on price and volume variations of securities.
  • It considers the percentage of volume traded by the top 25 clients for some securities.
• Factors Considered by ASM:
  • Variation between high and low prices in the previous three months.
  • Variation between closing prices over different time frames (e.g., 1 month, 60 days, and 365 days).
  • Client concentration, which is the percentage of volume traded by the top 25 clients for each stock.
  • Variation in trading volumes over various time frames.
• Criteria Variations:
  • Criteria for ASM vary based on the market capitalization and PE ratio of the stocks.
• Inapplicability of ASM:
  • ASM is not applicable to securities that are already under the regular surveillance system (GSM).
  • It is also not applied to securities placed under the trade for trade segment.
  • Securities with available derivative products are exempt from ASM.
  • Public sector units (PSUs) are not subjected to ASM.
• Margin Requirements:
  • Once a stock is shortlisted under ASM, the applicable margin on the security is increased to 80%.
  • Additional restrictions may be imposed on the security, including narrowing of price bands and increasing the margin to 100%.
• Review and Removal:
  • Stocks listed under ASM undergo periodic reviews.
  • If a stock no longer meets the shortlisting criteria during a review, it is removed from ASM.

Forms of Communication in Investment Advertising

Forms of communication in investment advertising encompass various mediums and materials that can influence investment decisions of investors or prospective investors. These communication forms are subject to an advertisement code, which includes pamphlets, circulars, brochures, notices, research reports, and more. They are disseminated through a wide range of channels, including print media, electronic communication, audio-visual media, and the internet.

Topic Pointers:

• Definition of Forms of Communication:
  • Forms of communication refer to various means by which information is conveyed to investors or potential investors.
  • These communications are typically created or disseminated by Investment Advisors (IA) or Research Analysts (RA).
• Purpose of Regulation:
  • The regulation applies to forms of communication that have the potential to impact investment decisions.
  • It is designed to ensure transparency, accuracy, and fairness in investment-related communications.
• Applicability of Advertisement Code:
  • The advertisement code applies to a wide range of communication materials, including:
    • Pamphlets
    • Circulars
    • Brochures
    • Notices
    • Research reports
    • Any other literature, document, information, or material
  • It is relevant for use in various publications and displays, both physical and digital.
• Communication Channels Covered:
  • The advertisement code is applicable to communication through various channels, such as:
    • Print media (newspapers, magazines)
    • Sign Boards and hoardings at physical locations
    • Electronic communication (email, text messaging, messaging platforms)
    • Social media platforms
    • Radio and telephone
    • Internet (websites, blogs, online forums)
    • Audio-visual forms (television, tape recordings, video tape recordings, motion pictures)
  • Essentially, it covers communication in any manner that can potentially influence investment decisions.

Information and Disclosures in Investment Advertisements

Information and disclosures in investment advertisements refer to the mandatory content that must be included in advertisements issued by Investment Advisors (IA) or Research Analysts (RA) as per SEBI (Securities and Exchange Board of India) regulations. These disclosures are aimed at ensuring transparency, accuracy, and investor protection.

Topic Pointers:

• Mandatory Information:
  • The advertisement must include the following key information about the IA/RA:
    • Name as registered with SEBI
    • Registered office address
    • SEBI Registration No.
    • Logo/brand name/trade name of IA/RA
    • Corporate Identification Number (CIN) of IA/RA (if applicable)
• Accuracy and Completeness:
  • All information in the advertisement should be accurate, true, and complete.
  • It should be presented in unambiguous and concise language to avoid confusion.
• Standard Warning:
  • A standard warning in legible fonts (minimum 10 font size) is required in every advertisement.
  • The warning states, “Investment in securities markets are subject to market risks. Read all the related documents carefully before investing.”
  • No additions or deletions to/from the standard warning are allowed.
• Audio-Visual Media Advertisements:
  • In audio-visual media-based advertisements, the standard warning in both visual and voice-over formats must be clear and understandable.
  • For example, a 20-word warning running for at least 10 seconds may be considered clear and understandable.
• Language Translation:
  • If the advertisement is issued in a language other than English, the standard warning must be accurately translated into the language of the advertisement.
• SMS/Message/Pop-up Advertisements:
  • In cases where advertisements are in the form of SMS, messages, pop-ups, etc., and do not contain all the required details (e.g., full name, logo/brand name, registered office address, SEBI registration number), an official website hyperlink must be provided.
  • The official website must contain all the necessary details.
• Use of Specific Securities:
  • If specific securities are displayed in the advertisement as examples, a disclaimer must be included stating that “The securities quoted are for illustration only and are not recommendatory.”
• Performance Disclaimer:
  • All advertisements and communications/correspondences with clients must include a disclaimer that the registration granted by SEBI, membership of a recognized supervisory body (BASL in the case of IAs), and certification from NISM do not guarantee the performance of the intermediary or provide any assurance of returns to investors.

Prohibitions in Investment Advertisements

Prohibitions in investment advertisements outline the restrictions and guidelines that must be followed by Investment Advisors (IA) and Research Analysts (RA) when creating and disseminating advertisements. These regulations aim to prevent false, misleading, or deceptive practices and ensure that investors receive accurate and transparent information.

Topic Pointers:

Compliance with the Law:

• Advertisements must not contain anything that is prohibited for publication under the law.

Accuracy and Honesty:

• Statements in advertisements should not be false, misleading, biassed, or deceptive.
• They should not be based on assumptions or projections that could mislead investors.

Testimonials:

• Advertisements must not include misleading or deceptive testimonials.

Avoiding Investor Misdirection:

• Statements should not directly or indirectly mislead investors.
• They should not be likely to be misunderstood or disguise the significance of any information.

Exploiting Investor Inexperience:

• Advertisements should not include statements designed to exploit the lack of experience or knowledge of investors.

Consistency with Risk Profile:

• Statements should not be exaggerated or inconsistent with the nature and risk-return profile of the product being advertised.

Avoiding Complexity:

• Excessive use of technical or legal terminology and complex language should be avoided.
• Inclusion of excessive details that may distract investors is discouraged.

Misleading “Free” References:

• Advertisements should not reference any report, analysis, or service as free unless it is genuinely free and without any conditions or obligations.

Avoiding Promise of Assured Returns:

• Advertisements must not promise or guarantee assured or risk-free returns to investors.

Avoiding Misleading Implications:

• Advertisements should not imply assured returns, minimum returns, target returns, percentage accuracy, or any other suggestion that investment advice or research reports are risk-free or immune to market risks.

Fair Comparisons:

• Advertisements must not discredit other advertisements or intermediaries or make unfair comparisons or ascribe qualitative advantages over other intermediaries.

Past Performance:

• Reference to the past performance of the IA/RA is not allowed in advertisements.

Avoiding Superlative Terms:

• Superlative terms such as “Best,” “No. 1,” “Top Adviser/Research Analyst,” “Leading,” etc., should not be used to endorse the quality or standing of the IA/RA.
• However, factual details of awards received from independent organisations may be included.

SEBI Logo Exclusion:

• Advertisements must not include the SEBI (Securities and Exchange Board of India) Logo.

Other Compliances and Requirements in Investment Advertisements

Other compliances and requirements in investment advertisements outline additional rules and guidelines that Investment Advisors (IA) and Research Analysts (RA) must adhere to when creating and disseminating advertisements. These requirements are aimed at ensuring transparency, accountability, and adherence to regulatory standards.

Topic Pointers:

Prior Approval:

• IA/RA must obtain prior approval for the advertisement/material from a SEBI recognized supervisory body (e.g., BSE Administration & Supervision Ltd. (BASL) for IAs) before its issuance.

Suspension Period:

• If SEBI or a recognized supervisory body suspends an IA/RA, that suspended entity cannot issue any advertisements during the suspension period.

Prohibition on Games and Schemes:

• IAs/RA are prohibited from engaging in games, leagues, schemes, competitions, etc., that involve the distribution of prize money, medals, gifts, etc., in the context of their services.

Applicability to Associated Agencies:

• These norms apply to any other investment, research, or consultancy agency associated with the IA/RA concerned if they are mentioned in the advertisement.

Advertisement Record Keeping:

• IAs/RA must retain a copy of the advertisement for a period of five years, as required by SEBI regulations.

Additional Guidelines:

• IAs/RA must comply with any additional guidelines specified by SEBI or a recognized supervisory body from time to time.

Pertaining to the usage of brand name and logo by RAs/IAs, the SEBI guidelines direct the following:

Transparency in Brand Name/Logo Usage:

IAs and RAs using a brand name, trade name, or logo must ensure transparency in their usage by:

• Displaying prominently the registered name of the IA/RA, its logo, registration number, and complete address with telephone numbers on various communication mediums.
• Displaying information such as the name of the compliance officer, their telephone number, and email address, as well as the name, telephone number, and email address of the grievance officer or grievance redressal cell in client correspondence.
• Including a disclaimer stating that “Registration granted by SEBI, membership of BASL (in case of IAs), and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors” in various communications.
• Not using the SEBI logo in advertisements or communications.

SEBI Investor Charter and Complaint Disclosure for Research Analysts

The SEBI Investor Charter and Complaint Disclosure for Research Analysts outline regulatory requirements and guidelines to enhance investor awareness and transparency in the services provided by research analysts. It includes the Investor Charter, a document detailing investor rights, services, grievance handling mechanisms, and responsibilities. Research analysts are mandated to prominently display the Investor Charter and disclose complaints on their websites and mobile applications or through email to investors.

Topic Pointers:

SEBI’s Investor Charter:

• SEBI has developed an Investor Charter for Research Analysts to inform investors about various aspects related to research analyst services.
• The Investor Charter includes details of services offered, investor rights, do’s and don’ts, responsibilities, grievance handling mechanisms, and estimated timelines.
• The document is designed in a clear and easily understandable language for the convenience of investors.

Display of Investor Charter:

• Registered Research Analysts are required to prominently display the Investor Charter on their websites and mobile applications.
• Research Analysts who do not have websites or mobile apps must send the Investor Charter as a one-time measure to investors via their registered email addresses.

Complaint Disclosure:

• Research Analysts are required to enhance transparency in grievance redressal by disclosing all complaints, including those received through the SEBI SCORES platform, on their websites and mobile applications.
• This disclosure must follow a specified format mentioned in Annexure-2 and should be made available by the 7th of the succeeding month.
• Research Analysts without websites or mobile apps must send the status of investor complaints to investors via their registered email addresses on a monthly basis.

Direct Complaint Link:

• Research Analysts are advised to provide a link or option on their websites and mobile apps for investors to lodge complaints directly.

Additionally, they should provide a link to the SEBI SCORES website or the option to download the SEBI SCORES mobile app for investor convenience.