Analysts or investment advisers are experts or at the least understand the markets a little more, given that they spend a lot of time reading and researching about stocks. People often rely on their advice, hoping that they have the most accurate information about the company/securities which they are covering. While this may or may not be true, the bigger question is – What exactly is an investment adviser, legally?

In the absence of any regulation, pretty much anyone can give themselves this title. Indeed, for many years such titles have proved very helpful at manipulating sentiment in favor of particular stocks. In order to root out unfair motives and make the market a safer place for investors, the Securities and Exchange Board of India (SEBI), has set some norms/guidelines to check ‘conflict of interests’ in stock markets.

Conflict of interest arises where market participants, particularly those claiming to be independent financial advisors stand on both sides of the transaction. On one side they may be acting for a company or its promoter while on the other, they have the authority and standing to recommend stocks of that very company to their clients. What follows is a situation where they must necessarily cheat one of the two parties. Often it is the smaller client who pays the price.

EXAMPLE

Promoter may want to sell 1% stake in his company. Advisors working with him could put out buy recommendations on the stock to prop up the share price before the promoter sells. Similarly, often the analysts buy a particular stock in their own account before recommending it to their clients. To deal with this “conflict of interest”, SEBI has set up new rules for investment advisers and research analyst. This is aimed at removing loopholes that allow irregularities like insider trading etc.

SEBI (Investment Advisers) Regulations, 2013

SEBI has published a set of guidelines for individuals and firms offering investment advice. These new regulations make it mandatory for everyone who is in the business of offering investment, to register with the market regulator – SEBI.

Exempted:

Insurance agent or insurance broker, pension advisor, distributor of mutual funds, advocate, stock broker or sub-broker registered under SEBI, fund manager (mutual fund etc) are not required to be registered under these regulations.

SEBI (Research Analysts) Regulations, 2014

On 1st September, 2014, SEBI published another set of guidelines to regulate research analysts covering Indian markets. Under these, research analyst will have to obtain a certificate from SEBI to continue giving opinions and recommendations on companies.

These regulations seek to regulate individual research analysts as well as entities engaged in issuance of research reports or research analysis or who makes ‘buy/sell/hold’ recommendations related to securities and public offers such as brokerage houses, merchant bankers and advisors etc. By doing so, SEBI’s main intention is to improve the quality of research by ensuring that analysts with suitable education qualifications and experience are only registered. Under this regulation, foreign entities conducting research on Indian markets or Indian-listed companies would need to tie-up with a registered entity in India.

Exempted:

Investment advisers, asset management companies, credit rating agencies, fund managers of venture capital fund or portfolio manager are not required to be registered under these regulations.

The following are some key changes under the new framework:

Eligibility Investment Advisers Regulations Research Analyst Regulations
  1. Professional qualification, or post-graduate degree or diploma in finance or related fields
  2. Graduate with at least five years of experience in activities related to financial market
  3. In addition, individual need to pass NISM Certification Examination for investment adviser
  1. Professional qualification, or post-graduate degree or diploma in finance or related fields
  2. Graduate with at least five years of experience in activities related to financial market
  3. In addition, individual need to pass NISM Certification Examination for research analysts
Capital adequacy
  1. Individual or partnership firm – Net tangible assets of value not less than one lakh rupees
  2. Body corporate – Net worth of not less than twenty five lakhs rupees
  1. Individual or partnership firm – Net tangible assets of value not less than one lakh rupees
  2. Body corporate – Net worth of not less than twenty five lakhs rupees
Avoiding conflicts of interest Investment advisors are not allowed to enter into transactions on thier own account contrary to the advice given to clients for at least 15 days from the day of such advice. SEBI has put a trading restriction on research analyst. They are not allowed to trade in the securities that they follow. The restriction is applicable 30 days before and five days after the publication of the research report
Disclosures Disclosure related to the fee they get from the beneficiary company / firm for the advice they give about a particular product.Disclosure about their holdings in the products on which they are advising.Risk related disclosures. Research analyst must disclose all the information given by the company to the public. This will prevent the analysts or their entities to gain any undue advantage over other investors
Validity of Certificate 5 years 5 years
Renewal of Certificate 3 months before the expiry of validity period 3 months before the expiry of validity period