The Draft SEBI (Research Analyst) Regulations, 2013 was issued on 29 November, 2013. Before the draft regulations, research analysts have been subjected to disclosure requirements under the SEBI (Prohibition of Insider Trading) Regulations, 1992 and the Code of Corporate Disclosure Practices for Prevention of Insider Trading.

The draft regulations provide for Registration and regulation of independent research analysts, intermediaries that employ research analysts or issue research reports and research analysts that give recommendations in the public media. Investment advisers, asset management companies, proxy advisory advisory service providers and fund managers of Alternative Investment Funds need not be registered as research analysts. However these entities need to fulfil conflict avoidance and disclosure obligations prescribed under Chapter III if, they, their employees or directors make public appearances or appear in public media to give recommendations on securities or public offers.

The avoidance of conflict of interest measures contained in the draft regulations are primarily restrictions on trading or dealing in securities on which research analysts make recommendations to the public. For instance, provisions to ensure that the recommendations are not influenced by investment banking or brokerage transactions of entities.

Research analysts and intermediaries are required to make several disclosures, including the valuation methods used to determine the price target, the financial interest of any close relative, whether they receive any compensation for investment banking or any other services from the company. All these disclosures are to be made in research reports and while making public appearances.

The draft regulations are a welcome step to ensure the neutrality and quality of research reports. However a few issues need attention. The draft regulations do not contain sufficient and specific provisions for prevention of potential conflicts and malpractices by research analysts. Further, it may be difficult to enforce provisions which impose the obligations under Chapter III on entities other than research analysts.

Foreign-based research analysts providing reports to foreign clients on Indian listed securities should be specifically excluded from the purview of these regulations as it would not protect Indian investors and would impose a severe restriction on the operation of foreign research entities providing their analysis to foreign investors. The capital adequacy requirements under Regulation 7 should be eliminated as research analysis does not need capital.

A Self-Regulatory Organization should be set up under Regulation 13 at an early date. It can function as a regulator of first instance at the industry level and prescribe industrywide conflict mitigation and disclosure standards. Moreover it will act as a link between SEBI and the research analyst.