Chapter 13: Legal and Regulatory Environment

Regulatory Compliance and Legal Framework

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Foundation (Ch 1-4)

Market Analysis (Ch 5-8)

Technical Analysis (Ch 9-11)

Advanced (Ch 12-13)

Annexures (Ch 14-16)

LEARNING OBJECTIVES:

After studying this chapter, you should know about:

  • Regulatory Framework of Indian Financial markets
  • Some of the important regulations in the Indian securities market
  • Code of Conduct prescribed for research analysts
  • Management of conflicts and Disclosure requirement for research analysts
  • Surveillance mechanism of exchanges: ASM and GSM

13.2 Important regulations in Indian Securities Market

The Indian Securities markets are governed by several Acts, Regulations and Bye-laws. Some of the relevant ones are described below:

13.2.1 Securities Contracts (Regulation) Act, 1956

The Securities Contracts (Regulation) Act, 1956 (SC(R)A), provides for direct and indirect control of virtually all aspects of securities market to SEBI – instruments, intermediaries, issuers and investors. It prevents undesirable transactions in securities by regulating the business of securities dealing and trading. The act covers a variety of issues, of which some are listed below:

  1. Granting recognition to stock exchanges
  2. Corporatization and demutualization of stock exchanges
  3. The power of the Central Government to call for periodical returns from stock exchanges
  4. The power of SEBI to make or amend bye-laws of recognized stock exchanges
  5. The power of the Central Government (exercisable by SEBI also) to supersede the governing body of a recognized stock exchange
  6. The power to suspend business of recognized stock exchanges
  7. The power to prohibit undesirable speculation

13.2.2 Securities and Exchange Board of India Act, 1992

The SEBI Act of 1992 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".

The SEBI in the broader sense performs the functions as stated in the above paragraph, however, without any prejudice to the generality, the act also provides for the following measures:

Section 11(1) of the SEBI Act, 1992, lays down that subject to the provisions of the SEBI Act, 1992, it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of and to regulate the securities market, by such measures as it thinks fit. Further, section 11(2) lays down that the measures that SEBI could adopt that may include the following:

  1. To regulate the business in stock exchanges and any other securities markets.
  2. To register and regulate the working of 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 and others associated with the securities market. SEBI's powers also extend to registering and regulating the working of depositories and depository participants, custodians of securities, foreign institutional investors, credit rating agencies, and others as may be specified by SEBI.
  3. To register and regulate the working of venture capital funds and collective investment schemes including mutual funds
  4. To promote and regulate SROs
  5. To prohibit fraudulent and unfair trade practices relating to the securities market.
  6. To promote investors' education and training of intermediaries in the securities market.
  7. To prohibit insider trading in securities
  8. To regulate substantial acquisition of shares and takeover of companies
  9. To require disclosure of information, to undertake inspection, to conduct inquiries and audits of stock exchanges, mutual funds, other persons associated with the securities market, intermediaries and SROs in the securities market.
  10. To perform such functions and to exercise such powers under the Securities Contracts (Regulation) Act, 1956 as may be delegated to it by the Central Government
  11. To levy fees or other charges pursuant to implementation of this section
  12. To conduct research for the above purposes

Further, SEBI is also empowered to enforce disclosure of information or to furnish information to agencies as may be deemed necessary. SEBI Act, 1992, empowers SEBI to impose penalties and initiate adjudication proceedings against intermediaries and market participants on various grounds.

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

The regulations prohibiting insider trading have been made pursuant to section 30 of the SEBI Act, 1992.

The regulations define "insider" as any person who is a connected person or one in possession of or having access to unpublished price sensitive information.

A connected person means:

  1. any person who is or has been, during the six months prior to the concerned act, associated with a company, in any capacity, directly or indirectly, including by reason of frequent communication with its officers or by being in any contractual, fiduciary or employment relationship or by being a director, officer or an employee of the company or holds any position including a professional or business relationship, whether temporary or permanent, with the company, that allows such a person, directly or indirectly, access to unpublished price sensitive information or is reasonably expected to allow such access.
  2. Without prejudice to the generality of the foregoing, the persons falling within the following categories shall be deemed to be connected persons unless the contrary is established:
    1. a relative of connected persons specified in clause (i); or
    2. a holding company or associate company or a subsidiary company; or
    3. an intermediary as specified in section 12 of the Act or an employee or director thereof; or
    4. an investment company, trustee company, asset management company or an employee or director thereof; or
    5. an official of a stock exchange or clearing house or corporation; or
    6. a member of the board of trustees of a mutual fund or a member of the board of directors of the asset management company of a mutual fund or is an employee thereof; or
    7. a member of the board of directors or an employee, of a public financial institution as defined in section 2 (72) of the Companies Act, 2013; or
    8. an official or an employee of a self-regulatory organization recognized or authorized by the SEBI; or
    9. a banker of the company; or
    10. a concern, firm, trust, Hindu undivided family, company or association of persons wherein a director of a company or his relative or banker of the company, has more than ten per cent of the holding or interest; or
    11. a firm or its partner or its employee in which a connected person specified in sub-clause (i) of clause (d) is also a partner; or
    12. a person sharing household or residence with a connected person specified in sub-clause (i) of clause (d);

The Regulation 2(n) defines unpublished price sensitive information as any information, relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities and shall, ordinarily including but not restricted to, information relating to the following:

  1. financial results;
  2. dividends;
  3. change in capital structure;
  4. mergers, de-mergers, acquisitions, delisting, disposals and expansion of business, award or termination of order/contracts not in the normal course of business and such other transactions;
  5. changes in key managerial personnel, other than due to superannuation or end of term, and resignation of a Statutory Auditor or Secretarial Auditor;
  6. change in rating(s), other than ESG rating(s);
  7. fund raising proposed to be undertaken;
  8. agreements, by whatever name called, which may impact the management or control of the company;
  9. fraud or defaults by the company, its promoter, director, key managerial personnel, or subsidiary or arrest of key managerial personnel, promoter or director of the company, whether occurred within India or abroad;
  10. resolution plan/ restructuring or one-time settlement in relation to loans/borrowings from banks/financial institutions;
  11. admission of winding-up petition filed by any party /creditors and admission of application by the Tribunal filed by the corporate applicant or financial creditors for initiation of corporate insolvency resolution process against the company as a corporate debtor, approval of resolution plan or rejection thereof under the Insolvency and Bankruptcy Code, 2016;
  12. initiation of forensic audit, by whatever name called, by the company or any other entity for detecting mis-statement in financials, misappropriation/ siphoning or diversion of funds and receipt of final forensic audit report;
  13. action(s) initiated or orders passed within India or abroad, by any regulatory, statutory, enforcement authority or judicial body against the company or its directors, key managerial personnel, promoter or subsidiary, in relation to the company;
  14. outcome of any litigation(s) or dispute(s) which may have an impact on the company;
  15. giving of guarantees or indemnity or becoming a surety, by whatever named called, for any third party, by the company not in the normal course of business;
  16. granting, withdrawal, surrender, cancellation or suspension of key licenses or regulatory approvals.

Regulation 3 (1) of the SEBI (Prohibition of Insider Trading) Regulations 2015 states that an insider shall not communicate, provide, or allow access to any unpublished price sensitive information, relating to a company or securities listed or proposed to be listed, to any person including other insiders except where such communication is in furtherance of legitimate purposes, the performance of duties or discharge of legal obligations. This provision is intended to cast an obligation on all insiders who are essentially persons in possession of unpublished price sensitive information to handle such information with care and to deal with the information with them when transacting their business strictly on a need-to-know basis. It is also intended to ensure that organisations develop practices based on "need-to-know" principles for treatment of confidential information in their possession.

As per Regulation 4, no insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information. When a person who has traded in securities has been in possession of unpublished price sensitive information, his trades would be presumed to have been motivated by the knowledge and awareness of such information in his possession. However, the insider may prove his innocence by demonstrating the circumstances as mentioned in the regulation. Connected persons have to establish that any trades done by them were not in violations of the regulations.

Trading by insiders have to be disclosed in the prescribed form. Disclosures include those relating to trading by such person's immediate relatives, and by any other person for whom such person takes trading decisions. Pertaining to the initial disclosures, every person on appointment as key managerial personnel or a director of the company or upon becoming a promoter or member of the promoter group shall disclose his holding of securities of the company as on the date of appointment or becoming a promoter, to the company within seven days of such appointment or becoming a promoter. The continuous disclosures have to be made in such form and such manner as may be specified by the Board from time to time.

As per the SEBI's Regulations, an organization needs to appoint a compliance officer who is responsible for setting forth policies and procedures and monitoring adherence to the code of fair disclosure and code of conduct aimed at preservation of "Price Sensitive Information". The principles of fair disclosure include ensuring prompt, uniform and universal dissemination of UPSI to avoid selective disclosure, ensuring information provided to analysts and consultants is not UPSI and developing best practices to record the proceedings in meetings with analysts and investor relation conferences to ensure official confirmation of the information provided. Designated persons who have access to information as part of their functions cannot trade in the securities during the period in which they are expected to hold UPSI. The compliance officer will decide when trading can commence based on factors such as when the UPSI will become generally available information. Designated persons include analysts, law firms, auditors and consultants, among others. Trading by the designated persons is subject to pre-clearance by the compliance officer if the value exceeds the limits set by the board of directors. Entities handling UPSI, such as auditors, analysts, consultants and others, are also required to formulate a code of conduct to monitor the trading in the securities by their employees.

Chinese Wall

To prevent the misuse of confidential information the organisation / firm shall adopt a "Chinese Wall" policy which separates those areas of the organisation/firm which routinely have access to confidential information, considered "insider areas" from those areas which deal with sale/ marketing/investment advice or other departments providing support services considered public areas and processes which would permit any designated persons to cross the wall".

The employees in the insider area shall not communicate any Price Sensitive Information to anyone in the public area. The employees in the inside area may also be physically segregated from the employees in the public area. The demarcation of the various departments as inside area may be implemented by the organisation / firm. However, in exceptional situations, employees from the public areas may be brought "cross the wall" and given confidential information on the basis of "need to know" criteria. Such cases should necessarily be intimated to the Compliance Officer.

These regulations also state that "Analysts, if any, employed with the organization /firm while preparing research reports of client company(s) shall disclose their shareholdings/interest in such company(s) to the Compliance Officer and the Analysts who prepare research report of listed company shall not trade in securities of that company for thirty days from preparation of such report."

13.2.4 SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulation, 2003

The SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations prohibit fraudulent, unfair and manipulative trade practices in securities. These regulations have been made in exercise of the powers conferred by section 30 of the SEBI Act, 1992.

Regulation 2(1) (c) defines fraud as inclusive of any act, expression, omission or concealment committed to induce another person or his agent to deal in securities. There may or may not be wrongful gain or avoidance of any loss. However, that is inconsequential in determining if fraud has been committed. Some of the instances cited are as follows:

  1. A wilful misrepresentation of the truth or concealment of material fact in order that another person may act, to his detriment,
  2. A suggestion as to a fact which is not true, by one who does not believe it to be true,
  3. An active concealment of a fact by a person having knowledge or belief of the fact,
  4. A promise made without any intention of performing it,
  5. A representation, whether true or false, made in a reckless and careless manner,
  6. Deceptive behaviour by a person depriving another of informed consent or full participation,
  7. A false statement made without reasonable ground for believing it to be true,
  8. The act of an issuer of securities giving out misinformation that affects the market price of the security, resulting in investors being effectively misled even though they did not rely on the statement itself or anything derived from it other than the market price.

Prohibition of Certain Dealing in Securities

Chapter II of the regulations prohibits certain dealings in securities covering buying, selling or issuance of securities. It states that no person shall directly or indirectly—

  1. buy, sell or otherwise deal in securities in a fraudulent manner;
  2. use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made there under;
  3. employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange;
  4. engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on are cognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under.

Prohibition of Manipulative, Fraudulent and Unfair Trade Practices

SEBI PFUTP Regulations clarify that without prejudice to the provisions of these regulations, no person shall indulge in a manipulative, fraudulent or an unfair trade practice in securities markets.

It is further states that dealing in securities shall be deemed to be a manipulative, fraudulent or unfair trade practice if it involves any of the following:

  1. knowingly indulging in an act which creates a false or misleading appearance of trading in the securities market;
  2. dealing in security not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress or cause fluctuations in the price of such security for wrongful gain or avoidance of loss;
  3. inducing any person to subscribe to an issue of the securities for fraudulently securing the minimum subscription to such issue of securities, by advancing or agreeing to advance any money to any other person or through any other means;
  4. inducing any person for dealing in any securities for artificially inflating, depressing, maintaining or causing fluctuation in the price of securities through any means including by paying, offering or agreeing to pay or offer any money or money's worth, directly or indirectly, to any person;
  5. any act or omission amounting to manipulation of the price of security including, influencing or manipulating the reference price or benchmark price of any securities;
  6. knowingly publishing or causing to publish or reporting or causing to report by a person dealing in securities any information relating to securities, including financial results, financial statements, mergers and acquisitions, regulatory approvals, which is not true or which he does not believe to be true prior to or in the course of dealing in securities;
  7. entering into a transaction in securities without the intention of performing it or without the intention of change of ownership of such security;
  8. selling, dealing or pledging of stolen, counterfeit or fraudulently issued securities whether in the physical or dematerialized form:

    However, if:

    1. the person selling, dealing in or pledging stolen, counterfeit or fraudulently issued securities was a holder in due course; or
    2. the stolen, counterfeit or fraudulently issued securities were previously traded on the market through a bonafide transaction,
    3. such selling, dealing or pledging of stolen, counterfeit or fraudulently issued securities shall not be considered as a manipulative, fraudulent, or unfair trade practice;
  9. disseminating information or advice through any media, whether physical or digital, which the disseminator knows to be false or misleading in a reckless or careless manner and which is designed to, or likely to influence the decision of investors dealing in securities
  10. a market participant entering into transactions on behalf of client without the knowledge of or instructions from client or mis utilizing or diverting the funds or securities of the client held in a fiduciary capacity;
  11. circular transactions in respect of security entered into between persons including intermediaries to artificially provide a false appearance of trading in such security or to inflate, depress or cause fluctuations in the price of such security;
  12. fraudulent inducement of any person by a market participant to deal in securities with the objective of enhancing his brokerage or commission or income;
  13. an intermediary predating or otherwise falsifying records including contract notes, client instructions, the balance of securities statement, client account statements;
  14. any order in securities placed by a person, while directly or indirectly in possession of information that is not publicly available, regarding a substantial impending transaction in those securities, its underlying securities or its derivative;
  15. knowingly planting false or misleading news which may induce sale or purchase of securities.
  16. mis-selling of securities or services relating to the securities market. Mis-selling means sale of securities or services relating to securities market by any person, directly or indirectly, by─
    1. knowingly making a false or misleading statement, or
    2. knowingly concealing or omitting material facts, or
    3. knowingly concealing the associated risk, or
    4. not taking reasonable care to ensure the suitability of the securities or service to the buyer.
  17. illegal mobilization of funds by sponsoring or causing to be sponsored or carrying on or causing to be carried on any collective investment scheme by any person.

For the purposes of this sub-regulation, for the removal of doubts, it is clarified that the acts or omissions listed in this sub-regulation are not exhaustive and that any act or omission is prohibited if it falls within the purview of regulation 3, notwithstanding that it is not included in this sub-regulation or is described as being committed only by a certain category of persons in this sub-regulation. Market Participant shall include any person or entity registered under Section 12 of the Act and its employees and agents.

Investigation

Chapter III of the SEBI (Unfair Trade Practices) Regulations, 2003 relates to investigation of transactions of the nature described above. In particular, under regulation 8(1), it shall be the duty of every person who is under investigation:

  1. To produce books, accounts and documents that may be required by the Investigating Authority and also to furnish statements and information that is sought.
  2. To appear before the Investigating Authority personally when required to do so and to answer questions posed by the authority.

SEBI may without prejudice to the provisions contained in sub-sections (1), (2), (2A) and (3) of section 11 and section 11B of the SEBI Act, by an order in the interests of the investors and the securities market issue or take any of the following actions or directions, either pending investigation or enquiry or on completion of the investigation or enquiry namely:

  1. Suspend the trading of the security found to be or prima facie found to be involved in fraudulent and unfair trade practice on recognised stock exchange
  2. Restrain persons from accessing the securities market and prohibit any person associated with securities market to buy, sell or deal in securities,
  3. Suspend any office-bearer of any stock exchange or self-regulatory organisation from holding such position
  4. Impound and retain the proceeds or securities in respect of any transaction which is in violation or prima facie in violation of these regulations,
  5. Direct an intermediary or any person associated with the securities market in any manner not to dispose of or alienate an asset forming part of a fraudulent and unfair transaction.
  6. Prohibit the person concerned from disposing of any of the securities acquired in contravention of these regulations

SEBI may even take the following action against an intermediary:

  1. Issue a warning or censure;
  2. Suspend the registration of the intermediary;
  3. Cancel the registration of the intermediary.

13.2.5 Securities and Exchange Board of India (Research Analyst) Regulations, 2014

Timely and accurate information about investment products is an important ingredient for making investment decisions. However, considering the volume and complexity of information it would be difficult for an investor for analysing and grasping the information. In this context the Research Analysts play an important role. They study Companies and industries, analyse raw data, and make forecasts or recommendations about whether to buy, hold or sell securities. They analyse information to provide recommendations about investments in securities to their clients. Investors often view analysts as experts and important sources of information about the securities they review and often rely on their advice.

However, such advice from investment analysts is many times prone to conflicts of interest that may prevent them from offering independent and unbiased opinions. Since the prime objective is to protect investors and enhance confidence in the market, it is a major concern of regulatory authorities to identify and deal with conflicts of interest arising from the production and dissemination of research reports. Indeed, the effort to address potential conflicts of interest affecting the production and dissemination of research by securities firms is truly a global one, with regulators in almost all developed market economies having proposed or implemented new rules for research related conflicts of interest.

Consensus, globally is that a regulatory framework is required to ensure impartial report, to address conflict of interest, to improve governance standards, to minimize market malpractices etc. IOSCO report on addressing conflicts of interest in September 2003 has prescribed principles as under:

  • Mechanisms should exist so that analysts' trading activities or financial interests do not prejudice their research and recommendations.
  • Mechanisms should exist so that analysts' research and recommendations are not prejudiced by the trading activities or financial interests or business relationships of the firms that employ them
  • Reporting lines for analysts and their compensation arrangements should be structured to eliminate or severely limit actual and potential conflicts of interest.
  • Firms that employ analysts should establish written internal procedures or controls to identify and eliminate, manage or disclose actual and potential conflicts of interest on the part of analysts.
  • The undue influence of issuers, institutional investors and other outside parties upon analysts should be eliminated or managed.
  • Disclosures of actual and potential conflicts of interest should be complete, timely, clear, concise, specific and prominent.
  • Analysts should be held to high integrity standards.
  • Investor education should play an important role in managing analyst conflicts of interest.

Accordingly, SEBI (Research Analyst) Regulation, 2014 has come into existence. These regulations and its amendments set forth requirements to foster objectivity and transparency in security research and provide investors with more reliable and useful information to make investment decisions. Some of the important provisions of these regulations are defined here:

Regulation 3: Application for grant of certificate

On and from the commencement of these regulations, no person shall act as a research analyst or research entity or hold itself out as a research analyst unless he has obtained a certificate of registration from the Board under these regulations:

  • Provided that any person acting as research analyst or research entity before the commencement of these regulations may continue to do so for a period of six months from such commencement or, if it has made an application for a certificate of registration under sub-regulation (2) within the said period of six months, till the disposal of such application:
  • Provided further that an investment adviser, credit rating agency, asset management company or fund manager, who issues research report or circulates/distributes research report to public or its director or employee who makes public appearance, shall not be required to seek registration under regulation 3, subject to compliance of Chapter III of these regulations:
  • Provided further that any principal officer, person associated with research services and partner of a research analyst which is registered under these regulations shall not be required to seek registration under regulation 3, subject to compliance with regulation 7 of the Research Analyst Regulations.

An application for grant of certificate of registration shall be made as specified in the First Schedule to these regulations and shall be accompanied by a non-refundable application fee to be paid in the manner specified in Second Schedule to these regulations.

Regulation 4: Issuance of research report by a person located outside India

Any person located outside India engaged in issuance of research report or research analysis in respect of securities listed or proposed to be listed on a stock exchange shall enter into an agreement with a research analyst or research entity registered under these regulations.

Regulation 5: Furnishing of further information, clarification and personal representation

  1. The Board may require the applicant to furnish further information or clarification for the purpose of consideration of the application filed under sub-regulation (2) of regulation 3.
  2. The applicant or his authorised representative, if so required, shall appear before the Board for personal representation.

Regulation 6: Consideration of application and eligibility criteria

For the purpose of the grant of certificate the Board shall take into account all matters which are relevant to the grant of certificate of registration and in particular the following, namely:

  1. whether the applicant is an individual or a body corporate or partnership firm or limited liability partnership firm;
  2. whether in case the applicant is an individual, he and all persons associated with research services are appropriately qualified and certified as specified in regulation 7;
  3. whether in case the applicant is a body corporate, the principal officer, individuals employed as research analyst and all persons associated with research services are appropriately qualified and certified as specified in regulation 7;
  4. whether in case the applicant is a partnership firm or a limited liability partnership, the principal officer, partners engaged in issuance of research report or research analysis and all person associated with research services are appropriately qualified and certified as specified in regulation 7;
  5. whether in case the applicant is a research entity, the individuals employed as research analyst and all persons associated with research services are qualified and certified as specified in regulation 7;
  6. whether the applicant fulfills the deposit requirements as specified in regulation 8;
  7. whether the applicant, individuals employed as research analyst, persons associated with research service and partners of the applicant, if any, are fit and proper persons based on the criteria as specified in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008;
  8. whether the applicant has the necessary infrastructure to effectively discharge the activities of research analyst;
  9. whether the applicant or any person directly or indirectly connected with the applicant has in the past been refused certificate by SEBI and if so, the grounds for such refusal;
  10. whether any disciplinary action has been taken by SEBI or any other regulatory authority against the applicant or any person directly or indirectly connected to the applicant under the respective Act, rules or regulations made thereunder.
  11. whether the applicant is enlisted with a body or body corporate recognised under regulation 14:

Provided that the existing research analysts and research entities shall be deemed to be enlisted with such a body or body corporate from the date of recognition of such a body or body corporate:

Provided further that the applicant whose application is received before the date of recognition of the body or body corporate as provided under regulation 14 and who is granted the certificate after the date of recognition of such body or body corporate shall also be deemed to be enlisted with such a body or body corporate.

Regulation 7: Qualification and certification requirement

  1. An individual research analyst or a principal officer of a non-individual research analyst registered under the Research Analyst Regulations, individuals employed as research analyst and partners of a research analyst, if any, engaged in research services shall have the following minimum qualifications, at all times:
    1. A professional qualification or graduate degree or post-graduate degree or post graduate diploma in finance, accountancy, business management, commerce, economics, capital market, banking, insurance, actuarial science or other financial services from a university or institution recognized by the Central Government or any State Government or a recognised foreign university or institution or association; or
    2. a professional qualification by completing a Post Graduate Program in the Securities Market (Research Analysis) from NISM of a duration not less than one year or a professional qualification by obtaining a CFA Charter from the CFA Institute;
  2. Persons associated with research services shall, at all times, have minimum qualification of a graduate degree in any discipline from a university or institution recognized by the Central Government or any State Government or a recognized foreign university or institution.
  3. An individual registered as research analyst under these regulations, a principal officer of a non-individual research analyst, individuals employed as research analyst, person associated with research services and in case of the research analyst being a partnership firm, the partners thereof if any, who are engaged in providing research services, shall have, at all times, a NISM certification as specified by the Board from time to time:

Provided that a fresh relevant NISM certification as specified by the Board from time to time shall be obtained before expiry of the validity of the existing certification to ensure continuity in compliance with certification requirements.

Regulation 8: Deposit

  1. A research analyst shall maintain a deposit of such sum as specified by the Board from time to time.
  2. The deposit shall be maintained with a scheduled bank, marked as lien in favour of a body or body corporate recognised by the Board for the purpose of administration and supervision of research analysts in accordance with regulation 14 of the Research Analyst Regulations:

Provided that such deposit shall be available for utilization in case the research analyst fails to pay dues emanating out of arbitration and conciliation proceedings, if any, under the Online Dispute Resolution Mechanism or such other mechanism as may be specified by the Board.

Note: Candidates are advised to read Master Circular for knowing the SEBI prescribed Deposit requirements.

Regulation 9: Grant of certificate of registration

The Board on being satisfied that the applicant complies with the requirements specified in regulation 6, shall send intimation to the applicant and on receipt of the payment of registration fees as specified in Second Schedule, grant certificate of registration in Form B to a research analyst or in Form C to a part-time research analyst, as the case may be under First Schedule, subject to such terms and conditions as the Board may deem fit and appropriate:

Provided that an individual or partnership firm registered as an investment adviser may also be granted certificate of registration as a research analyst, subject to such terms and conditions as the Board may deem fit and appropriate.

As per Regulation 13, the certificate granted under this regulation shall, inter alia, be subject to conditions as specified by SEBI from time to time.

Regulation 10: Period of validity of certificate

The certificate of registration granted under regulation 9 shall be valid till it is suspended or cancelled by the Board.

Regulation 11: Renewal of certificate

The research analyst who has already been granted certificate of registration by the Board, prior to the commencement of the Securities and Exchange Board of India (Research Analysts) (Amendment) Regulations, 2016 shall be deemed to have been granted a certificate of registration, subject to payment of fee, as prescribed in Schedule II of these regulations.

Regulation 12: Procedure where registration is refused

  1. After considering an application made under regulation 3, if the Board is of the opinion that a certificate should not be granted to the applicant, it may reject the application after giving the applicant a reasonable opportunity of being heard.
  2. The decision of the Board to reject the application shall be communicated to the applicant within thirty days of such decision.
  3. Where an application for a certificate is rejected by the Board, the applicant shall forthwith cease to act as a research analyst:

Provided that nothing contained in this regulation shall affect the liability of the applicant under the law.

13.2.6 Insolvency and Bankruptcy Code (IBC)

The Insolvency and Bankruptcy Code (2016) is an act that consolidates all the laws related to reorganisation and insolvency proceeding against companies, partnership firms and individuals. The law stipulates time bound resolution of insolvency proceedings. Under the law any creditor to the firm (be it financial creditors or operational creditors) can bring in insolvency proceedings against a company, if the undisputed amount outstanding is more than Rs.1,00,000. A financial creditor is one who receives consideration against the time value of money (in other words, earns interest on the amount outstanding). The corporate itself can initiate the proceedings, if it defaults on any payment.

Upon application for insolvency proceeding, the adjudicating authority (if it is satisfied that a default has occurred), appoints an interim resolution professional (IRP) who shall be responsible for managing the affairs of the company. Upon the appointment of IRP, the board shall be considered as dissolved and all management personnel are required to report to IRP.

The IRP need to collate all the list of amounts outstanding and shall form the committee of creditors. Although operational creditors can initiate insolvency proceedings, they cannot be part of the committee of creditors.

The committee of creditors is required to either confirm the appointment of IRP as the Insolvency Professional (IP) or it can appoint any other person as IP.

IBC envisages that every insolvency proceeding should be completed within 180 days since the initiation of the process and IP is responsible to carry it out. However, on many occasions, extension has been granted. The resolution can be in the form of restructuring of business, take over or it can result in liquidation. However, liquidation route is preferred only if no other option is available.

13.3 Code of Conduct for Research Analysts

Code of conduct as defined in the Third Schedule of Research Analyst Regulations:

  1. Honesty and Good Faith: Research analyst or research entity shall act honestly and in good faith.
  2. Diligence: Research analyst or research entity shall act with due skill, care and diligence and shall ensure that the research report is prepared after thorough analysis.
  3. Conflict of Interest: Research analyst or research entity shall effectively address conflict of interest which may affect the impartiality of its research analysis and research report and shall make appropriate disclosures to address the same.
  4. Insider trading or front running: Research analyst or research entity or its employees shall not engage in insider trading or front running or front running of its own research report.
  5. Confidentiality: Research analyst or research entity or its employees shall maintain confidentiality of report till the report is made public.
  6. Professional Standard: Research analyst or research entity or its employees engaged in research analysis shall observe high professional standard while preparing research report.
  7. Compliance: Research analyst or research entity shall comply with all regulatory requirements applicable to the conduct of its business activities.
  8. Responsibility of senior management: The senior management of research analyst or research entity shall bear primary responsibility for ensuring the maintenance of appropriate standards of conduct and adherence to proper procedures.

13.4 Management of Conflicts of Interest and Disclosure Requirements for Research Analysts

Chapter III of SEBI (Research Analyst) Regulations specify the requirements for the Research Analysts to deal with potential conflict of interests and define the disclosure requirements for Research Analysts.

Regulation 15: Establishing internal policies and procedures

  1. Research analyst or research entity shall have written internal policies and control procedures governing the dealing and trading by any research analyst for:
    1. addressing actual or potential conflict of interest arising from such dealings or trading of securities of subject company;
    2. promoting objective and reliable research that reflects the unbiased view of research analyst; and
    3. preventing the use of research report or research analysis to manipulate the securities market.
  2. Research analyst or research entity shall have in place appropriate mechanisms to ensure independence of its research activities from its other business activities.

As per regulation 15 A, a research analyst is entitled to charge fees for providing research services from a client including an accredited investor in the manner as specified by the Board.

Regulation 16: Limitations on trading by research analysts

  1. Personal trading activities of the individuals employed as research analyst by research entity shall be monitored, recorded and wherever necessary, shall be subject to a formal approval process.
  2. Independent research analysts, part-time research analysts, individuals employed as research analyst by research entity or their associates shall not deal or trade in securities that the research analyst recommends or follows within thirty days before and five days after the publication of a research report.
  3. Independent research analysts, part-time research analysts, individuals employed as research analysts by research entity or their associates shall not deal or trade directly or indirectly in securities that he reviews in a manner contrary to his given recommendation.
  4. Independent research analysts, part-time research analysts, individuals employed as research analysts by research entity or their associate shall not purchase or receive securities of the issuer before the issuer's initial public offering, if the issuer is principally engaged in the same types of business as companies that the research analyst follows or recommends.
  5. Provisions of sub-regulations (2) to (4) shall apply mutatis mutandis to a research entity unless it has segregated its research activities from all other activities and maintained an arms-length relationship between such activities.
  6. Notwithstanding anything contained in sub-regulations (2) to (4), such restrictions to trade or deal in securities may not apply in case of significant news or event concerning the subject company or based upon an unanticipated significant change in the personal financial circumstances of the research analyst, subject to prior written approval as per the terms specified in the approved internal policies and procedures.

Regulation 17: Compensation of research analysts

  1. Research entity shall not pay any bonus, salary or other form of compensation to any individual employed as research analyst that is determined or based on any specific merchant banking or investment banking or brokerage services transaction.
  2. The compensation of all individuals employed as research analyst shall be reviewed, documented and approved annually by board of directors/committee appointed by board of directors of the research entity, which does not consist of representation from its merchant banking or investment banking or brokerage services divisions.
  3. The board of directors/committee appointed by board of directors of the research entity approving or reviewing the compensation of individual employed as research analyst shall not take into account such individual's contribution to the research entity's investment banking or merchant banking or brokerage services business.
  4. An individual employed as research analyst by research entity shall not be subject to the supervision or control of any employee of the merchant banking or investment banking or brokerage services divisions of that research entity.

Regulation 18: Limitations on publication of research report, public appearance and conduct of business, etc.

  1. Research analyst or research entity shall not publish or distribute research report or research analysis or make public appearance regarding a subject company for which he has acted as a manager or co-manager at any time falling within a period of:
    1. Forty days immediately following the day on which the securities are priced if the offering is an initial public offering; or
    2. Ten days immediately following the day on which the securities are priced if the offering is a further public offering:

Provided that research analyst or research entity may publish or distribute research report or research analysis or make public appearance within such forty day and ten day periods, subject to prior written approval of legal or compliance personnel as specified in the internal policies and procedures.

  1. A research entity who has agreed to participate or is participating as an underwriter of an issuer's initial public offering shall not publish or distribute a research report or make public appearance regarding that issuer before expiry of twenty five days from the date of the offering.

Explanation- For the purposes of sub-regulations (1) and (2), the date of the offering refers to the first date on which the security was offered to the public.

  1. Research analyst or research entity who has acted as a manager or co-manager of public offering of securities of a company shall not publish or distribute a research report or make a public appearance concerning that company within fifteen days prior to date of entering into and fifteen days after the expiration/waiver/termination of a lock-up agreement or any other agreement that the research analyst or research entity has entered into with a subject company that restricts or prohibits the sale of securities held by the subject company after the completion of public offering of securities:

Provided that research analyst or research entity may publish or distribute research report or research analysis or make public appearance regarding that company within such fifteen days subject to prior written approval of legal or compliance personnel as specified in the internal policies and procedures.

  1. Research analyst or individuals employed as research analyst by research entity shall not participate in business activities designed to solicit investment banking or merchant banking or brokerage services business, such as sales pitches and deal road shows.
  2. Research analyst or individuals employed as research analyst by research entity shall not engage in any communication with a current or prospective client in the presence of personnel from investment banking or merchant banking or brokerage services divisions or company management about an investment banking services transaction.
  3. Investment banking or merchant banking or brokerage services division's personnel of research entity shall not direct the individuals employed as research analyst to engage in sales or marketing related to an investment banking or merchant banking or brokerage services and shall not direct the research analyst to engage in any communication with a current or prospective client about such division's transaction:

Provided that sub-regulations (4) to (6) shall not prohibit research analyst or research entity from engaging in investor education activities including publication of pre-deal research and briefing the views of the research analyst on the transaction to the sales or marketing personnel.

  1. Research analyst or research entity shall have adequate documentary basis, supported by research, for preparing a research report.
  2. Research analyst or research entity shall not provide any promise or assurance of favourable review in its research report to a company or industry or sector or group of companies or business group as consideration to commence or influence a business relationship or for the receipt of compensation or other benefits.
  3. Research analyst or research entity shall not issue a research report that is not consistent with the views of the individuals employed as research analyst regarding a subject company.
  4. Research entity shall ensure that the individuals employed as research analyst are separate from other employees who are performing sales trading, dealing, corporate finance advisory or any other activity that may affect the independence of its research report:

Provided that the individual employed as research analyst by research entity can receive feedback from sales or trading personnel of brokerage division to ascertain the impact of research report.

Regulation 19: Disclosures in research reports

A research analyst or research entity shall disclose all material information about itself including its business activity, disciplinary history, the terms and conditions on which it offers research report, details of associates and such other information as is necessary to take an investment decision, including the following:

  1. Research analyst or research entity shall disclose the following in research report and in public appearance with regard to ownership and material conflicts of interest:
    1. whether the research analyst or research entity or his associate or his relative has any financial interest in the subject company and the nature of such financial interest;
    2. whether the research analyst or research entity or its associates or relatives, have actual/beneficial ownership of one per cent or more securities of the subject company, at the end of the month immediately preceding the date of publication of the research report or date of the public appearance;
    3. whether the research analyst or research entity or his associate or his relative, has any other material conflict of interest at the time of publication of the research report or at the time of public appearance;
  2. Research analyst or research entity shall disclose the following in research report with regard to receipt of compensation:
    1. whether it or its associates have received any compensation from the subject company in the past twelve months;
    2. whether it or its associates have managed or co-managed public offering of securities for the subject company in the past twelve months;
    3. whether it or its associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months;
    4. whether it or its associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months;
    5. whether it or its associates have received any compensation or other benefits from the subject company or third party in connection with the research report.
  3. Research analyst or research entity shall disclose the following in public appearance with regard to receipt of compensation:
    1. whether it or its associates have received any compensation from the subject company in the past twelve months;
    2. whether the subject company is or was a client during twelve months preceding the date of distribution of the research report and the types of services provided:

Provided that research analyst or research entity shall not be required to make a disclosure as per sub-clauses (c), (d) and (e) of clause (ii) or sub-clauses (a) and (b) of clause (iii) to the extent such disclosure would reveal material non-public information regarding specific potential future investment banking or merchant banking or brokerage services transactions of the subject company.

  1. whether the research analyst has served as an officer, director or employee of the subject company;
  2. whether the research analyst or research entity has been engaged in market making activity for the subject company;
  3. Research analyst or research entity shall provide all other disclosures in research report and public appearance as specified by the Board under any other regulations.
  4. A research analyst or research entity shall disclose to the client the extent of use of Artificial Intelligence tools in providing research services.

Regulation 19A: Website

A Research analyst or research entity shall maintain a functional website containing such details as may be specified by SEBI.

Regulation 20: Contents of research report

  1. Research analyst or research entity shall take steps to ensure that facts in its research reports are based on reliable information and shall define the terms used in making recommendations, and these terms shall be consistently used.
  2. Research analyst or research entity that employs a rating system must clearly define the meaning of each such rating including the time horizon and benchmarks on which a rating is based.
  3. If a research report contains either a rating or price target for subject company's securities and the research analyst or research entity has assigned a rating or price target to the securities for at least one year, such research report shall also provide the graph of daily closing price of such securities for the period assigned or for a three-year period, whichever is shorter.
  4. Research analyst or research entity shall ensure that the recommendations in the research report are corroborated by relevant data and analysis forming the basis for such research service.

Regulation 21: Recommendations in public media

  1. Research analyst or research entity including its director or employee shall disclose the registration status and details of financial interest in the subject company, if he makes public appearance.
  2. If any person including a director or employee of an investment adviser or credit rating agency or asset management company or fund manager, makes public appearance or makes a recommendation or offers an opinion concerning securities or public offers through public media, all the provisions of regulations 16 and 17 shall apply mutatis mutandis to him and he shall disclose his name, registration status and details of financial interest in the subject company at the time of:
    1. making such recommendation or offering such opinion in personal capacity;
    2. responding to queries from audiences or journalists in personal capacity;
    3. communicating the research report or substance of the research report through the public media.

Regulation 22: Distribution of research reports

  1. A research report shall not be made available selectively to internal trading personnel or a particular client or class of clients in advance of other clients who are entitled to receive the research report.
  2. Research analyst or research entity who distributes any third party research report shall review the third party research report for any untrue statement of material fact or any false or misleading information.
  3. Research analyst or research entity who distributes any third party research report shall disclose any material conflict of interest of such third party research provider or he shall provide a web address that directs a recipient to the relevant disclosures.
  4. Provisions of sub-regulations (2) and (3) shall not apply to a research analyst or research entity if he has no direct or indirect business or contractual relationship with such third party research provider.

Regulation 23: Additional disclosures by proxy adviser

  1. All the provisions of Chapter II, III, IV, V and VI shall apply mutatis mutandis to the proxy adviser:

Provided that the employees of proxy advisors engaged in providing proxy advisory services shall be required to have a minimum qualification of being a graduate in any discipline:

Provided further that certification requirements for employees of proxy advisors engaged in providing proxy advisory services shall be as specified by the Board:

Provided further that time period for compliance with capital adequacy as provided in sub-regulation (3) of regulation 8, for proxy advisors shall be three years.

  1. The proxy adviser shall additionally disclose the following:
    1. the extent of research involved in a particular recommendation and the extent and/or effectiveness of its controls and procedures in ensuring the accuracy of issuer data;
    2. policies and procedures for interacting with issuers, informing issuers about the recommendation and review of recommendations;
  2. Proxy adviser shall maintain the record of his voting recommendations and furnish the same to the Board on request.
  3. In case of any inconsistency or difficulty in respect of applicability of provisions of these regulations to proxy advisers, the Board may issue such clarifications or exemptions as may be deemed appropriate.

Regulation 24: General responsibility

  1. Research analyst or research entity shall maintain an arms-length relationship between its research activity and other activities.
  2. Research analyst or research entity shall abide by Code of Conduct as specified in the Third Schedule of the Regulations and also mentioned in section 13.3 of this chapter.
  3. In case of change in control of the research analyst or research entity, prior approval from SEBI shall be taken.
  4. Research analyst or research entity shall furnish to SEBI information and reports as may be specified by SEBI from time to time.
  5. It shall be the responsibility of the research analyst or research entity to ensure that its employees or partners, as may be applicable, comply with the certification and qualification requirements under regulation 7 at all times.
  6. A research analyst or research entity shall disclose to the client the terms and conditions as may be specified by SEBI and take consent of the client on such terms and conditions in such manner as may be specified by SEBI.
  7. A research analyst or research entity who uses Artificial Intelligence tools, irrespective of the scale and scenario of adoption of such tools, for servicing its clients shall be solely responsible for the security, confidentiality and integrity of the client data, use of any other information or data for research services, research services based on output of Artificial Intelligence tools and compliance with any law for the time being in force.
  8. Research analyst or research entity engaged in providing model portfolio shall abide by the guidelines issued by SEBI from time to time.
  9. A research analyst shall ensure compliance with the Investor Charter specified by SEBI from time to time.

Regulation 25: Maintenance of records

  1. Research analyst or research entity shall maintain the following records:
    1. research report duly signed and dated;
    2. research recommendation provided;
    3. rationale for arriving at research recommendation;
    4. record of public appearance.
    5. Know Your Client records of the fee paying client;
    6. a register or record containing list of the clients along with client's PAN, the date and nature of the research service, details of the products/securities for which research service was provided and fee/consideration, if any charged/received for such research service;
    7. records of communication including emails, call recordings etc. with all clients including prospective clients in such manner as may be specified;
    8. the terms and conditions of research services disclosed to the clients and the consent of the client thereon.
  2. All records shall be maintained either in physical or electronic form and preserved for a minimum period of five years:

Provided that where records are required to be duly signed and are maintained in electronic form, such records shall be digitally signed.

  1. Research analyst or research entity shall conduct annual audit in respect of compliance with these regulations from a member of Institute of Chartered Accountants of India or Institute of Company Secretaries of India or Institute of Cost Accountants of India and submit the report of the same in such manner as may be specified by SEBI.

Regulation 26: Appointment of compliance officer

  1. A non-individual research analyst or research entity shall appoint either:
    1. a compliance officer; or
    2. an independent professional who is a member of Institute of Chartered Accountants of India or Institute of Company Secretaries of India or Institute of Cost Accountants of India or member of any other professional body as may be specified by SEBI, provided that such a professional holds a relevant certification from NISM, as specified by SEBI who shall be responsible for monitoring the compliance of the provisions of the Act, these regulations and circulars issued by SEBI.
  2. Where independent professional referred in sub-regulation (1) of this regulation is appointed for monitoring compliance, the principal officer shall submit an undertaking to SEBI or the body or body corporate recognised under regulation 14 of these regulations to the effect that principal officer shall be responsible for monitoring the compliance in respect of the requirements of the Act, regulations, notifications, guidelines, instructions issued by SEBI.

Regulation 26A: Dispute Resolution

All claims, differences or disputes between a research analyst or research entity and its client arising out of or in relation to the activities of the research analyst or research entity in the securities market shall be submitted to a dispute resolution mechanism that includes mediation and/or conciliation and/or arbitration, in accordance with the procedure specified by SEBI.

Regulation 26B: Redressal of Investor Grievances

  1. The Research Analyst shall redress investor grievances promptly but not later than twenty-one calendar days from the date of receipt of the grievance and in such manner as may be specified by the Board.
  2. SEBI may also recognize a body corporate for handling and monitoring the process of grievance redressal within such time and in such manner as may be specified.

Regulation 26C: Client level segregation of research services and distribution activities

  1. An individual research analyst shall not provide distribution services.
  2. The family of an individual research analyst shall not provide distribution services to the client to whom research services are being rendered by the individual research analyst and no individual research analyst shall render research services to a client who is receiving distribution services from other family members.
  3. A non-individual research analyst or research entity shall have client level segregation at group level for research services and distribution services.

Explanation:

  1. The same client cannot be offered both research and distribution services within the group of the non-individual entity.
  2. A client can either be receiving research services where no distributor consideration is received at the group level or distribution services where no research services fee is collected from the client at the group level.
  3. 'Group' for this purpose shall mean an entity which is a holding, subsidiary, associate, subsidiary of a holding company to which it is also a subsidiary, an investing company or the venturer of the company as per the provisions of Companies Act, 2013 for non-individual research analyst or research entity which is a company under the said Act and in any other case, an entity which has a controlling interest or is subject to the controlling interest of a non-individual research analyst.
  1. Non-individual research analyst or research entity shall maintain an arm's length relationship between its activities as research analyst and distributor by providing research services through a separately identifiable department or division.
  2. Compliance and monitoring process for client segregation at group or family level shall be in accordance with the guidelines specified by SEBI.

Regulation 32 (Chapter V): Liability for action in case of default

Research analyst or research entity who:

  1. contravenes any of the provisions of the Act or any regulations or circulars issued thereunder;
  2. fails to furnish any information relating to its activity as a research analyst as required by the Board;
  3. furnishes to the Board information which is false or misleading in any material particular;
  4. does not submit periodic returns or reports as required by the Board;
  5. does not co-operate in any enquiry, inspection or investigation conducted by the Board;
  6. fails to resolve the complaints or fails to give a satisfactory reply to the Board in this behalf, shall be dealt with in the manner provided under the Act or the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.

13.5 Exchange surveillance mechanisms: GSM and ASM

Stock exchanges facilitate transparent trading in securities between buyers and sellers. By enabling such trades, the market also enables discovery of fair price of the securities. However, in certain cases, it is possible that some traders may employ unscrupulous trade practices that distort the prices and adversely affect the interest of other traders.

In order to enhance the integrity of the market and to protect investor interest, SEBI along with the exchanges implement several surveillance mechanisms. They monitor stocks based on objective set of criteria and impose certain restrictions or additional rules in relation to their trading in order to prevent unscrupulous practices.

Graded surveillance measures (GSM)

GSM is targeted on securities with low market capitalisation or networth where the valuation is not commensurate with the business fundamentals. Once the companies are shortlisted based on such criteria, they are listed to alert and advice investors to be extra cautious while dealing in such securities as well as to advice market participants to carry out extra due diligence on such securities.

These securities shall be monitored by the Exchanges and SEBI and they may place various restrictions such as follows:

  1. Placing securities under Trade for trade category (i.e., only delivery based trading)
  2. Requirement for surveillance deposit
  3. Reducing the price band
  4. Increasing the margin requirement
  5. Freezing of price on the upside

Further, members of the exchange and trades in such stocks are also closely monitored.

The criteria for putting a security under GSM are as follows:

  • Companies with networth less than or equal to Rs 10 crores and net fixed assets less than or equal to Rs 25 crores but trading at a negative PE or at a PE multiple that is 2x the PE of the benchmark index.
    • This criteria is not applicable to securities already under suspension and certain other securities including securities of PSUs, securities that are part of an index, shares that have paid dividends in previous three years, stocks that went through IPO within the last one year, those that are traded in the derivatives segment, securities with significant institutional holding or those that are currently undergoing merger or demerger under a scheme of arrangement.
  • Companies with market cap below Rs 25 crores but trading at PE ratio that is greater than 2x the PE of benchmark index or is trading at negative PE ratio with P/B ratio that is negative or 2x the P/B of the benchmark index.

Additional surveillance measures (ASM)

While GSM identifies securities based on its valuation, ASM identifies and short lists securities based on variations in the price and volumes of securities. It also takes into consideration the percentage of volume traded by the top 25 clients in certain cases.

The various factors that ASM takes into consideration include the following:

  • Variation between the high and low prices in the previous three months
  • Variation between the closing prices over various time frames including 1 month, 60 days and 365 days
  • Client concentration (i.e., percentage of volume traded by top 25 clients in each stock)
  • Variation in the volumes traded over different time frames

The criteria vary partly based on the market capitalisation and PE ratio of the stocks.

ASM is, however, not applicable for the following securities:

  • Securities that already under GSM
  • Securities that are placed under trade for trade segment
  • Securities on which derivative products are available
  • Public sector units

Once a stock has been short listed under ASM, the applicable margin on security is raised to 80%. The restrictions are further tightened as the security meets additional criteria. Such restriction includes narrowing of the price bands and increasing margin to 100%.

Stocks that are listed under ASM are reviewed after a minimum time period and they are removed from ASM if they stop meeting the short-listing criteria on such review date.

Advertisement Code for RAs/IAs

As per the SEBI directives, the Research analyst/Investment Advisor (RAs/IAs) are required to ensure compliance with the following advertisement code:

a. Forms of communication:

  1. Advertisement shall include all forms of communications, issued by or on behalf of IA/RA, that may influence investment decisions of any investor or prospective investor.
  2. The forms of communications, to which the advertisement code shall be applicable, shall include pamphlets, circulars, brochures, notices, research reports or any other literature, document, information or material published, or designed for use in any publication or displays (such as newspaper, magazine, sign boards/hoardings at any location), in any electronic, wired or wireless communication (such as electronic mail, text messaging, messaging platforms, social media platforms, radio, telephone, or in any other form over the internet) or over any other audio-visual form of communication (such as television, tape recording, video tape recordings, motion pictures) or in any other manner whatsoever. Further, a research report, irrespective of the mode of its dissemination to any investor or prospective investor, shall be construed as an advertisement if anything contained in the said research report is either expressly or impliedly in the nature of promotion of products or services offered by an RA."

b. Information/disclosures in the advertisement:

The information/disclosures that the advertisement shall contain, include the following:

  1. Name of the IA/RA as registered with SEBI, registered office address, SEBI Registration No., logo/brand name/trade name of IA/RA, and CIN of the IA/RA, if applicable.
  2. Information which is accurate, true and complete in unambiguous and concise language.
  3. Standard warning in legible fonts (minimum 10 font size) which states "Investment in securities market are subject to market risks. Read all the related documents carefully before investing.". No addition or deletion of words shall be made to/from the standard warning.
  4. In audio-visual media based advertisements, the standard warning in visual media based advertisement and accompanying voice over reiteration shall be audible in a clear and understandable manner. For example, in standard warning both the visual and the voice over reiteration containing 20 words running for at least 10 seconds may be considered as clear and understandable.
  5. Whenever the advertisement is being issued in a language other than English, it will be ensured that the standard warning is accurately translated in the language of the advertisement.
  6. In case the mode of advertisement is SMS/Message/Pop-up, social media etc. and the details such as full name, logo/brand name, full registered office address, SEBI registration number, membership number of a SEBI recognized supervisory body and standard disclaimer are not mentioned, then official website hyperlink should be provided in such SMS/Message/Pop-up, etc. and the website must contain all such details.
  7. In case any specific security/securities are displayed in the advertisement as examples, disclaimer that "The securities quoted are for illustration only and are not recommendatory" should be mentioned.
  8. Advertisements and communications/correspondences with clients shall include the disclaimer 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."

c. Prohibitions in the advertisement:

The advertisement shall not contain:

  1. Anything which is prohibited for publication under the law.
  2. Statements which are false, misleading, biased or deceptive, based on assumptions or projections.
  3. Any misleading or deceptive testimonials.
  4. Statements which, directly or by implication or by omission, may mislead the investor.
  5. Any statement likely to be misunderstood or likely to disguise the significance of the same or any other statement contained in the advertisement.
  6. Any statement designed to exploit the lack of experience or knowledge of the investors.
  7. Any statement that is exaggerated or is inconsistent with or unrelated to the nature and risk and return profile of the product.
  8. Extensive use of technical or legal terminology or complex language and the inclusion of excessive details which may distract the investors.
  9. Reference to any report, analysis, or service as free, unless it actually is free and without condition or obligation.
  10. Any promise or guarantee of assured or risk free return to the investors.
  11. The advertisement shall not imply any assured returns or minimum returns or target return or percentage accuracy or service provision till achievement of target returns or any other nomenclature that gives the impression to the client that the investment advice/recommendation of research report is risk-free and/or not susceptible to market risks and/or that it can generate returns with any level of assurance.
  12. Any statement which directly or indirectly discredits other advertisements or intermediaries or makes unfair comparisons or ascribes any qualitative advantage over other intermediaries directly or indirectly.
  13. Reference to past performance of the IA/RA.
  14. Superlative terms such as "Best", "No. 1", Top Adviser/Research Analyst, "Leading", "One of the best amongst market leaders", etc. so as to provide any endorsement of quality or standing of the IA/RA. However, factual details of awards received by the IA/RA from independent organizations may be included.
  15. Advertisements shall not include SEBI Logo.

d. Other compliances/requirements:

  1. Prior approval for the advertisement/material shall be obtained from SEBI recognized supervisory body (e.g., BSE Administration & Supervision Ltd. (BASL) in case of IAs) before issue.
  2. In the event of suspension of any IA/RA by SEBI and/or by SEBI recognized supervisory body, the IA/RA so suspended shall not issue any advertisement either singly or jointly with any other IA/RA, during the period of suspension.
  3. The IA/RA shall not engage in games, leagues, schemes, competitions etc. which may involve distribution of prize monies, medals, gifts, etc.
  4. These norms shall be applicable to any other investment/research/consultancy agency associated with the IA/RA concerned and issuing advertisement wherein the IA/RA has been named in the advertisement.
  5. Copy of the advertisement shall be retained by IA/RA for a period of five years in terms of Regulation 19(2) of the SEBI (Investment Advisers) Regulations, 2013 and Regulation 25 (2) of SEBI (Research Analysts) Regulations, 2014 respectively.
  6. Any additional guidelines as may be specified by SEBI or SEBI recognized supervisory body from time to time.

Usage of Brand Name and Logo by RAs/IAs

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

While investment advisers and research analysts may use the brand name/trade name/logo, in order to ensure the transparency in such a usage of brand name/trade name/logo, they shall ensure that:

  1. The information such as name of the IA/RA as registered with SEBI, its logo, its registration number and its complete address with telephone numbers shall be prominently displayed on portal/web site, if any, notice board, display boards, advertisements, publications, know your client forms and client agreements.
  2. The information such as name of the IA/RA as registered with SEBI, its logo, its registration number, its complete address with telephone numbers, the name of the compliance officer, his telephone number and e-mail address, the name, telephone number and e-mail address of the grievance officer or the grievance redressal cell shall be displayed prominently in statements or reports or any other form of correspondence with the client.
  3. Disclaimer 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" shall be mentioned on portal/web site, if any, notice board, display boards, advertisements, publications, know your client forms, client agreements, statements or reports or any other form of correspondence with the client.
  4. SEBI logo shall not be used by IA/RA.

SEBI Investor Charter and Complaint Disclosure

  1. In order to facilitate investor awareness about various activities which an investor deals with while availing the services provided by research analysts, SEBI has developed an Investor Charter for Research Analysts. This Investor Charter for Research Analysts, is a document containing details of services provided to investors, their rights, do's and don'ts, responsibilities, investor grievance handling mechanism and estimated timelines thereof etc., at one single place, in a lucid language, for ease of reference.
  2. All registered Research Analysts are required to bring to the notice of their clients the Investor Charter by prominently displaying on their websites and mobile applications. Research Analysts not having websites/mobile applications shall, as a one-time measure, send Investor Charter to the investors on their registered e-mail address.

Additionally, in order to enhance transparency in grievance redressal, Research Analyst (RA) shall disclose on their websites/mobile applications, all complaints including SCORES complaints received by them in the format mentioned in Annexure-2 on a monthly basis. The information shall be made available by 07th of the succeeding month. Research Analysts not having websites/mobile applications shall send status of Investor Complaints to the investors on their registered email on a monthly basis.

Further, Research Analysts are advised to display link/option to lodge complaint with them directly on their websites and mobile apps. Additionally, link to SCORES website/ link to download mobile app (SEBI SCORES) may also be provided.

Cybersecurity and Cyber Resilience Framework (CSCRF)

All Research Analysts are required to comply with the Cybersecurity and Cyber Resilience Framework (CSCRF). The CSCRF is based on following five cyber resiliency goals to be:

  1. ANTICIPATE - This means to maintain a state of informed preparedness in order to forestall compromises of mission/business functions from adversary attacks.
  2. WITHSTAND - This indicates to continue essential mission/business functions despite successful execution of an attack by an adversary.
  3. CONTAIN - This is to localize containment of crisis and isolate trusted systems from untrusted systems to continue essential business operations in the event of cyber-attacks.
  4. RECOVER - This is to restore mission/business functions to the maximum extent possible, subsequent to successful execution of an attack by an adversary.
  5. EVOLVE - To change mission/business functions and/or the supporting cyber capabilities, so as to minimize adverse impacts from actual or predicted adversary attacks.

The cyber resiliency goals cover different cybersecurity functions. These functions are to be implemented by regulated entities through various cybersecurity controls.

Further, the applicability of various standards and guidelines of CSCRF is based on different categories of REs. CSCRF follows a graded approach and classifies REs in the following five broad categories:

  1. Market Infrastructure Institutions (MIIs)
  2. Qualified REs
  3. Mid-size REs
  4. Small-size REs
  5. Self-certification REs

The criteria and thresholds for RAs categorization is as follows:

All RAs who are not registered in other category of REs Institutional RAs who are registered in other category of REs
All RAs who are not registered in other categories of REs shall be excluded from submission of compliance with CSCRF. However, SEBI SaaS circular titled "Advisory for Financial Sector Organizations regarding Software as a Service (SaaS) based solutions" dated November 03, 2020 is applicable to RAs under which a declaration shall be submitted in respect of SaaS for managing their governance, risk compliance functions, and to improve their cybersecurity posture. Institutional RAs who are registered with SEBI in other category of REs shall be classified as Qualified REs/ Mid-size REs/ Small size REs based on their categorization in their respective other REs/ group entity category.

End of Chapter 13

For more information and updates, please visit: www.sebi.gov.in

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Source Attribution

This comprehensive educational content is derived from the NISM-Series-XV: Research Analyst Certification Examination Workbook (June 2025 version), published by the National Institute of Securities Markets.

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