Market regulator Sebi?s consultation paper on research analysts may increase compliance costs for broking outfits, with independent research analysts and boutique research houses likely to get impacted the most.
?It is the independent advisors and research outfits who will get impacted the most as these entities are unregulated at present,? said a senior broker from a top brokerage, on the condition of anonymity. ?The impact on brokers will be much less as most of them already have several of these requirements in place.? For instance, research analysts in broking outfits are already required to adhere to several norms such as not buying a stock 30 days before it is recommended, or not sharing research reports with clients not registered with the analyst.
There are about 10,000 brokers in the country today, while the number of independent analysts who give research and charge fees for it are much higher, according to market watchers.
Compliance costs are likely to rise as well. The draft guidelines mandate the appointment of a compliance officer who will be responsible for monitoring compliance by the research analyst. They also mandate a yearly audit by a practising member of the Institute of
Chartered Accountants of India or Institute of Company Secretaries of India, and that all records of research reports should be maintained either in physical or electronic form and preserved for a minimum period of five years.
?Auditing and storing of reports will significantly up costs for independent analysts and research houses if the proposals are accepted,? said AK Prabhakar, an independent research analyst who earlier worked with broking outfit Anand Rathi. ?Maintaining reports for five years can prove unfeasible for short-term calls ranging from 3 months to 6 months.?
Deven Choksey, MD, KR Choksey Shares and Securities, believes that the cost of producing research reports will rise going forward. ?Currently, a lot of these reports are given free of cost by brokers. Maybe, in future, clients will have to pay for it, which will hopefully help better the quality of research reports produced by brokerages.?
He also believes that the guidelines should have been more specific to the types of reports generated by analysts. ?A research report can be a fundamental, technical or based on derivatives analysis. Also, the report could be targeted at different segments such as institutional investors, retail investors or proprietary traders. It could even be catering specifically to corporates or meant purely for an academic purpose. The paper is silent on these categories,? said Choksey.
Last Friday, Sebi released a draft paper that proposes to regulate research analysts providing advice on the securities market. Among other things, the 33-page paper details guidelines on registration, qualification, capital adequacy, compliance and disclosure requirements for research analysts.