NISM RA Chapter 14 — Legal and Regulatory Environment: the 10 marks you can bank

This is my note on Chapter 14 of the NISM-Series-XV Research Analyst workbook — “Legal and Regulatory Environment.” Ten marks, and here’s why it deserves disproportionate attention: it is pure recall with clean, unambiguous answers. No calculations, no judgment calls, no ambiguity. Every mark in this chapter is available to anyone willing to memorise the rules. If Chapters 8 and 10 are where the exam is lost, this is where it’s most reliably won.

It’s also the chapter that describes the profession I’m actually training to enter — so unlike some of the syllabus, this one has to be learned properly rather than crammed.

The regulators

Ministry of Finance — handles taxation, financial legislation, financial institutions, capital markets, state finances and the Union Budget. Five departments:

• Department of Economic Affairs — the nodal agency for formulating and monitoring fiscal policy and the functioning of the capital market including stock exchanges; also mobilisation of external resources and all policy matters on the design, form, size, security features and printing of banknotes and coins. Its principal responsibility: preparing the Union Budget annually.
• Department of Expenditure — expenditure management, administration of financial rules and regulations including service conditions of Central Government employees, financial assistance to states and state borrowings.
• Department of Revenue — all direct and indirect taxes through two statutory boards, the CBDT and the CBEC.
• Department of Financial Services — banks, insurance, financial services by government agencies and private corporations, pension reforms, industrial finance and MSMEs.
• Department of Disinvestments — policy approach to disinvestment and privatisation of PSUs, and the financial policy on using disinvestment proceeds.

Ministry of Corporate Affairs — administers the Companies Act and allied acts regulating the corporate sector; issuance of securities by companies is subject to the Companies Act. The Registrar of Companies (ROC) registers companies and ensures compliance. MCA also administers the Competition Act 2002 (which replaced the MRTP Act, 1969), supervises three professional bodies — ICAI, ICSI and ICWAI — and administers the Partnership Act 1932, the Companies (Donations to National Funds) Act 1951 and the Societies Registration Act 1980.

Reserve Bank of India — the central bank, responsible for administering monetary policy. Its Preamble defines its basic function as regulating the issue of banknotes and keeping reserves to secure monetary stability, and operating the currency and credit system to the country’s advantage. Six main functions: as monetary authority (formulate, implement and monitor monetary policy for price stability with adequate credit flow to productive sectors); as regulator and supervisor of the financial system (prescribe broad parameters of banking operations, maintain public confidence, protect depositors, facilitate cost-effective banking); as manager of foreign exchange (administer FEMA 1999 to facilitate external trade and payments and develop the forex market); as issuer of currency (issue, exchange and destroy notes and coins); its developmental role; and its banking functions — banker to the Government, managing Central and State Government securities issuance, and banker to the banks by maintaining accounts of all scheduled banks.

SEBI — the regulatory authority for the securities market, established under Section 3 of the SEBI Act, 1992. Its Preamble: to protect the interests of investors in securities, to promote the development of and to regulate the securities market. Its jurisdiction extends over corporates in the issuance of capital and transfer of securities, plus all intermediaries and persons associated with the securities market. It can conduct enquiries, audits and inspections, adjudicate offences, register and regulate all market intermediaries, and penalise them for violations. Functions include protecting investors, promoting market development, regulating stock exchange business, registering and regulating brokers and sub-brokers, promoting and regulating SROs, investor education and intermediary training, prohibiting insider trading, prohibiting fraudulent and unfair trade practices, regulating substantial acquisition and takeovers, and calling for information and conducting inspections and audits.

A date worth memorising: SEBI merged with the Forward Markets Commission on 28 September 2015 and now regulates the commodities markets — overseeing forward and futures trading, monitoring trading conditions including demand, supply and prices, advising government on granting and withdrawing recognition to associations, and inspecting them. Its measures include limits on open positions, circuit filters to control price volatility, margins for risk management, and regulations for physical delivery and default penalties.

IRDAI — regulates insurance under the IRDA Act, 1999. It is the licensing authority for insurance companies and defines their capital and net-worth requirements. Its mission covers regulating, promoting and ensuring orderly growth of insurance including re-insurance, while protecting policyholders’ interests. It defines rules for contract terms (sum assured, surrender value, claim settlement, nomination and assignment, insurable interest), regulates distribution by laying down qualification and training requirements for intermediaries and commission payments, supervises the Tariff Advisory Committee (which determines rates for general insurance products), and lays down modalities for insurers’ investments.

PFRDA — regulator of the pension sector under the PFRDA Act, 2013, constituted in October 2003. Its responsibilities: promoting old age income security by establishing, developing and regulating pension funds, and protecting subscribers’ interests. It designs the structure of funds and constituents in the National Pension System (NPS), registers fund managers, custodians, the Central Record Keeping Agency and trustee banks, and defines their roles.

IBBI — established under the Insolvency and Bankruptcy Code 2016, the regulator overseeing the insolvency process and insolvency professionals, with oversight over insolvency professionals, professional entities and professional agencies. It makes and enforces rules on corporate insolvency resolution, corporate liquidation, individual insolvency resolution and individual bankruptcy. It is also appointed as the authority for regulation and development of valuers in India.

The key Acts

Securities Contracts (Regulation) Act, 1956 (SCRA) — provides direct and indirect control of virtually all aspects of the securities market to SEBI: instruments, intermediaries, issuers and investors. It prevents undesirable transactions by regulating the business of securities dealing and trading. Its coverage includes: granting recognition to stock exchanges; corporatization and demutualization of exchanges; the Central Government’s power to call for periodical returns from exchanges; SEBI’s power to make or amend bye-laws of recognized stock exchanges; the Central Government’s power (exercisable by SEBI too) to supersede the governing body of a recognized exchange; the power to suspend business of recognized exchanges; and the power to prohibit undesirable speculation.

SEBI Act, 1992 — enacted to establish a Board to protect investors’ interests and to promote the development of and regulate the securities market. Section 11(1) lays down the Board’s duty to protect investors and promote and regulate the market by such measures as it thinks fit; Section 11(2) lists those measures: regulating business in stock exchanges; registering and regulating stockbrokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers, depositories and depository participants, custodians, foreign institutional investors, credit rating agencies and others; registering and regulating venture capital funds and collective investment schemes including mutual funds; promoting and regulating SROs; prohibiting fraudulent and unfair trade practices; promoting investor education and intermediary training; prohibiting insider trading; regulating substantial acquisition and takeovers; requiring disclosure, inspections, enquiries and audits; performing delegated functions under the SCRA; levying fees; and conducting research. SEBI is further empowered to enforce disclosure of information and to impose penalties and initiate adjudication proceedings.

Insider Trading Regulations, 2015

Made pursuant to Section 30 of the SEBI Act, 1992 — and this is the single most career-relevant section of the chapter for a research analyst.

“Insider” = any person who is a connected person OR one in possession of or having access to unpublished price sensitive information. Note the “or” — you don’t need a connection if you have the information.

“Connected person” = anyone 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 frequent communication with its officers, or by contractual, fiduciary or employment relationship, or as director, officer or employee, or holding any professional or business relationship whether temporary or permanent — that allows or is reasonably expected to allow access to UPSI.

And then the deemed connected persons (unless the contrary is established) — a long list worth skimming for the pattern: relatives of connected persons; a holding, associate or subsidiary company; an intermediary under Section 12 or its employee or director; an investment company, trustee company or AMC or its employee or director; an official of a stock exchange, clearing house or corporation; a member of the board of trustees of a mutual fund or of the board of the AMC or its employee; a board member or employee of a public financial institution; an official or employee of a recognized SRO; a banker of the company; a concern, firm, trust, HUF, company or association where a director, his relative, or the company’s banker holds more than 10% holding or interest; a firm, its partner or employee where a connected person is also a partner; and a person sharing household or residence with a connected person.

Unpublished Price Sensitive Information (Regulation 2(n)) = any information relating to a company or its securities, directly or indirectly, that is not generally available and which upon becoming generally available is likely to materially affect the price of the securities. The workbook’s list (ordinarily including but not restricted to): financial results; dividends; change in capital structure; mergers, de-mergers, acquisitions, delisting, disposals and expansion of business, award or termination of orders/contracts not in the normal course; changes in key managerial personnel other than superannuation or end of term, and resignation of a Statutory or Secretarial Auditor; change in rating(s), other than ESG ratings; fund raising proposed; agreements which may impact management or control; fraud or defaults by the company, promoter, director, KMP or subsidiary, or arrest of KMP/promoter/director, whether in India or abroad; resolution plan, restructuring or one-time settlement on loans; admission of winding-up petition or of an application under the IBC, and approval or rejection of a resolution plan; initiation of forensic audit for detecting misstatement, misappropriation, siphoning or diversion of funds, and receipt of the final forensic audit report; actions or orders by any regulatory, statutory, enforcement authority or judicial body in India or abroad against the company, directors, KMP, promoter or subsidiary; outcome of litigation or disputes with an impact on the company; giving of guarantees or indemnity or becoming a surety for a third party not in the normal course; and granting, withdrawal, surrender, cancellation or suspension of key licenses or regulatory approvals.

Regulation 3(1) — an insider shall not communicate, provide or allow access to UPSI relating to a listed or proposed-to-be-listed company to any person including other insiders, except where the communication is in furtherance of legitimate purposes, performance of duties or discharge of legal obligations. The intent: cast an obligation on all insiders to handle such information with care and transact strictly on a “need-to-know” basis, and ensure organisations develop need-to-know practices for confidential information.

Regulation 4 — no insider shall trade in listed or proposed-to-be-listed securities while in possession of UPSI. Where a person who has traded was in possession of UPSI, his trades are presumed to have been motivated by that knowledge — though he may prove his innocence by demonstrating the circumstances mentioned in the regulation. Connected persons have to establish that their trades were not in violation. Note where the burden of proof sits.

Disclosures. Trading by insiders must be disclosed in the prescribed form, including trades by the person’s immediate relatives and by anyone for whom the person takes trading decisions. Initial disclosure: every person, on appointment as KMP or director, or upon becoming a promoter or member of the promoter group, must disclose his holding of the company’s securities as on that date to the company within seven days. Continuous disclosures follow the form and manner the Board specifies.

Compliance officer. Every organisation must appoint a compliance officer responsible for setting policies and procedures and monitoring adherence to the code of fair disclosure and code of conduct aimed at preserving price sensitive information.

Principles of fair disclosure: 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 of meetings with analysts and investor relations conferences to ensure official confirmation of what was provided.

Designated persons — who have access to information as part of their functions — cannot trade during the period they are expected to hold UPSI; the compliance officer decides when trading can commence, based on when the UPSI becomes generally available. Designated persons include analysts, law firms, auditors and consultants. Their trading is subject to pre-clearance by the compliance officer if the value exceeds limits set by the board. Entities handling UPSI — auditors, analysts, consultants — must themselves formulate a code of conduct to monitor employee trading.

The Chinese Wall. To prevent misuse of confidential information, the firm must adopt a “Chinese Wall” policy separating areas that routinely have access to confidential information (“insider areas”) from those dealing with sales, marketing, investment advice or support services (“public areas”). Employees in the insider area shall not communicate price sensitive information to anyone in the public area, and may be physically segregated. In exceptional situations, public-area employees may be brought “cross the wall” and given confidential information on a need-to-know basis — and such cases must necessarily be intimated to the Compliance Officer.

And the rule that applies directly to us: analysts employed with a firm, while preparing research reports of client companies, shall disclose their shareholdings/interest in such companies to the Compliance Officer, and shall not trade in the securities of that company for thirty days from preparation of such report.

PFUTP Regulations, 2003

Also made under Section 30 of the SEBI Act. Regulation 2(1)(c) defines fraud as including any act, expression, omission or concealment committed to induce another person or his agent to deal in securities — and crucially, there may or may not be wrongful gain or avoidance of loss; that is inconsequential in determining whether fraud was committed.

The instances cited: a wilful misrepresentation of the truth or concealment of material fact so another acts to his detriment; a suggestion as to a fact which is not true by one who does not believe it true; active concealment of a fact by one having knowledge of it; a promise made without any intention of performing it; a representation, whether true or false, made in a reckless and careless manner; deceptive behaviour depriving another of informed consent or full participation; a false statement made without reasonable ground for believing it true; and an issuer giving out misinformation that affects the market price, misleading investors even where they did not rely on the statement itself but only on the market price.

Prohibited dealings (Chapter II): no person shall directly or indirectly buy, sell or deal in securities in a fraudulent manner; use any manipulative or deceptive device or contrivance; employ any device, scheme or artifice to defraud; or engage in any act, practice or course of business operating as fraud or deceit in connection with dealing in or issue of listed securities.

Deemed manipulative, fraudulent or unfair practices — the list is long, and the exam draws from it, so here it is in full: knowingly creating a false or misleading appearance of trading; dealing in a security not intended to effect transfer of beneficial ownership but only to inflate, depress or cause fluctuations for wrongful gain; inducing subscription to fraudulently secure minimum subscription by advancing money; inducing dealing to artificially inflate, depress or maintain prices by paying or offering money; any act or omission manipulating the price, including influencing or manipulating a reference or benchmark price; knowingly publishing untrue information relating to securities including financial results, statements, M&A or regulatory approvals prior to or during dealing; entering a transaction without intention of performing it or without intention of change of ownership; selling, dealing or pledging stolen, counterfeit or fraudulently issued securities (with exceptions where the person was a holder in due course, or where the securities were previously traded through a bonafide transaction); disseminating false or misleading information or advice through any media, physical or digital, in a reckless or careless manner, designed or likely to influence investor decisions; a market participant transacting on behalf of a client without knowledge or instructions, or misutilising or diverting client funds or securities held in fiduciary capacity; circular transactions to give a false appearance of trading; fraudulent inducement by a market participant to enhance his brokerage, commission or income; an intermediary predating or falsifying records including contract notes, client instructions, balance statements or account statements; placing an order while in possession of non-public information regarding a substantial impending transaction; knowingly planting false or misleading news; mis-selling of securities or services — defined as knowingly making a false or misleading statement, knowingly concealing or omitting material facts, knowingly concealing the associated risk, or not taking reasonable care to ensure suitability to the buyer; and illegal mobilization of funds through collective investment schemes.

The list is explicitly not exhaustive — any act or omission falling within Regulation 3 is prohibited even if not listed.

Investigation (Chapter III). Under Regulation 8(1), every person under investigation must produce books, accounts and documents required and furnish statements and information sought, and must appear personally before the Investigating Authority when required and answer questions.

SEBI’s powers, pending or on completion of investigation: suspend trading in the security involved; restrain persons from accessing the securities market and prohibit them from buying, selling or dealing; suspend any office-bearer of a stock exchange or SRO; impound and retain proceeds or securities; direct an intermediary not to dispose of or alienate an asset forming part of a fraudulent transaction; and prohibit disposal of securities acquired in contravention. Against an intermediary specifically, SEBI may issue a warning or censure, suspend the registration, or cancel the registration.

SEBI (Research Analyst) Regulations, 2014

This is the section about our own profession, so it deserves care.

Why the regulations exist. Research analysts study companies and industries, analyse raw data, and make forecasts or recommendations to buy, hold or sell. Investors view analysts as experts and important sources of information and often rely on their advice — but such advice is many times prone to conflicts of interest that may prevent independent and unbiased opinions. Addressing these conflicts is a global effort, with regulators in almost all developed market economies having proposed or implemented rules.

The IOSCO principles (September 2003) that shaped the framework: mechanisms should exist so analysts’ trading activities or financial interests do not prejudice their research; mechanisms should exist so research is not prejudiced by the trading activities, financial interests or business relationships of the employing firms; reporting lines and compensation arrangements should be structured to eliminate or severely limit conflicts; firms employing analysts should establish written internal procedures or controls to identify, eliminate, manage or disclose conflicts; undue influence of issuers, institutional investors and other outside parties should be eliminated or managed; disclosures of conflicts should be complete, timely, clear, concise, specific and prominent; analysts should be held to high integrity standards; and investor education should play an important role.

Regulation 3 — Registration. No person shall act as, or hold himself out as, a research analyst or research entity without a certificate of registration from SEBI. Transitional provision: anyone acting as an RA before commencement could continue for six months, or until disposal of an application made within those six months. Exemptions: an investment adviser, credit rating agency, asset management company or fund manager who issues or circulates research reports to the public, or whose director or employee makes a public appearance, need not register under Regulation 3 — subject to compliance with Chapter III. Similarly, a principal officer, person associated with research services, or partner of a registered RA need not separately register, subject to compliance with Regulation 7.

Regulation 4 — Persons outside India. Any person located outside India issuing research reports on securities listed or proposed to be listed in India must enter into an agreement with a registered research analyst or research entity.

Regulation 5 — SEBI may require further information or clarification, and the applicant or authorised representative must appear for personal representation if required.

Regulation 6 — Eligibility. SEBI considers: whether the applicant is an individual, body corporate, partnership firm or LLP; whether the individual and all persons associated with research services are appropriately qualified and certified per Regulation 7 (with parallel requirements for the principal officer, employed analysts and partners in the non-individual cases); whether the deposit requirement of Regulation 8 is met; whether the applicant and associated persons are fit and proper under Schedule II of the SEBI (Intermediaries) Regulations, 2008; whether there is necessary infrastructure; whether the applicant or a connected person has previously been refused a certificate and on what grounds; whether disciplinary action has been taken by SEBI or any other regulatory authority; and whether the applicant is enlisted with a recognised body under Regulation 14.

Regulation 7 — Qualification and certification. The minimum qualifications, required at all times, for an individual RA, the principal officer of a non-individual RA, employed analysts, partners engaged in research services and persons associated with research services: (a) a graduate degree or equivalent from a recognised university or institution (Indian or foreign) or a CFA Charter from the CFA Institute, plus relevant certification from NISM or an NISM-accredited organisation; or (b) a Post Graduate Program in the Securities Market (Research Analysis) from NISM or another NISM program specified by the Board.

And the renewal rule: a fresh relevant NISM certification must be obtained before expiry of the existing certification, or within three years from the date of the registration certificate, to ensure continuity of compliance.

Regulation 8 — Deposit. An RA shall maintain a deposit of such sum as SEBI specifies, in the form or manner specified, marked as lien in favour of the recognised body administering and supervising research analysts under Regulation 14. The purpose: the deposit is available for utilisation if the RA fails to pay dues emanating from arbitration and conciliation proceedings under the Online Dispute Resolution Mechanism. In practice, the deposit must be held as units of a liquid mutual fund or an overnight mutual fund, or a deposit with a scheduled bank, marked as lien in favour of RAASB.

Regulation 9 — Grant of certificate. On being satisfied, SEBI grants registration in Form B to a research analyst or Form C to a part-time research analyst. An individual or partnership firm registered as an investment adviser may also be granted registration as a research analyst, subject to terms and conditions.

Regulation 10 — Validity. The certificate is valid till it is suspended or cancelled by SEBI (i.e., no fixed expiry).

Regulation 12 — Refusal. SEBI may reject an application after giving a reasonable opportunity of being heard; the decision must be communicated within thirty days; and on rejection the applicant shall forthwith cease to act as a research analyst, without affecting his liability under law.

The Insolvency and Bankruptcy Code, 2016

Consolidates all laws on reorganisation and insolvency proceedings against companies, partnership firms and individuals, stipulating time-bound resolution.

Any creditor — financial or operational — can bring insolvency proceedings if the undisputed amount outstanding exceeds ₹1,00,000. A financial creditor is one who receives consideration against the time value of money (i.e., earns interest on the outstanding amount). The corporate itself can initiate proceedings if it defaults on any payment.

On application, the adjudicating authority (if satisfied a default occurred) appoints an Interim Resolution Professional (IRP) to manage the company’s affairs. Upon the IRP’s appointment the board is considered dissolved and all management personnel report to the IRP. The IRP collates the list of amounts outstanding and forms the committee of creditors — and note this asymmetry: although operational creditors can initiate proceedings, they cannot be part of the committee of creditors. The committee either confirms the IRP as the Insolvency Professional (IP) or appoints someone else.

Every insolvency proceeding should be completed within 180 days of initiation (extensions have often been granted). Resolution may take the form of restructuring, takeover, or liquidation — with liquidation preferred only if no other option is available.

Code of Conduct for Research Analysts

From the Third Schedule of the RA Regulations — eight points, and they’re short enough to memorise verbatim:

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

Managing conflicts — Chapter III of the RA Regulations

Regulation 15 — Internal policies. An RA shall have written internal policies and control procedures governing dealing and trading by any research analyst for three purposes: (i) addressing actual or potential conflicts of interest arising from dealings in securities of the subject company; (ii) promoting objective and reliable research reflecting the unbiased view of the analyst; and (iii) preventing the use of the research report to manipulate the securities market. (Sample question 5 tests exactly this — and note the distractors distort it to “only actual” conflicts and “biased” views.) The RA must also have mechanisms ensuring independence of research activities from other business activities. Under Regulation 15A, an RA is entitled to charge fees for research services from a client, including an accredited investor, in the manner specified.

Regulation 16 — Limitations on trading. The rules that most directly govern an analyst’s own portfolio:

• Personal trading activities of employed analysts shall be monitored, recorded and where necessary subject to a formal approval process.
• Analysts (independent, part-time or employed) or their associates shall not deal or trade in securities they recommend or follow within thirty days before and five days after publication of a research report. (30 before, 5 after — memorise the asymmetry.)
• They shall not trade in securities they review in a manner contrary to their given recommendation.
• They shall not purchase or receive securities before the issuer’s IPO if the issuer is principally engaged in the same types of business as companies the analyst follows or recommends.
• These apply mutatis mutandis to a research entity unless it has segregated research from all other activities and maintains an arm’s-length relationship.
• Exception: the restrictions may not apply in case of significant news or an event concerning the subject company, or an unanticipated significant change in the analyst’s personal financial circumstances — subject to prior written approval per the internal policies.

Regulation 17 — Compensation. A research entity shall not pay any bonus, salary or other compensation to an analyst that is determined by or based on any specific merchant banking, investment banking or brokerage services transaction. Compensation of all analysts must be reviewed, documented and approved annually by the board or a board-appointed committee which does not include representation from merchant banking, investment banking or brokerage divisions — and that body shall not take into account the analyst’s contribution to those businesses. Further, an employed analyst shall not be subject to the supervision or control of any employee of those divisions.

Regulation 18 — Publication blackouts and conduct. The quiet-period rules, all of which are prime exam material:

• No research report, research analysis or public appearance regarding a subject company for which the RA acted as manager or co-manager, within forty days following the day the securities are priced for an IPO, or ten days for an FPO — unless with prior written approval of legal or compliance personnel.
• A research entity participating as an underwriter of an issuer’s IPO shall not publish a report or make a public appearance regarding that issuer before expiry of twenty-five days from the date of the offering (the date of offering being the first date the security was offered to the public).
• An RA who acted as manager or co-manager of a public offering shall not publish or appear concerning that company within fifteen days prior to and fifteen days after the expiration, waiver or termination of a lock-up agreement restricting sale of securities after the offering — again subject to prior written approval.
• Analysts shall not participate in business activities designed to solicit investment banking, merchant banking or brokerage business, such as sales pitches and deal road shows.
• Analysts shall not communicate with a current or prospective client in the presence of personnel from those divisions or company management about an investment banking transaction.
• Those divisions’ personnel shall not direct analysts to engage in sales or marketing, or to communicate with clients about such transactions. Provided that these three sub-regulations do not prohibit investor education activities including publication of pre-deal research and briefing the analyst’s views on the transaction to sales or marketing personnel.
• The RA shall have adequate documentary basis, supported by research, for preparing a report.
• The RA shall not provide any promise or assurance of favourable review to a company, industry, sector or business group as consideration to commence or influence a business relationship or for compensation or benefits.
• The RA shall not issue a research report inconsistent with the views of the analysts regarding the subject company.
• The research entity shall ensure analysts are separate from employees performing sales trading, dealing, corporate finance advisory or anything affecting research independence — provided the analyst may receive feedback from sales or trading personnel to ascertain the impact of a research report.

Regulation 19 — Disclosures in research reports. The RA shall disclose all material information about itself including business activity, disciplinary history, terms and conditions of its research offering and details of associates. Specifically:

On ownership and material conflicts (in both reports and public appearances): whether the RA, its associate or relative has any financial interest in the subject company and its nature; whether they have actual/beneficial ownership of one per cent or more of the subject company’s securities at the end of the month immediately preceding the date of publication or public appearance; and whether there is any other material conflict of interest at the time.

On receipt of compensation (in research reports): whether it or its associates received any compensation from the subject company in the past twelve months; whether they managed or co-managed a public offering for it in the past twelve months; whether they received compensation for investment banking, merchant banking or brokerage services in that period; whether they received compensation for products or services other than those; and whether they received any compensation or other benefits from the subject company or a third party in connection with the research report.

On receipt of compensation in public appearances: whether it or its associates received any compensation from the subject company in the past twelve months; and whether the subject company is or was a client during the twelve months preceding distribution of the report, and the types of services provided. (An exemption applies where such disclosure would reveal material non-public information about specific potential future investment banking transactions.)

Also to be disclosed: whether the analyst served as an officer, director or employee of the subject company; whether the RA has been engaged in market making activity for it; all other disclosures specified by the Board; and — a very current addition — the extent of use of Artificial Intelligence tools in providing research services.

Regulation 19A — an RA shall maintain a functional website with details specified by SEBI.

Regulation 20 — Contents of research report. Facts must be based on reliable information; terms used in making recommendations must be defined and consistently used. An RA employing a rating system must clearly define the meaning of each rating including the time horizon and benchmarks on which it is based. If a report contains a rating or price target and the RA has assigned one for at least one year, the report must also provide a graph of daily closing prices for the period assigned or a three-year period, whichever is shorter. And recommendations must be corroborated by relevant data and analysis.

Regulation 21 — Recommendations in public media. An RA including its director or employee shall disclose registration status and details of financial interest when making a public appearance. And if any person — including a director or employee of an investment adviser, credit rating agency, AMC or fund manager — makes a public appearance or offers a recommendation or opinion through public media, Regulations 16 and 17 apply mutatis mutandis, and he must disclose name, registration status and details of financial interest when making the recommendation in personal capacity, when responding to queries from audiences or journalists in personal capacity, and when communicating the report or its substance through public media.

Regulation 22 — Distribution. 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 entitled to receive it. An RA distributing third-party research must review it for untrue statements of material fact or false or misleading information, and must disclose any material conflict of interest of the third-party provider or give a web address directing recipients to the relevant disclosures — unless it has no direct or indirect business or contractual relationship with that provider.

Regulation 23 — Proxy advisers. All of Chapters II, III, IV, V and VI apply mutatis mutandis. Employees engaged in proxy advisory services need a minimum qualification of a graduate degree in any discipline; the time period for compliance with capital adequacy is three years. Proxy advisers must additionally disclose the extent of research involved in a recommendation and the extent/effectiveness of controls ensuring accuracy of issuer data, and their policies and procedures for interacting with issuers, informing them about recommendations and reviewing them. They must maintain records of voting recommendations and furnish them to the Board on request.

The procedural guidelines for proxy advisors carry specific timelines worth noting: formulate and disclose voting recommendation policies, reviewed at least once annually, including the circumstances when not to provide a recommendation; disclose methodologies and processes; alert clients within 24 hours of receipt of information about factual errors and impending material revisions, and communicate material revisions within 72 hours; have a stated process to communicate with clients and the company; share the report with clients and the company at the same time, disclosing this sharing policy on their website, with company comments received within the defined timeline included as an addendum; clearly disclose the legal requirement versus any higher standard they suggest and the rationale; disclose conflict of interest on every specific document; and establish procedures to disclose, manage or mitigate conflicts from other business activities including consulting services.

Regulation 24 — General responsibility. Maintain an arm’s-length relationship between research and other activities; abide by the Code of Conduct; obtain prior SEBI approval for any change in control; furnish information and reports to SEBI as specified; ensure employees and partners comply with Regulation 7 certification at all times; disclose to clients the terms and conditions specified by SEBI and take client consent; and — for AI — an RA using Artificial Intelligence tools, irrespective of the scale and scenario of adoption, is solely responsible for the security, confidentiality and integrity of client data, the use of information or data for research, the research services based on AI output, and compliance with any law in force. An RA providing a model portfolio must abide by SEBI’s guidelines, and must ensure compliance with the Investor Charter.

Regulation 25 — Records. The RA shall maintain: the research report duly signed and dated; the research recommendation provided; the rationale for arriving at it; record of public appearance; KYC records of the fee-paying client; a register of clients with PAN, the date and nature of the research service, details of products/securities and fees charged; records of communication including emails and call recordings with all clients including prospective clients; and the terms and conditions disclosed and the client’s consent. All records — physical or electronic — must be preserved for a minimum of five years, and electronic records required to be signed must be digitally signed. The RA must conduct an annual audit of compliance from a member of ICAI, ICSI or ICMAI and submit the report as specified.

Regulation 26 — Compliance officer. A non-individual RA or research entity shall appoint either a compliance officer, or an independent professional who is a member of ICAI/ICSI/ICMAI or another specified professional body holding a relevant NISM certification, responsible for monitoring compliance. Where an independent professional is appointed, the principal officer must submit an undertaking to SEBI or the recognised body that he shall be responsible for monitoring compliance.

Regulation 26A — Dispute resolution. All claims, differences or disputes between an RA and its client arising out of securities-market activities shall be submitted to a dispute resolution mechanism including mediation and/or conciliation and/or arbitration, per SEBI’s procedure.

Regulation 26B — Investor grievances. The RA shall redress grievances promptly and not later than twenty-one calendar days from receipt.

Regulation 26C — Client level segregation. An individual RA shall not provide distribution services. The family of an individual RA shall not provide distribution services to a client receiving research services from that RA, and the RA shall not render research services to a client receiving distribution services from other family members. A non-individual RA shall have client level segregation at group level — the same client cannot be offered both research and distribution services within the group; a client either receives research services (with no distributor consideration at group level) or distribution services (with no research fee collected at group level). “Group” means a holding, subsidiary, associate, subsidiary of a holding company, investing company or venturer under the Companies Act 2013, or an entity with or subject to a controlling interest. Non-individual RAs must maintain an arm’s-length relationship by providing research services through a separately identifiable department or division.

Regulation 32 — Liability for default. An RA who contravenes the Act, regulations or circulars; fails to furnish information required; furnishes false or misleading information; does not submit periodic returns or reports; does not co-operate in any enquiry, inspection or investigation; or fails to resolve complaints or give a satisfactory reply, shall be dealt with under the Act or the SEBI (Intermediaries) Regulations, 2008.

Surveillance: GSM and ASM

Exchanges enable transparent trading and price discovery, but some traders employ unscrupulous practices distorting prices. SEBI and the exchanges therefore run surveillance mechanisms, monitoring stocks against objective criteria and imposing restrictions.

Graded Surveillance Measures (GSM) — targets securities with low market capitalisation or net worth where valuation is not commensurate with business fundamentals. Shortlisted companies are listed to alert investors to be extra cautious and to advise market participants to carry out extra due diligence.

Possible restrictions: placing securities in the trade-for-trade category (only delivery-based trading); requiring a surveillance deposit; reducing the price band; increasing margin requirements; and freezing of price on the upside. Members and trades in such stocks are also closely monitored.

The GSM criteria:

• Companies with net worth ≤ ₹10 crore and net fixed assets ≤ ₹25 crore, trading at a negative P/E or a P/E multiple 2× that of the benchmark index. Exclusions: securities already under suspension, PSUs, index constituents, shares that paid dividends in the previous three years, stocks that had an IPO within the last one year, those traded in the derivatives segment, securities with significant institutional holding, and those currently undergoing a merger or demerger under a scheme of arrangement.
• Companies with market cap below ₹25 crore trading at a P/E greater than 2× the benchmark P/E, or at a negative P/E with a P/B that is negative or 2× the benchmark P/B.

Additional Surveillance Measures (ASM) — where GSM identifies securities by valuation, ASM identifies them by variations in price and volume, and in certain cases the percentage of volume traded by the top 25 clients.

Factors considered: variation between high and low prices over the previous three months; variation in closing prices over 1 month, 60 days and 365 days; client concentration (percentage of volume traded by top 25 clients in each stock); and variation in volumes traded over different time frames. The criteria vary partly by market capitalisation and P/E ratio.

ASM is not applicable to: securities already under GSM; securities in the trade-for-trade segment; securities with derivative products available; and public sector units.

The consequence: once shortlisted under ASM, the applicable margin is raised to 80%, with restrictions tightened as further criteria are met — including narrowing of price bands and increasing margin to 100%. Stocks are reviewed after a minimum time period and removed if they no longer meet the shortlisting criteria.

The advertisement code

Applicable to both RAs and Investment Advisers.

What counts as an advertisement: all forms of communication issued by or on behalf of an IA/RA that may influence investment decisions of any investor or prospective investor — pamphlets, circulars, brochures, notices, research reports or any other literature, documents or material published or designed for use in publications or displays (newspapers, magazines, sign boards, hoardings), in any electronic, wired or wireless communication (email, text messaging, messaging platforms, social media, radio, telephone, or any form over the internet), or any audio-visual form (television, tape or video recordings, motion pictures). Critically: a research report, however disseminated, is construed as an advertisement if anything in it is expressly or impliedly in the nature of promotion of the RA’s products or services.

Required information: the name as registered with SEBI, registered office address, SEBI Registration No., logo/brand/trade name, and CIN if applicable; information that is accurate, true and complete in unambiguous and concise language; and the standard warning in legible fonts (minimum 10 font size): “Investment in securities market is subject to market risks. Read all the related documents carefully before investing.” — with no addition or deletion of words. In audio-visual media the warning and voice-over must be clear and understandable (the example given: 20 words running for at least 10 seconds). In non-English advertisements the warning must be accurately translated. Where the mode is SMS/message/pop-up/social media and full details can’t be included, the official website hyperlink must be provided and the website must contain all such details. If specific securities are displayed as examples, the disclaimer “The securities quoted are for illustration only and are not recommendatory” must appear. And all advertisements and client correspondence must include: “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.”

Prohibitions: anything prohibited for publication under law; statements that are false, misleading, biased or deceptive, based on assumptions or projections; misleading or deceptive testimonials; statements that mislead directly, by implication or by omission; statements likely to be misunderstood or to disguise significance; statements designed to exploit the lack of experience or knowledge of investors; statements exaggerated or inconsistent with the nature, risk and return profile of the product; extensive use of technical or legal terminology or excessive detail that distracts; describing any report, analysis or service as free unless it actually is free without condition or obligation; any promise or guarantee of assured or risk-free return; any implication of assured, minimum or target returns, percentage accuracy, or service provision till achievement of target returns, or anything giving the impression that the advice is risk-free or not susceptible to market risks; statements that discredit other advertisements or intermediaries or make unfair comparisons; reference to past performance of the IA/RA; superlative terms such as “Best”, “No. 1”, “Top Adviser/Research Analyst”, “Leading”, “One of the best amongst market leaders” (though factual details of awards received from independent organizations may be included); and the SEBI logo shall not be used.

Other compliances: prior approval for the advertisement must be obtained from the SEBI-recognised supervisory body before issue; a suspended IA/RA shall not issue any advertisement during the suspension period; the IA/RA shall not engage in games, leagues, schemes or competitions involving distribution of prize monies, medals or gifts; the norms apply to any associated investment/research/consultancy agency naming the IA/RA; and a copy of the advertisement must be retained for five years (Regulation 25(2) of the RA Regulations).

Brand name and logo usage: the SEBI-registered name, logo, registration number and complete address with telephone numbers must be prominently displayed on the website, notice board, display boards, advertisements, publications, KYC forms and client agreements. In statements, reports or any correspondence with clients, add the name, telephone number and email of the compliance officer and of the grievance officer or grievance redressal cell. The guarantee disclaimer must appear across all of these. And again: the SEBI logo shall not be used.

Investor Charter, complaints and cybersecurity

Investor Charter. SEBI has developed an Investor Charter for Research Analysts — a single document in lucid language containing details of services provided, investors’ rights, do’s and don’ts, responsibilities, the grievance handling mechanism and estimated timelines. All registered RAs must bring it to the notice of existing and new clients by disclosing it on their websites and mobile applications, making it available at prominent places in the office, providing a copy as part of client onboarding, and through emails or letters.

Complaint disclosure. RAs must disclose on their websites/mobile applications all complaints including SCORES complaints in SEBI’s specified format. RAs without websites or apps must send the status of investor complaints to investors on their registered email. RAs are advised to display a link/option to lodge a complaint directly on their websites and apps, and may also provide a link to the SCORES website or app.

Cybersecurity and Cyber Resilience Framework (CSCRF). All Research Analysts must comply. It rests on five cyber resiliency goals:

• ANTICIPATE — maintain a state of informed preparedness to forestall compromises of business functions from adversary attacks.
• WITHSTAND — continue essential business functions despite a successful attack.
• CONTAIN — localize containment of a crisis and isolate trusted from untrusted systems to continue essential operations.
• RECOVER — restore business functions to the maximum extent possible after a successful attack.
• EVOLVE — change business functions and supporting cyber capabilities to minimize adverse impacts from actual or predicted attacks.

CSCRF follows a graded approach, classifying regulated entities into five categories: Market Infrastructure Institutions (MIIs), Qualified REs, Mid-size REs, Small-size REs, and Self-certification REs. For RAs specifically: those not registered in any other RE category are excluded from submitting CSCRF compliance (though the SEBI SaaS advisory of 3 November 2020 applies, requiring a declaration in respect of SaaS used for governance, risk and compliance functions). Institutional RAs registered with SEBI in another RE category are classified as Qualified/Mid-size/Small-size REs based on their categorization in that other category.

How this chapter is tested

Ten marks, entirely theory, and — I’ll say it again — the most reliably scoreable chapter in the syllabus. The questions have clean right answers with no judgment involved.

The five sample questions show how straightforward the style is: the unhealthy practice among the options is insider trading (disclosure, transparency and surveillance are all healthy); the central bank administering monetary policy is the RBI; the authority for old age income security is the PFRDA; the claim that stock exchange bye-laws are the same across exchanges is false (SEBI has the power to make or amend them, but they differ); and the purpose of an RA’s written internal policies is preventing use of the research report to manipulate the securities market — note that the distractors deliberately corrupt the other two purposes (“only actual” conflicts instead of actual or potential, and “biased” instead of unbiased view).

The numbers to memorise cold, because they’re the likeliest question fodder:

• 30 days before and 5 days after publication — the analyst trading blackout.
• 30 days — the trading ban after preparing a report (insider trading regulations).
• 40 days (IPO) / 10 days (FPO) — manager or co-manager publication blackout.
• 25 days — underwriter blackout from the date of the offering.
• 15 days before and after a lock-up expiry — manager/co-manager blackout.
• 1% or more ownership — the disclosure threshold, measured at the end of the month immediately preceding publication.
• 12 months — the compensation disclosure look-back.
• 5 years — record and advertisement retention.
• 21 calendar days — investor grievance redressal.
• 7 days — initial disclosure of holdings on becoming a KMP/director/promoter.
• 30 days — communication of SEBI’s refusal decision.
• 3 years — NISM re-certification (and proxy adviser capital adequacy compliance).
• 6 months — the “connected person” look-back, and the transitional period for existing RAs.
• ₹1,00,000 and 180 days — IBC threshold and timeline.
• ₹10 crore net worth / ₹25 crore net fixed assets / ₹25 crore market cap / 2× benchmark P/E — GSM criteria.
• 80% then 100% margin — ASM consequences.
• 24 hours / 72 hours — proxy adviser alert and revision timelines.
• 10 font size and 10 seconds — advertisement warning requirements.
• 1992, 1956, 2003, 2014, 2015, 2016, 28 Sept 2015 — SEBI Act, SCRA, PFUTP, RA Regulations, PIT Regulations, IBC, and the FMC merger.

The classification traps: insider communication (Reg 3) vs insider trading (Reg 4); GSM (valuation-driven) vs ASM (price/volume-driven) and their different exclusion lists; financial vs operational creditors under IBC (both can initiate, only financial ones sit on the committee); Form B (RA) vs Form C (part-time RA); who is exempt from RA registration (IAs, CRAs, AMCs, fund managers — subject to Chapter III compliance); and the fact that a certificate is valid until suspended or cancelled, not for a fixed term.

My approach: this is a flashcard chapter, full stop. One card per number above, one card per regulation with its subject in three words, and the eight-point Code of Conduct written out from memory each day until it’s automatic. Ten marks with no arithmetic and no ambiguity is the best return on study time in the entire syllabus — and unlike some chapters, everything here is knowledge I’ll need on the job the day I’m registered, not just in the exam hall.

Next up: Chapter 15 — Technical Analysis. Fifteen marks, the heaviest chapter in the syllabus, and newly added in the 2026 restructure. See you in the last note of the series.

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Note: These are my personal study notes as I prepare for the NISM-Series-XV Research Analyst exam. They are for learning purposes only and are not investment advice.