In December 2024, the Securities and Exchange Board of India (SEBI) introduced significant amendments to the Research Analyst (RA) Regulations, sparking questions among industry members.
I recently had an insightful discussion with a client, who heads compliance at a Mumbai-based stock broking firm, about navigating these changes.
Below is a breakdown of our conversation discussing one crucial addition in the RA Regulations.
“Kruti, the December 2024 amendments to the SEBI Research Analyst (RA) regulations have left us quite confused. We need your expertise to clarify things”
“Sure Radhika, please go ahead!
“SEBI amended the definition of research analyst stating it’s someone who, for consideration, provides research services. As you are aware, we provide research reports to clients but do not charge any fees. Does this mean RA regulations do not apply to us?”
“I understand your confusion, Radhika. Firstly, let’s clarify that providing research reports is covered under the definition of research services. With the amendment to the Research Analyst definition, SEBI also introduced a very critical definition of ‘consideration’.
As per the regulations, ‘Consideration’ means any form of economic benefit including non-cash benefit, received or receivable, directly or indirectly, in any form whether from client or otherwise for providing research services.
So, consideration includes cash as well as non-cash benefits in any form and manner. Since you receive brokerage, you’re receiving an economic benefit. It qualifies as “receipt of consideration” and you will have to get registered with SEBI as a research analyst.”
“Okay, got it! What if we shift the research activity to our group company, which is involved in mutual fund distribution business? We earn commissions for mutual funds, not stocks, and provide stock recommendations as an add-on. Would that exempt us?”
“Good question, Radhika! We have to refer to the definition of ‘consideration’. In my view, although you are not getting direct economic benefit, you are getting indirect benefits.
Non-cash benefits include getting details of customers to whom you upsell the services. Customers will continue to take the MF distribution services since they also get some ad-on benefits like research reports, without making any direct payment. And you continue to get the commissions on the mutual fund investments made by the clients through your company. So, you will have to still comply with RA regulations.”
“So, any entity providing research reports or stock recommendations alongside other business activities is covered by the RA Regulations, right?”
“Exactly. If you derive any direct or indirect benefit—cash or non-cash— from your clients or otherwise – you’re subject to the RA Regulations.”
“Okay! What if we start a new company with an RA license, offering two services: a model portfolio of stocks charging a nominal fee and free analysis on mutual funds? We will display the reports on website, accessible to anyone who is visiting the website. Would we need to comply with RA Regulations only for the paid service?”
“No, Radhika. Once an entity receives consideration for any research service, the RA Regulations apply to all services provided under the RA license. Compliance is at the entity level, not at the product or service level.”
“So, who is exempted from needing an RA license? It feels like no one is! Even people discussing stocks on news channels — do they need a license? RA means a person who for consideration provides research service, right? If they’re not directly offering any RA services for a fee, what consideration are they getting to qualify them as RA?”
“That’s an interesting point. The definition of consideration also includes benefits from non-clients, such as payments from media companies or the companies they represent. I guess, they may be getting other non-cash benefit . However, SEBI may need to provide further clarity on such cases.”
“Thanks, Kruti! Discussing these regulations with you always brings clarity. We’ll soon start the RA registration process with SEBI and will need your guidance to secure the license.”
“Sure, happy to assist, Radhika!”
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Are you providing research reports for free? Understanding “receipt of consideration” is key to determining if you need an RA license. If you have questions about your specific case, please send an email to kruti [at] cskruti [dot] com.