Sebi looks to plug selective leaks in research reports

The flow of price-sensitive information between a company and research analysts could tantamount to insider trading under new regulations approved by the markets regulator, the Securities and Exchange Board of India (Sebi). This is the first time contents of research reports published by brokerage houses could be checked for violation of insider trading norms.

The move is aimed at cracking down on market participants' non-discriminatory access to price-sensitive information. Last month, Sebi had approved new regulations on insider trading, recommended by a panel headed by N K Sodhi, former chief justice of the Karnataka High Court.

The markets regulator is yet to notify the new insider trading regulations and the detailed final framework isn't out in public domain yet. Under the new norms, research reports that are made available for a price to all clients on a non-discretionary basis will be considered "generally available" and remain out of the insider trading ambit. "Any report or information from a research firm will be considered unpublished price-sensitive information if it is being given to a set of clientele on a selective basis," said a source.

According to the new definitions cleared by Sebi, generally available information refers to facts accessible to the public on a non-discriminatory platform such as a stock exchange. Price-sensitive information will include material events in accordance with the listing agreement.

Analysts say such categorisation of information sent out by research firms will ensure certain clientele do not get advantage of material facts. "Research firms that used to indulge in the practice of giving material information to some clients for a higher price will now have to stop this," an analyst said on the condition of anonymity.

Also, there is fear among those buying these reports that the model on dissemination of such reports will need a revamp. "A research report is an important marketing and sales tool for research and brokerage firms. If all high net worth clients are being provided information about a particular stock in a uniform fashion and for the same price, ideally, it should not be a concern. To my mind, providing unfair advantage to any client base will definitely be construed as part of insider trading," said Shantanu Shyam of Angel Broking.

Experts say while analysing privileged information, research analysts will have to be cautious in their approach. "The research analysts and issuers of research reports should henceforth be more cautious and ensure they don't analyse or utilise any privileged information in their research reports that has the potential to have a material effect on the price of a company's shares if such information were to come in public domain. This obligation will be even more pertinent in cases wherein the research report is paid and not generally available in public domain," said Tejesh Chitlangi, partner, IC Legal.

To stem insider trading and selective leaks by research organisations, Sebi had recently notified regulations for research analysts, effective Monday. These regulations impose an obligation on providers of research reports to ensure the reports do not lead to any insider trading. Now, any independent research analyst will be barred from dealing or trading in the securities they have recommended, 30 days before and five days after the publication of the research report.