Sebi Plans Code Of Conduct For Market Players

Taking a cue from the wide- ranging reforms initiated by the Securities and Exchange Commission (SEC) in the US, the Securities and Exchange Board of India (Sebi) today proposed a code of conduct for all market participants, including research analysts who cover the equity markets. The capital market watchdog has put up a discussion paper on this on its website.

The code of conduct pertains to foreign institutional investors (FIIs), merchant bankers, portfolio managers, debenture trustees, bankers to an issue, stock exchanges, stock brokers, depositories and registrars to an issue and share transfer agents, besides research analysts.

Independent research publishers not affiliated to any capital market intermediary, academic researchers and writers in newspapers are exempted from the provisions of the proposed code of conduct.

To start with, Sebi plans to make disclosure of the compensation received by research analysts mandatory. It points out that capital market intermediaries like merchant bankers, brokerage houses and others are required to disclose the compensation they receive for various services. It has also proposed to direct research analysts to disclose the success (or failure) rate of recommendations in the past 12 months.

Sebi said merchant bankers and brokerage houses must disclose their holdings in the company on which the research report is produced. This disclosure is necessary if the shares held by the intermediary exceed 1 per cent of the paid-up capital of the subject company on the date of the commencement of research.

The research analyst should disclose his holdings and those of his relatives and dependents in the company on the date of the commencement of research on the company, Sebi said.

It has suggested that a capital market intermediary should be prohibited from trading in the equity shares of the company on which the research report is produced from the time the work on the report started, during the preparation of the report and for five working days after the report is published.

On foreign institutional investors, it said they will need to ensure the following:

Not to engage in securities borrowing activities and margin trading in the Indian securities market.

Not to extend a loan or provide collateral in connection with dealing in the Indian securities market either directly or indirectly.

Not to sell securities they do not hold.

Not to deal in any derivative instruments issued outside India where in underlying is/are Indian securities either directly or indirectly.

It has suggested that every merchant banker should develop its own internal code of conduct for governing its internal operations and lay down standards of appropriate conduct for its employees and officers in the carrying out of their duties.

The portfolio manager should not make any statement or become privy to any act, practice or unfair competition, which is likely to place such other portfolio managers in a disadvantageous position in relation to the portfolio manager himself, while competing for or executing any assignment.

Similarly, a debenture trustee or any of his employees is barred from rendering directly or indirectly, any investment advice about any security in the publicly accessible media, whether real-time or non-real-time, unless a disclosure of his interest including long or short position in the said security has been made, while rendering such advice.

A banker to an issue has been advised not to accept applications after office hours or after the date of closure of the issue or on bank holidays.

The Sebi script

Market intermediaries required to disclose compensation received for various services

Merchant bankers and brokerage houses should disclose holdings in firm on which the research report is produced

FIIs must not engage in securities