SEBI's diktat to register analysts unlikely to rein in rouge elements

Move to bring analysts under scrutiny is a welcome step but a lot more needs to be done to ensure a fair flow of information

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If by just registering research analysts, Sebi intends to ensure impartial reports, improve transparency and governance standards in the capital market, then it has a long way to go. This does not mean that the analysts should not be monitored. On the contrary, research analysts need severe monitoring. 

 

One of the ideas behind Sebi's registration of research analysts is to improve the quality of research by ensuring that analysts with suitable education qualifications and experience are only registered. Most of the analysts recruited by broking firms (sell side analysts) and asset management companies (buy side analysts) more than meet the qualification norms set by Sebi. 

 

Most of the analysts will remain unaffected by this proposal and they will continue to maintain their quality of research. Commere minister Anand Sharma's statement is apt for this occasion when he said that analysts have left behind a graveyard of failed projections and prediction. Though it was meant for Goldman Sachs, it is true for the entire community. 

 

Registrations will fail to have any impact on the issue of conflict of interest. A Chinese Wall already exists between investment banking and broking arms, but it is as porous as the India-Bangladesh border. A look at FII recommendations on some real estate, airlines and telecom companies over the last five years clearly show that analysts continue to have a 'Buy' recommendation on these companies despite price erosion of over 75%. 

 

Companies in these sectors are regularly in need of funds and have been issuing fund raising mandates to these broking firms to keep their rating intact. Even if an analyst is not bullish on the company, he has to maintain a favourable recommendation as the broker goes on a road show to raise funds. No broking house would be able to seek funds if its own analysts do not give a favourable recommendation.

 

Further, monitoring only the analysts will not serve the purpose of transparency and conflict of interest. The sales team of a broking firm, especially institutional broking have equal access to information and in almost all cases know the recommendation beforehand. Even they need to be brought under the net. Sebi's proposal calls for registration of only those people apart from analysts, who speak to or disseminate the information through media outlets. 

 

On the issue of market malpractices and governance standards, there are enough provisions under the SEBI (Prohibition of Insider Trading) Regulation, 1992 act that prohibits malpractices, but it is still rampant. 

 

Most of the brokers and rating agencies have restricted their employees from trading in stocks. But there is no way of stopping them from passing on the information to their friends or 'willing brokers' who trade on their behalf and split the spoils after booking profits. Among the very few cases of insider trading caught by Sebi was that of a dealer passing information to his friend who profited from these trades and later split the proceeds. Sebi's proposal does not prevent such malpractises. 

 

Further insider trading is too rampant in the market, not only in India but in world markets too. There are very few cases where the market is surprised by a news development. In most of the cases, a stock would have reacted to the news even before it was made public. There is little Sebi has done in this regard over the years, nor does it address the issue now.

 

While Sebi's  proposal to bring advisors under scrutiny is a welcome step, there is still too much to be done to ensure free and fair flow of information. 

 

Here's hoping this is only the first step toward further transparency in the markets.