The Securities and Exchange Board of India (SEBI) has introduced a comprehensive set of guidelines for Research Analysts (RAs) through its circular dated January 8, 2025. Below, we break down the key amendments and their impact on Research Analysts and their clients.
1. Revised Qualification and Certification Criteria
SEBI has relaxed the qualification requirements for existing individual RAs, principal officers of non-individual RAs, employed analysts, and partners offering research services. However, all such individuals must obtain the necessary National Institute of Securities Markets (NISM) certifications and comply with Regulation 7(3) of the RA Regulations.
2. Mandatory Security Deposits Based on Client Base
A major change introduced is the requirement for Research Analysts to maintain security deposits, structured as follows:
- Up to 150 clients: ₹1 lakh
- 151 to 300 clients: ₹2 lakhs
- 301 to 1,000 clients: ₹5 lakhs
- More than 1,000 clients: ₹10 lakhs
These deposits must be held in a scheduled bank and marked as a lien in favor of the Research Analyst Administration and Supervisory Body (RAASB). Existing RAs are required to comply with this by April 30, 2025.
3. Artificial Intelligence (AI) in Research Services
With the increasing use of AI in financial research, SEBI has mandated that RAs using AI tools must:
- Maintain the security, confidentiality, and integrity of client data.
- Disclose the extent of AI usage to clients before engagement.
- Update disclosures as necessary, with existing clients notified by April 30, 2025.
4. Changes in Fee Structure and Client Agreements
SEBI has capped fees for individual and HUF clients at ₹1,51,000 per year per family, excluding statutory charges. The fee cap will be reviewed every three years. However, non-individual clients, institutional investors, and accredited investors are exempt from this limit.
- RAs can collect advance fees for a maximum of one quarter.
- Refunds must be provided for any unutilized portion of the fee if the client terminates services early.
- Breakage fees for early termination are not permitted.
- Existing clients must comply with these changes by June 30, 2025.
5. Client-Level Segregation of Research & Distribution Services
To prevent conflicts of interest, SEBI has prohibited clients from availing both research and distribution services from the same RA or its group entities.
- New clients must choose between research or distribution at onboarding.
- Existing clients must comply with this requirement by June 30, 2025.
- PANs will be used to track and enforce segregation.
- RAs must submit an annual compliance certificate confirming adherence to this rule.
6. Regulation of Model Portfolio Recommendations
RAs providing model portfolio recommendations must ensure compliance with SEBI’s framework. SEBI has mandated that RAs align with the new guidelines by June 30, 2025.
7. Enhanced Disclosure Requirements
Before offering research services, RAs must disclose detailed terms and conditions, including:
- Nature and scope of services.
- Fee structure and refund policy.
- Any AI involvement in research services.
- Terms and risks associated with research recommendations.
Conclusion
These rules aim to provide greater accountability while reinforcing ethical practices among RAs. Compliance deadlines are approaching fast, and it is crucial for Research Analysts to adapt to these changes to remain in line with regulatory requirements.
For any queries or assistance in complying with SEBI’s guidelines, feel free to reach out to us. We specialize in regulatory compliance for SEBI intermediaries and can help ensure a smooth transition under the new framework.
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