SEBI has taken steps to ensure that the research services provided by analysts are governed by clear, standardized terms that protect investors and enhance the professionalism of the industry.
The most recent SEBI circular, dated February 17, 2025, addresses the disclosure of the Most Important Terms and Conditions (MITC) for research analysts, marking a significant step in enhancing transparency and accountability in the field of investment research. This article aims to provide a detailed analysis of the SEBI circular, its implications, and how it will shape the future of the research analyst industry in India.
Introduction to the Circular: Key Objectives
The primary objective of the SEBI Circular is to provide a standardized and mandatory framework for research analysts (RAs) in terms of the Most Important Terms and Conditions (MITC) that must be disclosed to clients. As per Regulation 24(6) of the SEBI (Research Analysts) Regulations, 2014, RAs are required to disclose the terms and conditions of their research services to clients and obtain their consent. This disclosure is aimed at creating transparency and ensuring that clients are fully aware of the services they are subscribing to.
In response to the evolving needs of the securities market and the importance of clear communication between research analysts and their clients, SEBI, through this circular, has emphasized the need for RAs to adopt a standardized approach to disclosing MITC. This move is designed to ensure that all RAs, regardless of their size or nature of operations, follow a uniform set of terms and conditions that are easily understandable by clients and provide clarity regarding the scope, limitations, and expectations of the research services being provided.
The Role of Industry Standards Forum (ISF) and RAASB
To ensure consistency and comprehensiveness in the disclosure of the MITC, SEBI has mandated the creation of standardized terms in collaboration with the Industry Standards Forum (ISF) and the Research Analyst Administration and Supervisory Body (RAASB). The ISF, in consultation with RAASB and SEBI, has been tasked with the responsibility of developing the standardized MITC, which will be applicable to all RAs.
The collaboration with RAASB is crucial in ensuring that the terms and conditions are practical, reasonable, and in line with best industry practices. By involving these key stakeholders, SEBI aims to create a balanced regulatory environment that fosters both transparency and fairness in the research services provided to clients.
Disclosing the MITC to Existing Clients
The circular mandates that RAs must inform their existing clients about the MITC by June 30, 2025. The disclosure can be made via email or any other communication method that can be preserved for future reference. This step ensures that all current clients are adequately informed about the new terms and conditions that govern their relationship with the research analyst. The use of digital channels, such as email, is particularly important in this context, as it provides a record of communication and helps maintain a transparent relationship between RAs and their clients.
Incorporating MITC into Terms and Conditions
As part of the compliance process, RAs must integrate the MITC into the broader ‘Terms and Conditions’ of providing research services. These terms and conditions will need to be disclosed to the clients, and the clients must provide their consent to these terms before availing of the services.
By incorporating the MITC into the terms and conditions of research services, SEBI is making a significant effort to reduce the possibility of misunderstandings or disputes between research analysts and clients. It is essential for clients to fully understand the scope, limitations, and potential risks associated with the research services being provided. This step also aligns with global best practices for financial transparency and consumer protection.
Immediate Implementation and Enforcement
The provisions of the circular are effective immediately, signaling SEBI’s commitment to implementing the necessary reforms as quickly as possible. The immediate effect of the circular emphasizes the urgency of ensuring that the industry adopts these standardized terms and conditions without delay. This swift action by SEBI highlights its proactive approach to protecting investor interests and regulating the research analyst industry to meet the demands of a rapidly evolving market.
Legal Framework and Powers Underlying the Circular
The SEBI circular is issued under the powers conferred by Section 11(1) of the Securities and Exchange Board of India Act, 1992, along with Regulation 24(6) of the SEBI (Research Analysts) Regulations, 2014. These provisions empower SEBI to regulate and oversee the activities of research analysts to ensure that they act in the best interests of investors and the market as a whole.
The legal backing of this circular is a key factor that reinforces its enforceability and importance. SEBI’s authority to issue such circulars is derived from its mandate to protect investors, promote the development of the securities market, and regulate the activities of market participants. The circular’s provisions are designed to uphold these objectives by promoting transparency, reducing risks associated with inadequate disclosure, and fostering investor confidence in the research provided by analysts.
Implications for Research Analysts and Clients
The immediate implication for research analysts is the requirement to update their existing client agreements and ensure that the MITC are clearly incorporated into their terms and conditions. This process will likely require significant effort on the part of RAs, especially for those with a large number of clients. However, this is an important step towards improving industry standards and ensuring that clients are well-informed before engaging with research services.
For clients, this circular ensures greater transparency and a more standardized approach to the terms governing their relationship with research analysts. By requiring explicit consent from clients, SEBI is protecting investors from potential exploitation or misunderstandings. The disclosure of MITC will help clients make informed decisions about whether or not to engage with a particular research analyst based on their terms and conditions.
