Research Analysts Oppose SEBI's New Norms


Last Updated: 22nd January 2025 - 12:42 pm
SEBI-registered research analysts (RAs) are expressing their discontent with the latest compliance requirements, with some well-known professionals even announcing their decision to shut down operations.
On January 8, the Securities and Exchange Board of India (SEBI) issued a circular titled Guidelines for Research Analysts. Several RAs, as reported by Moneycontrol, believe that while these guidelines have made it easier for new entrants to register, they have simultaneously increased the compliance burden on existing analysts.
Concerns among RAs revolve around the fear that such regulatory changes could lead to an influx of unqualified participants, prompting stricter oversight in the future. This, they argue, may make it increasingly difficult for ethical professionals to sustain their businesses.
Sandeep Parekh, founder of Finsec Law Advisors and former legal and enforcement head at SEBI, voiced his concerns on microblogging platform X. He criticized the regulator for excessively tightening rules, stating that this approach could drive out competent and ethical advisors while allowing only those who are either dishonest or incompetent to remain in the industry.
Parekh also shared posts from several RAs who have decided to discontinue their services due to the compliance challenges. Among them, Neeraj Marathe, owner of Sentinel Research, mentioned that he had initially halted his research services in anticipation of better regulatory provisions but found the final rules to be even more restrictive.
Impact on Long-Term Investing
One major issue raised pertains to restrictions on the advance collection of fees. The SEBI circular states that RAs may collect fees in advance only if agreed upon by the client, but the amount must not exceed fees for more than one quarter.
Stalwart Advisors, while announcing the closure of their research services, acknowledged that the additional compliance costs—such as client onboarding (agreements, KYC, CKYC), benchmarking, validation, and audits—were manageable. However, they emphasized that the shift toward quarterly renewals would push the focus toward short-term market activities, which goes against their long-term investment philosophy.
They explained that their strategy involves patiently waiting for the right opportunities, with an average investment horizon of three to five years. This approach, they noted, has led to substantial gains over time. They also warned that the new regulations might inadvertently encourage excessive trading activity, turning analysts into mere "tip providers"—something they strongly oppose.
Fee Cap Concerns
Independent research analyst Nitin Mangal described the updated norms as highly problematic.
One of his primary concerns is the cap on fees that RAs can charge per family. Under the new guidelines effective January 2025, SEBI has set a maximum limit of ₹1,51,000 per year for individual and Hindu Undivided Family (HUF) clients. This cap is subject to revision every three years based on the Cost Inflation Index (CII) after due consultation with SEBI’s supervisory body, the Research Analyst Administration and Supervisory Body (RAASB).
Mangal questioned the logic behind regulating service fees in the industry, arguing that different analysts offer varying levels of service. Some research reports, he explained, require extensive time and travel, whereas others may focus on intraday trading tips. Grouping all research analysts under the same pricing restrictions, he said, is unfair.
He also criticized the fee cap being applied to entire families, calling it unreasonable.
Regarding the restrictions on advance fee collection, Mangal pointed out that they could lead both analysts and clients to prioritize short-term gains. Since long-term investment strategies often take a year or more to yield results, clients might discontinue services if they do not see immediate returns within the three-month renewal period. He also highlighted the difficulties this poses for foreign institutional investors (FIIs), whose systems are not structured for quarterly renewals.
Stalwart Advisors echoed these concerns, comparing the frequent renewal requirement to a hotel repeatedly checking in with guests every hour, despite their clear intention to stay longer.
Additional Challenges
RAs have flagged several operational difficulties with the new regulations, including:
- The requirement to issue refunds to clients who discontinue services, which could create cash flow issues or be exploited by dishonest clients.
- The need for service agreements to be signed either in person or through e-signature, necessitating additional functionality in payment gateways.
- The obligation to have their performance validated by a third-party agency, which is yet to be established.
These challenges have left many research analysts questioning the feasibility of continuing their services under the new regulatory framework.
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