SEBI's New RA Regulation, What a Research Entity cannot do?
Authored by
Invos Research
Date Released
What Research Analysts (RAs) Are Not Allowed to Do: A Guide for Investors
Investors often rely on Research Analysts (RAs) to gain insights into the financial markets. However, it is essential to understand the limitations of RAs as defined by the Securities and Exchange Board of India (SEBI). Knowing what RAs are not permitted to do will help you make informed decisions and avoid unrealistic expectations.
This article outlines the key activities that RAs are prohibited from engaging in under SEBI regulations.
Fee Restrictions: The maximum fee that may be charged by RA is ₹1.51 lakhs per annum per family of client.
1. Research Analysts Cannot Provide Portfolio Management Services (PMS)
RAs are strictly prohibited from managing your investment portfolio. They can offer recommendations and insights through research reports, but they cannot make investment decisions on your behalf or execute trades for you.
If you need someone to manage your portfolio, you should seek out a SEBI-registered Portfolio Manager (PMS provider), not a Research Analyst.
What This Means for Investors
- An RA can suggest what stocks or funds to buy or sell, but they cannot manage your funds or handle your investment account.
- Investors must independently decide whether to act on the recommendations provided by the RA.
2. Research Analysts Cannot Engage in Automated Trading
RAs are not allowed to provide or operate any automated trading systems on behalf of clients. Automated trading involves using algorithms to execute trades without manual intervention, and this activity falls outside the scope of services that RAs can offer.
What This Means for Investors
- If an RA offers to set up an automated trading system or claims to have an algorithm that will trade on your behalf, it is a violation of SEBI regulations.
- Only licensed stockbrokers or portfolio managers with specific approvals can offer automated trading services.
3. Research Analysts Cannot Provide Personalized Investment Advice
Unlike Investment Advisers, RAs cannot give client-specific, personalized financial advice. Their recommendations must be general in nature and applicable to a broader audience through research reports.
What This Means for Investors
- RAs provide insights based on market research, but they cannot tailor their advice to your personal financial situation.
- For personalized investment advice, investors should consult a SEBI-registered Investment Adviser.
4. Research Analysts Cannot Handle Client Funds or Securities
RAs are not permitted to take custody of or manage their clients' funds or securities in any manner. They cannot accept deposits, manage bank accounts, or have direct control over your trading accounts.
What This Means for Investors
- Never transfer funds or grant trading access to an RA.
- Any such request from an RA should be considered a red flag.
5. Research Analysts Cannot Guarantee Returns
SEBI regulations explicitly prohibit RAs from making any promises or guarantees about the returns investors will earn from following their recommendations. Financial markets are inherently volatile, and no one can predict returns with certainty.
What This Means for Investors
- Be cautious of RAs who claim to offer "guaranteed" or "high-return" strategies.
- Always remember that investment outcomes depend on various market factors beyond anyone’s control.
6. Research Analysts Cannot Execute Trades on Behalf of Clients
RAs cannot perform any trading activity on your behalf. They may recommend a stock to buy or sell, but the decision and execution of the trade must be done by the investor.
What This Means for Investors
- You are responsible for executing any trades based on the RA’s recommendations.
- If an RA offers to execute trades for you, it is a violation of SEBI guidelines.
7. Research Analysts Cannot Combine Research and Distribution Activities
SEBI regulations require a clear separation between research and distribution activities. An RA cannot act as a distributor of financial products while providing research services.
What This Means for Investors
- An RA cannot sell you financial products, such as mutual funds or insurance, while also offering research advice.
- Ensure there is no conflict of interest in the services provided by your RA.
8. Research Analysts Cannot Charge Exorbitant Fees
SEBI has set a cap on the fees that RAs can charge retail investors. As per current regulations, RAs can charge a maximum of ₹1.51 lakh per annum per family for their services.
What This Means for Investors
- If an RA charges fees beyond the prescribed limit, they are violating SEBI regulations.
- Ensure that the fees charged by your RA are within the permissible limit and that there is transparency in fee structures.
9. Research Analysts Cannot Offer Financial Planning Services
Financial planning involves creating a comprehensive plan to achieve financial goals, including tax planning, retirement planning, and risk management. RAs are not authorized to offer such services.
What This Means for Investors
- If you need a detailed financial plan, consult a certified Financial Planner or a SEBI-registered Investment Adviser.
- RAs are focused solely on providing research-based market insights.
10. Research Analysts Cannot Use Client Data Unethically
SEBI regulations mandate that RAs must protect client data and use it responsibly. They cannot share, sell, or misuse client information for personal gain.
What This Means for Investors
- Ensure your RA complies with data protection laws and has a clear privacy policy.
- Be wary of any RA who requests unnecessary personal information.
Red Flags to Watch For
If you encounter any of the following behaviors from a Research Analyst, it’s a sign they may be violating SEBI regulations:
| Red Flag | What It Means |
|---|---|
| Offering to manage your portfolio | RAs are not allowed to manage client portfolios |
| Promising guaranteed returns | No RA can guarantee profits or returns |
| Proposing automated trading systems | RAs cannot provide or operate automated trading solutions |
| Asking for custody of your funds | RAs cannot handle client funds or securities |
| Providing personalized advice | RAs must provide general recommendations, not personalized advice |
Conclusion
Research Analysts play a vital role in providing investors with insights into the financial markets. However, SEBI regulations set clear boundaries on what RAs can and cannot do to protect investors from conflicts of interest, unethical practices, and financial harm.
As an investor, it’s crucial to be aware of these limitations and ensure that your RA is compliant with SEBI guidelines. Always verify your RA’s SEBI registration and stay vigilant to avoid any potential malpractice. Understanding these restrictions will empower you to make better financial decisions and safeguard your investments.