📘 Chapter 13: Legal and Regulatory Environment – Outline

Section Title Description
13.1 Role of SEBI in Regulation Outlines SEBI’s purpose, powers, and function as the regulator for Indian securities markets.
13.2 SEBI (Research Analysts) Regulations, 2014 Details the eligibility, responsibilities, and conduct rules for SEBI-registered research analysts.
13.3 Code of Conduct for Research Analysts Highlights ethical practices, conflict disclosures, and integrity standards required by SEBI.
13.4 Research Report Guidelines Explains mandatory report disclosures, certifications, and format rules for publishing equity research.
13.5 Penalties and Enforcement Describes the consequences for violations, including penalties and disciplinary action by SEBI.

📘 13.1 Regulatory Infrastructure in Financial Markets

The Indian financial market is governed by a well-defined legal and regulatory structure. Various regulators oversee different segments such as banking, capital markets, insurance, corporate affairs, and insolvency to ensure fair, transparent, and stable market functioning.

13.1.1 Ministry of Finance

The apex ministry responsible for overall economic policy, financial legislation, capital markets, and fiscal management. It includes departments like DEA, DFS, and Revenue.

13.1.2 Ministry of Corporate Affairs (MCA)

Regulates corporate governance, company registrations, and enforces the Companies Act. Ensures financial disclosures, transparency, and corporate responsibility.

13.1.3 Reserve Bank of India (RBI)

India’s central bank and monetary authority, regulating banking, currency issuance, interest rates, and managing foreign exchange reserves and financial stability.

13.1.4 Securities and Exchange Board of India (SEBI)

Regulator of India’s securities market. It protects investor interests, promotes fair trading, regulates intermediaries, and ensures transparency in equity markets.

13.1.5 Insurance Regulatory and Development Authority of India (IRDAI)

Oversees and regulates India’s insurance sector. Ensures solvency of insurers, protection of policyholders, and orderly development of insurance markets.

13.1.7 Insolvency and Bankruptcy Board of India (IBBI)

Regulates insolvency professionals and proceedings under the Insolvency and Bankruptcy Code. Ensures time-bound resolution of insolvencies for corporates and individuals.

📘 13.2 Important Regulations in Indian Securities Market

The Indian securities market is governed by a set of well-established regulations that aim to ensure transparency, protect investor interests, and promote orderly development. Below are key regulatory frameworks enforced by SEBI and the Government of India:

13.2.1 Securities Contracts (Regulation) Act, 1956

This Act provides the legal framework for regulating stock exchanges and contracts in securities. It empowers SEBI to regulate and recognize stock exchanges, and defines valid contracts for securities trading.

13.2.2 SEBI Act, 1992

The SEBI Act established the Securities and Exchange Board of India as the regulatory authority for capital markets. It gives SEBI powers to protect investors, regulate intermediaries, and monitor market practices.

13.2.3 SEBI (Prohibition of Insider Trading) Regulations, 2015

This regulation aims to prevent trading based on unpublished price-sensitive information (UPSI). It mandates disclosure norms, trading windows, and codes of conduct for listed companies and intermediaries.

13.2.4 SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003

Also known as SEBI (FUTP) Regulations, it prohibits market manipulation, price rigging, misleading statements, and fraudulent activities in the securities market. Amended in 2007, 2012, and 2013.

13.2.5 SEBI (Research Analyst) Regulations, 2014

These regulations govern the eligibility, registration, code of conduct, and responsibilities of research analysts to ensure quality, transparency, and unbiased equity research.

📘 13.3 Code of Conduct for Research Analysts

The Securities and Exchange Board of India (SEBI) has laid down a detailed Code of Conduct for registered research analysts under the SEBI (Research Analyst) Regulations, 2014. This code ensures ethical conduct, integrity, transparency, and objectivity in securities research and recommendations.

📌 SEBI-Mandated Code of Conduct Includes:

  • Act honestly, fairly, and in the best interest of investors.
  • Maintain high standards of integrity and professionalism.
  • Ensure independence of views, and disclose any conflicts of interest.
  • Conduct thorough research and present data that is adequate, up-to-date, and fact-based.
  • Make investment recommendations only after proper due diligence.
  • Maintain confidentiality of client information and sensitive data.
  • Comply with all legal and regulatory requirements.
  • Do not engage in misleading, manipulative, or deceptive practices.

This code helps maintain investor confidence and ensures that research analysts provide fair and unbiased advice. Violations may result in penalties, suspension, or cancellation of registration by SEBI.

All SEBI-registered research analysts must follow this code strictly while preparing research reports or issuing recommendations to ensure ethical standards and investor protection.

📘 13.4 Management of Conflicts of Interest and Disclosure Requirements for Research Analysts

SEBI has provided an extensive framework under the SEBI (Research Analyst) Regulations, 2014 to manage conflicts of interest, enhance transparency, and ensure professionalism in research reporting. Below are key regulations applicable to research analysts and their organizations:

Regulation 15

Requires research entities to establish internal policies and procedures to identify and manage conflicts of interest.

Regulation 17

Specifies that analyst compensation must not be linked to specific merchant banking or brokerage outcomes.

Regulation 18

Provides limitations on publication of research reports, public appearances, and overall business conduct.

Regulation 19

Outlines disclosure requirements in research reports such as conflicts, shareholding, compensation, and certification.

Regulation 19A

Mandates publication of research-related disclosures and documents on the official website.

Regulation 20

Specifies minimum content requirements for research reports including recommendations, assumptions, and risk factors.

Regulation 21

Regulates the issuance of investment recommendations in public media including print, television, or social media.

Regulation 22

Lays down conditions for distribution of research reports and ensures fair access to all clients.

Regulation 23

Requires additional disclosures by proxy advisers regarding voting recommendations and conflict handling.

Regulation 25

Mandates maintenance of records such as published reports, drafts, communications, and disclosures for 5 years.

Regulation 26

Requires appointment of a qualified compliance officer to oversee regulatory adherence and handle grievances.

Regulation 26A

Outlines the framework for internal dispute resolution within research analyst entities.

Regulation 26B

Covers redressal of investor grievances through a clear and accessible mechanism.

Regulation 26C

Introduces client-level segregation of research and distribution services to maintain independence and avoid conflict.

Regulation 32 (Chapter V)

Defines liability and enforcement measures in case of default, including penalties and restrictions imposed by SEBI.

Together, these regulations ensure that research analysts operate ethically, disclose all material facts, avoid biased opinions, and protect investor interests at all times.

📘 13.5 Exchange Surveillance Mechanisms: GSM, ASM & SEBI Advertisement Compliance

To protect investors and promote fair trading, SEBI and stock exchanges have introduced several surveillance frameworks such as Graded Surveillance Measures (GSM) and Additional Surveillance Measures (ASM). These mechanisms help in identifying and regulating high-risk stocks to avoid price manipulation and volatility.

Graded Surveillance Measures (GSM)

GSM is a SEBI-led initiative to monitor companies with consistent poor fundamentals, low market capitalization, or suspicious price movements. Stocks are placed under different stages with increasing levels of restrictions like trade-to-trade settlement, price band tightening, or periodic call auctions.

Additional Surveillance Measures (ASM)

ASM aims to monitor stocks showing high volatility, abnormal price/volume behavior, or surveillance concerns even if their fundamentals are sound. ASM actions include margin requirements, circuit limits, and transfer to T2T segment.

📌 SEBI Advertisement Code for RAs/IAs

Research Analysts (RAs) and Investment Advisers (IAs) must comply with SEBI’s advertisement code while promoting services through any form of communication:

a. Forms of Communication

  • Print, digital, SMS, emails, social media, and public media.
  • Applies to all forms of promotional, sponsored, or educational content.

b. Mandatory Information & Disclosures

  • Name, SEBI registration number, validity period, and compliance officer contact.
  • Risk disclaimers, nature of service (advisory/research), and non-guarantee of returns.

c. Prohibitions in Advertisement

  • False, misleading, exaggerated, or unverifiable performance claims.
  • Assured return guarantees or selective disclosure of past performance.

d. Other Compliance Requirements

  • Advertisements must be approved and archived with date stamps.
  • No unregistered third-party testimonials or influencer marketing allowed.

📌 SEBI Investor Charter & Complaint Disclosure

  • RAs/IAs must publish the SEBI-prescribed Investor Charter on their website and communication platforms.
  • Disclose total complaints received, resolved, pending with aging details every month.
  • Maintain transparency and accountability by allowing grievance redressal visibility to all clients.

These initiatives are aimed at improving investor protection, minimizing manipulation, and increasing transparency in the capital markets ecosystem.

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