Some equity research firms shutting shops after SEBI's new guidelines on research analysts

New Delhi: Markets regulator SEBI's new guidelines on research analysts (RAs) are forcing several equity research firms publicly announcing plans to shut down their shops due to heightened compliance and operational requirements.

The Securities and Exchange Board of India (SEBI), on January 8, came out with guidelines for Research Analysts in a bid to curb fraudulent stock recommendations and illegal practices in the securities market.

The new guidelines necessitate research firms to comply with stricter measures such as maintaining records of client interactions, conducting compliance audits, and following Know-Your-Customer (KYC) procedures and these requirements have led to increased operational costs for smaller entities.

Consequently, a few firms including Sentinel Research, Stalwart Advisors, and Mystic Wealth have announced their plans of shutting their research services citing significant operational and compliance burden.

Market experts said that the new guidelines have notably lowered the threshold for individuals to register as RAs, making it easier for newcomers to enter the profession. However, for established RAs, these guidelines have imposed heightened compliance and operational requirements.

They believe that the new regulations are too stringent and could undermine the quality of research in the market.

Sandeep Parekh, founder of Finsec Law Advisors, posted on microblogging site X that SEBI is "going way overboard in its regulations and shutting down competent and honest advisors and researchers from the market".

"If it goes down this path, all that will remain will be incompetent and dishonest, or incompetent or dishonest advisors," he added.

Neeraj Marathe, who operates independent research firm Sentinel Research, also expressed his dismay on social media.

He had paused his research services last year when the draft RA regulations were first announced, hoping for more clarity and more balanced guidelines. However, upon reviewing the final regulations, he stated that the rules were even more burdensome than expected.

"Last year, when the proposed RA regulations came, I had paused my research services at sentinelresearch.in. The hope was that the actual regulations would be better in terms of conditions and compliance and I shall restart after getting clarity. Well, the actual regulations have turned out to be much worse! I too shall be discontinuing my research services portal," he added.

Stalwart Advisors, which has been operating its equity research service "Treasure Trove" for over a decade, announced it would be closing its operations.

The firm cited the increased operational and compliance requirements, including the rule that limits subscription fees to a quarterly payment model, as a key factor in its decision.

"Coming back to new guidelines, besides adding significant operational & compliance burden, the new guidelines dictate that a research subscription cannot accept more than a quarter's fee at a time," Stalwart Advisors said on its website.

"The additional operating costs & effort for client onboarding (Agreement, KYC, CKYC, etc), benchmarking, validation, audit etc is still manageable. The deal breaker for us is the risk of focus shifting to short-term activity in order to justify quarterly renewals (unintended consequence). We clearly understand that the big money is not in constant buying or selling, but waiting patiently for the right opportunities and then riding them," it added.

Mystic Wealth, which had previously operated as a Registered Investment Advisor (RIA), surrendered its licence and later transitioned to becoming a Research Analyst, only to announce its intention to surrender that licence as well due to the new regulatory burdens.

"After consistently beating the benchmarks since our inception, we have now closed our RA services," Mystic Wealth said on its website.