SEBI has specified specific requirements for the contents of a research report under the RA Regulations. These requirements ensure that research reports are based on reliable information, use consistent terminology, and provide clients with the information they need to make informed investment decisions. This article provides a comprehensive technical analysis of the mandated contents of a research report.
Regulatory Basis
Primary Provision: Regulation 20
Regulation 20 provides:
(1) Research analyst or research entity shall take steps to ensure that facts in its research reports are based on reliable information and shall define the terms used in making recommendations, and these terms shall be consistently used.
(2) Research analyst or research entity that employs a rating system must clearly define the meaning of each such rating including the time horizon and benchmarks on which a rating is based.
(3) If a research report contains either a rating or price target for subject company's securities and the research analyst or research entity has assigned a rating or price target to the securities for at least one year, such research report shall also provide the graph of daily closing price of such securities for the period assigned or for a three-year period, whichever is shorter.
(4) Research analyst or research entity shall ensure that the recommendations in the research report are corroborated by relevant data and analysis forming the basis for such research service.
Detailed Analysis of Each Requirement
1. Reliable Information (Regulation 20(1))
Requirement: RAs shall take steps to ensure that facts in research reports are based on reliable information.
Implications:
- Use reliable and verifiable sources.
- Verify information before inclusion.
- Avoid unreliable or unverified sources.
Terms Definition:
- RAs must define the terms used in making recommendations.
- Terms must be consistently used.
2. Rating System Definition (Regulation 20(2))
Requirement: RAs that employ a rating system must clearly define the meaning of each such rating.
Must Include:
- Meaning of each rating (e.g., Buy, Sell, Hold).
- Time horizon for the rating.
- Benchmarks on which a rating is based.
Sample Rating Definitions:
| Rating | Meaning | Time Horizon | Benchmark |
|---|---|---|---|
| Buy | Expected to outperform benchmark | 12 months | Nifty 50 |
| Hold | Expected to perform in line with benchmark | 12 months | Nifty 50 |
| Sell | Expected to underperform benchmark | 12 months | Nifty 50 |
3. Price Target Graph (Regulation 20(3))
Requirement: If a research report contains a rating or price target and the RA has assigned a rating or price target for at least one year, the report must provide a graph of daily closing price.
Details:
- Graph of daily closing price of the securities.
- For the period assigned.
- Or for a three-year period, whichever is shorter.
Purpose: To provide clients with historical price context for the rating or price target.
Example: A research report on HDFC Bank with a price target of ₹2,000 must include a graph of HDFC Bank's daily closing price for the period assigned (e.g., 12 months) or for three years, whichever is shorter.
4. Corroboration by Data and Analysis (Regulation 20(4))
Requirement: RAs shall ensure that recommendations in the research report are corroborated by relevant data and analysis forming the basis for such research service.
Implications:
- Recommendations must be supported by data and analysis.
- The basis for the recommendation must be clear.
- The analysis must be documented.
Practical Implementation
Sample Research Report Structure
1. Title and Header
- Company Name
- Recommendation (Buy/Sell/Hold)
- Price Target
- Rating
2. Executive Summary
- Key highlights
- Investment rationale
3. Business Overview
- Company background
- Business segments
4. Financial Analysis
- Revenue and profit trends
- Key financial ratios
5. Valuation
- Valuation methodology
- Peer comparison
6. Risks
- Key risks to the recommendation
7. Rating System Definition
- Definition of rating used
8. Price Target Graph
- Daily closing price graph
9. Disclosures
- Conflict of interest disclosures
- Other regulatory disclosures
Sample Rating System Definition
"Rating System:
- Buy: Expected to outperform the Nifty 50 Index by more than 10% over the next 12 months.
- Hold: Expected to perform in line with the Nifty 50 Index (within +/- 10%) over the next 12 months.
- Sell: Expected to underperform the Nifty 50 Index by more than 10% over the next 12 months.
- Accumulate: Expected to moderately outperform the Nifty 50 Index (5-10%) over the next 12 months.
- Reduce: Expected to moderately underperform the Nifty 50 Index (5-10%) over the next 12 months."
Common Compliance Gaps
1. Not Defining Rating System
Some RAs do not clearly define their rating system.
Solution: Define rating system with meaning, time horizon, and benchmark.
2. Using Inconsistent Terminology
Some RAs use inconsistent terminology.
Solution: Ensure consistent use of defined terms.
3. Not Including Price Graph
Some RAs do not include the required price graph.
Solution: Include the price graph when a rating or price target has been assigned for at least one year.
4. Not Corroborating Recommendations
Some RAs do not corroborate recommendations with data and analysis.
Solution: Ensure recommendations are supported by relevant data and analysis.
Conclusion and How Anuj Desai & Associates Can Help
The contents of a research report are mandated by SEBI to ensure clients receive accurate, reliable, and complete information.
Anuj Desai & Associates offers specialized services to help RAs comply with research report content requirements:
- Review of research report structure and content.
- Guidance on rating systems and terminology.
- Compliance audit and advisory.
Contact us today to ensure your research reports comply with SEBI requirements. Our team will review your reports and provide a tailored compliance roadmap.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. Readers are advised to consult qualified professionals for legal and compliance matters. Anuj Desai & Associates is a SEBI compliance consulting firm based in India.