Research Analysts (RAs) must have a documentary basis and rationale for their recommendations. This ensures that recommendations are supported by research and analysis, and that the RA can demonstrate the basis for their recommendations. This article provides a comprehensive technical analysis of this requirement.
Regulatory Basis
Primary Provision: Regulation 18(7)
Regulation 18(7) provides that:
"Research analyst or research entity shall have adequate documentary basis, supported by research, for preparing a research report."
What "Documentary Basis" Means
Definition
A documentary basis means that:
- There is documented evidence for the research.
- The research is supported by analysis.
- The analysis is documented.
- The basis for the recommendation is traceable.
Purpose
- Ensures recommendations are based on research.
- Provides evidence for regulatory review.
- Enables clients to understand the rationale.
- Protects the RA from allegations of arbitrariness.
What Must Be Documented
1. Research
- The research conducted.
- The sources used.
- The analysis performed.
2. Analysis
- The analytical methods used.
- The calculations performed.
- The assumptions made.
3. Recommendations
- The basis for the recommendation.
- How the analysis supports the recommendation.
4. Data
- The data used.
- Where the data came from.
- The reliability of the data.
Documentation Requirements
Types of Documentation
| Document Type | Description |
|---|---|
| Research Notes | Notes from research conducted |
| Analysis Files | Spreadsheets, models, calculations |
| Source Documents | Copies of sources used |
| Draft Reports | Draft versions of research reports |
| Final Reports | Final research reports |
Documentation Format
- Can be physical or electronic.
- Must be organized and accessible.
- Must be maintained for five years.
Documentation Retention
Regulation 25(2) provides that:
"All records shall be maintained either in physical or electronic form and preserved for a minimum period of five years."
The Research Process
Step 1: Research
- Identify the company or sector to research.
- Gather information from reliable sources.
- Analyze the information.
Step 2: Analysis
- Perform financial analysis.
- Perform valuation analysis.
- Identify key drivers and risks.
Step 3: Recommendation
- Develop a recommendation based on the analysis.
- Document the rationale.
- Corroborate with data.
Step 4: Documentation
- Document the entire process.
- Maintain records of research, analysis, and recommendations.
Example: Documentary Basis for a Buy Recommendation
Research
- Annual reports of the company (5 years).
- Quarterly results (8 quarters).
- Industry reports.
- Analyst consensus estimates.
Analysis
- Financial model with P&L, balance sheet, cash flow.
- Valuation model with DCF, PE, PB.
- Peer comparison analysis.
- Sensitivity analysis.
Recommendation
- "Buy with a price target of ₹2,000."
- Rationale: Strong financial performance, attractive valuation, positive industry outlook.
Documentation
- Research file with all documents.
- Financial model spreadsheet.
- Valuation model spreadsheet.
- Draft and final research report.
Common Compliance Gaps
1. No Documentary Basis
Some RAs do not maintain a documentary basis.
Solution: Maintain a documentary basis for all recommendations.
2. Incomplete Documentation
Some RAs maintain incomplete documentation.
Solution: Document the entire research process.
3. Not Retaining Documentation
Some RAs do not retain documentation for five years.
Solution: Retain documentation for five years.
4. Unreliable Sources
Some RAs use unreliable sources without documentation.
Solution: Use reliable sources and document them.
Conclusion and How Anuj Desai & Associates Can Help
A documentary basis is essential for demonstrating that recommendations are based on research and analysis.
Anuj Desai & Associates offers specialized services to help RAs comply with documentary basis requirements:
- Review of research documentation.
- Guidance on documentation best practices.
- Compliance audit and advisory.
Contact us today to ensure your research is properly documented. Our team will review your documentation 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.