An open letter to India's financial guardians: SEBI and Finance Ministry

Rethinking SEBI guidelines for Research Analysts to preserve a thriving capital market.

To:
Chairperson
Smt. Madhabi Puri Buch
SEBI Bhavan
Bandra Kurla Complex (BKC)
Mumbai

Dear Smt. Madhabi Puri Buch,
As a leading media house committed to delivering insightful financial news and fostering informed investment decisions, we at “Dalal Street Investment Journal” (DSIJ Pvt Ltd) find it imperative to address the recent SEBI guidelines for Research Analysts (RAs) issued on January 8, 2025. These regulations, while aimed at protecting investors, risk undermining the very ecosystem they are meant to support.

Through this open letter, we hope to highlight critical concerns and encourage a more balanced approach to regulation.

1. Restrictive Nature of the Guidelines
The newly issued guidelines appear overly cautious, prioritising regulatory safeguards at the expense of innovation and growth. While protecting investors is undoubtedly essential, creating an environment that stifles entrepreneurial spirit and operational flexibility in the RA industry could have far-reaching consequences for the broader capital market.

Example:

• The fee cap of Rs 1.51 lakh per family annually limits an RA's ability to invest in essential resources like advanced analytics and skilled personnel. These investments are crucial for delivering high-quality research and ensuring the market’s informed growth.
• Letting market forces define the pricing of services, as is standard in other industries, ensures fairness and competitiveness. Artificially capping fees disrupts this natural equilibrium and inhibit the RA’s ability to innovate and sustain their operations.

2. Contradiction in Responding to Feedback
In SEBI’s consultation paper, 76 per cent of respondents explicitly opposed the proposed limit on fees chargeable by RAs, arguing that it would hinder growth and innovation in the industry. Despite this overwhelming feedback, SEBI went ahead with the fee cap. This decision raises questions about whether the consultation process truly reflects the concerns of stakeholders and whether investor protection measures are being applied in a balanced manner.

3. Implications for Industry Sustainability
The RA industry is a vital contributor to informed investing and market stability. However, the new guidelines’ restrictive provisions, including fee caps, deposit requirements, and refund obligations, place undue financial and operational strain on this sector.

• Fee Cap: Restricts RAs’ capacity to reinvest in innovation and scale operations.
• Deposit Requirements: Create additional financial burdens without addressing core investor concerns.
• Refund Obligations: Expose RAs to significant risks driven by volatile investor sentiment.

4. Refund Provisions and Market Volatility
The provision for refunds in the RA guidelines is particularly problematic. Unlike other industries, the capital market is heavily influenced by investor sentiment. During market downturns, investor panic often leads to hasty exits. In such scenarios, if RAs are obligated to process refunds, they would face unsustainable financial pressures.

Refund requests under explainable circumstances, such as cessation of services or license cancellation, are understandable and fair. However, blanket provisions for refunds in any situation risk destabilising the industry. This is akin to a run on a bank, where all depositors demand their money simultaneously. Banks survive such crises because of a “Big Brother” entity like the RBI, which steps in with liquidity support. For RAs, however, no such safety net exists. Will SEBI assume the role of stabilizing the RA industry under such circumstances?

Also, once the refund is processed, the services are discontinued for the subscriber. With nearly four decades of experience, we understand this is a crucial time when investors require support, guidance, and reassurance to make informed investment decisions. An untimely refund could leave them without the assistance they need, potentially putting them at a disadvantage.

5. Capping Fees Stifles Innovation
The financial advisory space is built on merit, where quality advice earns trust and trust earns fair compensation. Imposing limits on fees disrupts this natural flow and reduces the ability to invest in the resources, tools, and expertise needed to consistently deliver high-quality services.

Innovation in financial research requires significant investment in:

• State-of-the-art advanced technologies including Artificial Intelligence.
• Plant/factory visits to verify the authenticity of the company’s operations etc.
• Training and development of skilled analysts.
• Acquiring reliable data and developing proprietary tools.

The fee cap discourages such investments, forcing RAs to cut corners and compromising the quality of research. This, in turn, harms investors by depriving them of robust and sophisticated analytical insights.

6. Impact of Restricting Performance Showcasing
An additional challenge arises from the restriction on RAs showcasing their past performance until SEBI establishes an agency to validate such claims. While the intent to ensure authenticity is appreciated, this creates an unfair disadvantage for genuine RAs.

During this transitional period, RAs who have consistently delivered superior results cannot demonstrate their value to potential clients. Meanwhile, unregulated entities, novice advisors, or those with questionable practices are placed on the same pedestal. This policy, intended to protect investors, paradoxically increases risk by making it harder to distinguish between credible and unreliable advisors.

SEBI must prioritise establishing the validation framework before implementing such blanket restrictions to avoid creating chaos and unfair competition for genuine players.

7. A Media House’s Perspective
As a media house, we interact daily with a diverse spectrum of market participants - from individual investors to institutional stakeholders. Their stories resonate with a common theme: the need for an ecosystem that fosters trust, transparency, and innovation. SEBI’s guidelines should reflect these aspirations rather than impose constraints that discourage participation and progress.

8. Recommendations for a Balanced Framework
To ensure the long-term growth and stability of the capital market, we urge SEBI to consider the following:

• Flexibility in Fee Structures:
  • Allow RAs to negotiate fees with clients based on the complexity and value of services.
• Rethink Refund Provisions:
  • Limit mandatory refund requirements to specific explainable circumstances such as cessation of services or license cancellation, avoiding blanket provisions that could destabilise the RA ecosystem.
• Streamline Compliance:
  • Simplify processes to reduce operational burdens while maintaining transparency and accountability.
• Support Innovation:
  • Provide incentives for RAs to invest in R&D, enabling them to adopt cutting-edge technologies and methodologies.
• Prioritise Validation Mechanisms:
  • Expedite the establishment of an agency to validate RA performance claims before implementing restrictions on showcasing past performance.
• Stakeholder Engagement:
  • Establish regular forums for dialogue with industry players to craft balanced and practical regulations.

Conclusion
India’s capital market is at a pivotal juncture. To realise its potential as a global economic leader, the country needs a thriving ecosystem where innovation and investor protection coexist harmoniously. However, the current guidelines seem overly focused on shielding SEBI from investor grievances rather than fostering a balanced and dynamic market ecosystem. On an extreme note, if eliminating grievances is the sole objective, one could argue to shut down the capital markets entirely - no markets would mean no grievances. But, that is clearly not the goal of SEBI or the financial system.

We urge SEBI to revisit these regulations with an open mind, incorporating feedback from all stakeholders to create a framework that fosters growth, innovation, and investor trust. As a media house, we remain committed to supporting such initiatives and amplifying voices that contribute to the betterment of our capital markets.

Yours sincerely,
Rajesh V. Padode
Editor – Dalal Street Investment Journal