Independent research analyst

Chapter 1 sorts research analysts by who employs them and who reads the work.

A sell-side analyst works at a firm that also does banking and broking, and publishes for the public. A buy-side analyst works inside a fund and writes for its own fund managers.

The independent research analyst is the third case. The firm is small and does nothing else — no investment banking, no broking, no asset management. It sells research, and subscribers pay for it.

That is the whole point of the model. With no banking mandate to protect and no fund positions to justify, the usual reasons to soften a view are simply not there.

The definition. Section 1.1: "Independent Research Analysts - They work for research originators or boutique firms separate from full-service investment firms and sell their research to others on a subscription basis."

Who buys it. The workbook's own list is broad: "Their clients could be investors, institutions, investment bankers, regulators, stock exchanges, fund managers etc."

The second product. Beyond subscriptions, independent analysts "also provide customized research reports on the businesses or industries or sectors on specific requests. The purpose of these reports could vary from investment activity to understanding competition landscape to mergers and acquisition etc."

Where it sits. These 3 categories are the workbook's main ones. It then adds that "entities such as newspapers, media and consolidators of information also provide research reports" — outside the 3.

The regulatory hook, with numbers. The term is not only descriptive. The SEBI (Research Analysts) Regulations, 2014, as set out in chapter 14, name independent research analysts expressly in regulation 16 on limitations on trading. They, part-time research analysts, individuals employed as research analysts by a research entity, and their associates:

• shall not deal or trade in securities the analyst recommends or follows within 30 days before and 5 days after publication of a research report;
• shall not deal, directly or indirectly, in securities he reviews in a manner contrary to his given recommendation;
• shall not purchase or receive securities of an issuer before that issuer's initial public offering, if the issuer is principally engaged in the same types of business as companies the analyst follows or recommends.

Regulation 16(6) allows those restrictions to be relaxed for significant news or an event concerning the subject company, or an unanticipated significant change in the analyst's personal financial circumstances — but only with prior written approval under approved internal policies.

Note the asymmetry. A research entity can escape sub-regulations (2) to (4) if it has segregated research from all other activities at arm's length. An independent analyst, having nothing to segregate from, cannot.

Illustrative. Anand runs a 3-person boutique research firm in Bengaluru covering 22 mid-cap industrial companies. His revenue:

Every rupee comes from people who pay for the research itself. No broking commission, no banking fee, no fund performance.

Now the regulation 16 arithmetic. Anand personally holds shares in one of the 22 companies and plans to publish a note on it on 20 June.

30 days before 20 June = 21 May
5 days after 20 June   = 25 June
Blackout window        = 21 May to 25 June

He cannot deal in that stock at any point in those 36 days. If he publishes a Buy and then sells, he has traded contrary to his own recommendation, which is barred outright with no window at all.

And if one of the 22 companies' unlisted competitors offers him pre-IPO shares, he must refuse — that issuer is principally engaged in the same type of business as companies he covers.

A large broking house could put its research arm behind a Chinese Wall and rely on the segregation proviso. Anand is the whole firm. The restrictions apply to him personally.

Section 1.1 (Primary Role of a Research Analyst) names the 3 categories, and a classification question drawn from it is among the most reliable one-markers in the paper. Chapter 14 then carries regulation 16, where independent research analysts are named in every one of sub-regulations (2), (3) and (4).

Expect a category question — which analyst sells research on a subscription basis — and a numeric question on the 30-day and 5-day trading window. Note also that a research analyst in the regulatory sense is a much wider term: anyone who, for consideration, is in the business of providing research services. Independent research analyst is a business-model description sitting inside that definition, not an alternative to it.

• Independent is a third category, not a kind of sell-side analyst. The workbook is explicit that these firms are "separate from full-service investment firms."
• The revenue model is subscription and commissioned work, not commission or banking fees. That is what the word independent is doing.
• "Independent research analyst" is not the same as "research analyst". The latter is the SEBI definition covering everyone in the business for consideration, including a part-time analyst. The former describes who employs the analyst.
• 30 days before, 5 days after. Both numbers, in that order. A window of 30 days on both sides is the usual wrong answer.
• The segregation escape in regulation 16(5) is for a research entity, not an individual. An independent analyst has no other activity to wall off.
• Trading against your own recommendation is prohibited absolutely. Unlike the 30-and-5-day window, there is no approval route past it.
• Newspapers, media and consolidators of information publish research too, but the workbook keeps them outside the 3 categories.