December 8, 2023

The landscape of stock market analysis and recommendations has been evolving rapidly with the rise of digital communication platforms. Analysts, particularly those operating on platforms like WhatsApp and Telegram, have been providing quick stock recommendations to their followers. However, recent developments suggest that such communication might be treated as “public appearance” by market regulators, leading to potential changes in how these analysts operate.

The Securities and Exchange Board of India (Sebi), the country’s market regulator, has taken note of this trend and is considering these instant messaging communications as a form of “public appearance”. According to Sebi’s order issued on August 11, even registered analysts who offer stock recommendations through platforms like WhatsApp and Telegram need to adhere to certain regulations. These regulations, specifically covered under Section 25 of Research Analyst (RA) Regulations, require analysts to maintain reports that explain the reasoning behind their recommendations.

A recent case involving registered analyst Manish Goel sheds light on this matter. Goel was fined Rs 60 lakh by Sebi for multiple violations, including fraudulent and unfair trade practices. Sebi’s order stated that since Goel did not maintain records related to the research recommendations he made through his WhatsApp and Telegram chats, he failed to comply with Regulation 25(1) of RA Regulations.

Sebi officials conducted an inspection of Goel’s records covering the period between April 1, 2020, and March 31, 2021. The investigation revealed that during this period, Goel collected over Rs 4.16 crore in fees from 583 clients for his services as a research analyst. Despite this, he failed to meet the basic requirements of RA Regulations, misled clients with promised assured returns, and breached professional standards and regulatory compliance.

One noteworthy aspect of Goel’s case was his promise to subscribers that they would receive a free stock recommendation if they incurred losses based on his initial recommendation. Sebi deemed this promise as a commitment to assured returns, without proper research-backed evidence.

Although Goel argued that his communications were similar to price targets provided by media channels, the Sebi Adjudicating Officer contradicted this claim. The officer noted that the certainty of outcome portrayed in Goel’s messages was misleading since stock markets inherently carry risks that can’t guarantee a specific outcome.

Furthermore, Sebi found Goel in violation of the Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations for his “sensationalistic” stock recommendations. Additionally, he was found to have breached various sections of the Research Analyst (RA) Regulations for not maintaining an arms-length relationship between his research activities and his role as a Director and Principal Officer to a Sebi Registered Investment Advisor (RIA).

In essence, Sebi’s action against Manish Goel highlights the need for analysts to maintain transparency and comply with regulations, especially when providing stock recommendations through messaging apps. The case also underscores the growing vigilance of regulators in monitoring digital communication platforms in the financial sector, aiming to safeguard investors and maintain the integrity of the market.

It remains to be seen how this regulatory stance will impact the way analysts provide recommendations through instant messaging platforms and whether more stringent rules will be introduced to govern this rapidly evolving landscape.

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