Research analysts may soon be able to recommend model portfolios without a worry; Sebi proposes framework

The guidelines proposed for RAs issuing a model portfolio include benchmarking it to an appropriate and relevant index, and disclosing performance duly validated by the Performance Validation Agency (PVA).

A few research analysts (RAs) have been operating in a regulatory grey area when providing their clients with model portfolios. Research services, as defined under the RA Regulations, do not explicitly include recommendation of model portfolios.

But this lacuna may soon be addressed through a framework suggested in a consultation paper issued by the capital markets regulator on August 6.

The Securities and Exchange Board of India (Sebi) has proposed expansive relaxations to the Investment Advisor (IA) Regulations and Research Analyst (RA) Regulations in an attempt to encourage more entities, including finfluencers, to register and come under the regulator's purview.

The relaxation includes allowing RAs to provide model portfolios for their clients.

The paper noted that "currently few RAs are also providing recommendations on basket of securities commonly called as ‘model portfolio’" though "these research services are not explicitly provided for in the definition of research analyst".

To accommodate evolving market practices, the paper proposes to include "recommendation of a model portfolio" as a research service provided by RAs.

The guidelines proposed for RAs issuing a model portfolio include benchmarking it to an appropriate and relevant index, and disclosing performance duly validated by the Performance Validation Agency (PVA). The regulator had issued a consultation paper on PVA in August 2023, and the Sebi Chairperson Madhabi Puri Buch recently said that the agency will soon start operations.

Also read: Sebi proposes sweeping relaxations to regulations for investment advisors, research analysts

In the guidelines, the model portfolio has been defined as a "a basket of securities for which a research report is issued by a RA recommending the relevant weightages for one or more securities mentioned therein".
Without weightages, merely a summary or a consolidation or securities recommended, will not be considered a portfolio.

The paper proposed that the portfolio should be issued through a research report with all constituent securities being recommended covered in the research report and rebalancing done at intervals that the RA thinks appropriate. The paper added that the opinion of the RA on any constituent securities forming part of the model portfolio should not be contrary to its opinion on each of such securities individually.

The consultation paper also said that the portfolio should be labelled to indicate the type of underlying universe of securities (such as large caps, mid-caps, multi-caps, etc.) or an underlying theme (such as Make in India, Defence, etc.) or a sector. It should also define and discuss in detail the methodology for selection of the securities.