Legal Advice for Challenges faced by Corporations rendering Stock Advisory Services | Corporate Attorney for Stock Brokers in Delhi NCR | Corporate Lawyer for Stock Brokers in Delhi NCR |

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“Is rendering stock advisory services in India illegal ? No, rendering stock advisory services in India is not illegal. Can stock brokers give stock advisory services in India ? Yes, stock brokers give stock advisory services in India.

Giving stock advisory services in India is a legitimate act, however, the Entrepreneur or the Corporate need to comply with several laws, rules and regulations especially the ones of the Securities & Exchange Board of India SEBI and other regulatory agencies.”

In India only about 3.7 percent of the total population invest and trade in the Financial Market. Out of them less than 50 percent invest wisely and the rest remain dependent on luck which creates distress among them due to heavy loss in the highly volatile market. To overcome and minimize such practice, a new trend in the market has taken its place. The new concept wherein the market factors are adequately evaluated, studied, valued, analysed and reported by experts, thereby minimising the risk and taking appropriate decisions. These experts are termed as Equity Research Analysts.

Equity Research mainly includes analyzing the company’s financials, performing ratio analysis, financial forecasting in excel, and exploring scenarios with the objective of making a buy/sell stock investment recommendation. Equity Research Analysts explain their research and analysis in their equity research reports. Equity Research plays a very important role in bridging the information gap between stock buyers and sellers. The reason is that at all levels (individual or institutional) the investors may not have the resources or the capabilities to analyze every stock. In addition, management does not provide complete information due to which further in-efficiencies are created and stocks trade below or above the fair value. Equity Research Analyst spends a lot of time, energy, and expertise to analyze stocks, follow the news, discuss with the management, and evaluate stock valuations. Also, equity research tries to help buyers make a profit by identifying the value stocks out of the massive ocean of stocks. Working as an Equity Research Analyst requires a pool of skills and talent. These professionals keep their eyes on the stock market and company specific news that can affect returns on a daily basis. Professionals keep themselves updated with all the factors that can affect the market such as natural disasters, political factors, foreign relations, and social factors.

Legal Challenges faced by Corporations rendering Stock Advisory Services: Best Corporate Lawyer Advice

1. Managing Client Expectations: This is an area where advisors need to understand the psychology of their clients to be successful. Managing a client’s portfolio may be an easy endeavour, but managing their expectations is much more difficult. Many clients have unrealistic expectations of return on investment and interest rates. Advisors should be able to show clients how to add value to their investing equation. One way to do this is to help clients maintain a long-term investment perspective so that they don’t go off the track with every movement in the market. Of course, it takes time to do this consistently but clients who rely on an advisor for help to get on track will be much more likely to remain loyal to their advisor.
2. Competitor Poaching the Clients: Competition is a natural by-product of being in business. The competitors often try to influence the clients of other companies by unethical means in order to increase their reputation, market share and monetary value. Defaming the competitor and misleading the clients depicts a wrong picture of the economy. Some researchers make false promises to provide high return and minimum service charges to attract clients of their competitors. Regulators should make policies and laws to eliminate such unethical practices in the market. Such practices mislead the common people resulting in distrust among clients towards the financial market. A lot of efforts are required for an Equity Research Analyst to capture clientele such as by way of providing free demo services, ensuring minimum guarantee returns, circulating their market research and digital and print media advertisement.
3. Protection of Data Privacy of Consumer Database: The emergence of internet commerce and big data cast consumer data privacy issues in a new light. The way we use and collect data is more common than ever. Almost all negative interactions with large enterprises lead to consumer data collection as data acquires new value for businesses. One reason is that more information leads to better online tracking, behavioral profiling, and data-driven targeted marketing. Overloading sensitive data with minimal configuration increases the risk of misuse and mishandling of sensitive information. With advances in technology and the increasing use of internet-connected devices for day-to-day operations and transactions, data becomes more detailed, and therefore more valuable to those that can profit off it. Artificial intelligence (AI) and machine learning algorithms often require massive amounts of data to pre-train them, establish patterns and model intelligence.
4. Employee Poaching by the Competitor: Stealing or poaching employees is a common phenomenon. To win work or obtain confidential information of the competitors, many rival employers look at recruiting key employees from other companies, which are expected to bring clients with them. This can have a devastating effect on companies when employees are poached by competitors. Though they cannot stop a rival making an offer to their employees, they can nevertheless reduce the likelihood of their employees accepting such an offer and taking their clients with them. This results in the risk of future losses and the imminent harm that might be caused to their business owing to the employee’s breach. In circumstances where the competitor has encouraged the employees to breach an employment contract, the competitor may be liable for inducing a breach of contract by the said employee. Subject to availability of evidence, they may commence proceedings against both the employee and their new employer for breaching the contract as well as for inducing and encouraging such breach.
5. Intellectual Property Protection: Entrepreneurs must be careful enough to ensure they are not infringing on someone else’s intellectual property and to protect their own in the process. Intellectual property is intangible and has to be protected through intellectual property rights such as copyrights and trademarks. Protecting the intellectual property from potential infringers in the marketplace requires well defined intellectual property strategies. Trademarks are distinctive signs to identify particular services and goods. Words, phrases, numbers, logos, designs and three-dimensional shapes can all become registered trademarks. The idea is that a trademark sets apart from the competitors and allows them to express the quality, history, and individuality of their work under a legally registered mark. Many corporations don’t have an established method to determine if they are leveraging their trademarks for maximum value. Additionally, monitoring trademark misuse can be time consuming on its own. The best way to protect the source code is to treat it as intellectual property and protect it under Copyright law. Further, under India’s Copyright Act of 1957, source code has protection against precise copying. It should be known that the form of expression of an idea gets protection under the Copyright Act but not the idea itself. In the case of a software program, both source code (human-readable) and object code (machine-executable) get protection by copyright law. Though, the algorithms within a program will not consider a protected expression. Free usage does not mean the software is in the Public Domain, i.e., it is not protected by copyright laws. As soon as the software is created, a copyright comes into existence.
6. Force Majeure: Acts of force majeure including nationalization, expropriation, currency restriction, measures taken by any government or agency of any country, state or territory worldwide, industrial action or labour disturbances of any nature amongst staff of the Advisor or of its agents (or of any third parties) boycotts, power failures or breakdowns in communication links or equipment (including but not limited to loss of electronic data) international conflicts, acts of violence, acts of terrorism, insurrection, revolution, nuclear fusion, fission or radioactivity, or acts of God, failure to provide courier or delivery services or disruption of any relevant stock exchange, depository, clearing house, clearing or settlement systems or market, or the delivery of counterfeit or stolen securities.
7. Insider Trading: Till the present time, ‘Insider Trading’ terminology has not been defined under any statute. It is an expected fact that they are the malpractices pertaining to the dealing and trading of securities undertaken by people or alike entities who have access to undistributed price sensitive information or simply a piece of confidential information. Disclosure of the insider trading prohibition, is mandatory for the entities as it helps to maintain the public faith in them, internally it helps in smooth functioning, a sense of transparency and accountability is sustained towards the SEBI. Regulation 2 (n) of SEBI (Prohibition of Insider Trading) Regulations, 2015 specifies the meaning of “unpublished price sensitive information”; often referred to as UPSI. Moreover, this term was again mentioned in the case: In Re: Divis Laboratories Ltd. in respect of Mr. Srinivas Maddineni, SEBI, Final Order No.-WTM/AB/IVD/ID3/9771/2020-21, Page 7 of 19 (Issued on 11th December, 2020). Furthermore this case also covered the aspects as to the connected persons and the insider, holding Mr. Srinivas Maddineni liable for wrongful and illegal gains. Impending upon the context of ‘Research Analyst’, until now, there are no precedents known as to the matter of research analysts and insider trading. However, referring to an article online of April 2021, published by Thomson Reuters, United States of America (USA), whereby a similar entity- the research analyst was barred by Financial Industry Regulatory Authority (FINRA) for insider trading in two companies. This might be of much relevance to upcoming defaulters of similar entities in India.

 

Applicable Laws & Regulatory Framework for the Corporations rendering Stock Advisory Services: Best Corporate Legal Solutions in India

1. Securities and Exchange Board of India, 1992: The main legal compliances revolving around such entity is the SEBI (Research Analyst) Regulations, 2014, which also connects it to the SEBI Act, 1992 and other connected SEBI statutes. All the regulations mentioned herein are to be complied with by the abovementioned body corporate. The very first compliance obligation is the ‘Registration Certificate’ from SEBI as mandated under the Regulation 3 & the grant of the certificate which has been mentioned under Regulation 9 of the SEBI (Research Analyst) Regulations, 2014;which should be under the compliance of the specifications under Regulation 6 of the SEBI (Research Analyst) Regulations, 2014. However, it seems to be fulfilled in reference to the Client Company Website. It is important to mention here that in the case: In Re: Indira Trading Company, SEBI, Final Order No.-WTM/MB/IMD/DoF-1/10676/2020-21,Paragraph 10 (Issued on 26th February, 2021), it can be pointed out that– “without registration with SEBI, the entity violates not only the Regulation 3 (1) of SEBI (Research Analyst) Regulations, 2014 or their respective regulations (pursuant to nature), but also the Section 12 (1) of the SEBI Act, 1992.” A defaulting applicant or a registered Investment Adviser who violates the Regulations shall be punishable and dealt with in accordance with the SEBI (Intermediaries) Regulations, 2008. The Investment Advisers were earlier governed by the Investment Advisory Agreement for the obligation cast upon them and any breach would thus lead to breach of contract. But with the regulations coming in, the advisers are now statutorily governed, imposing a fiduciary obligation to act in the best interest of the investor. This move is expected to cast a greater degree of responsibility and accountability on the Investment Advisers. SEBI conducted a preliminary examination and found that Tips4Market (T4M) was soliciting and inducing investors to deal in securities market based on investment advice including stock tips among others, prima facie, without having the requisite IA standard registration. The interim order dated 20th November, 2020 passed by the Securities and Exchange Board of India (SEBI) stated that by indulging in such activities, they have violated the provisions of investment advisers (IA) Regulations. SEBI has directed “cease and desist from acting as an investment advisor” to T4M and its sole proprietor until further orders.
2. Consumer Protection Act of 2019 & Rules of 2021: Consumers and investors have undergone substantial losses during the financial crisis, propelled in large parts by faulty practices and fundamental flaws of research analysts such as:
   • Wrong promises and short-term incentives promoting risks
   • Absence of unprejudiced advice for investors
   • Absence of thorough due-diligence for in-house and third party products
   • Aggressive charging models and fee structures
3. Information Technology Act, 2000: Data theft is defined in Section 43 (b) of the Information Technology Act, 2000 (IT Act) as follows: If any person downloads copies or extracts any data, computer database or information from a computer system or computer network without permission of the owner or any other person who is in charge of such a computer, computer system or computer network. The term is used when any information in data form is illegally copied or obtained without the consent or knowledge of other business or individual. Data theft has emerged as one of the major cyber crime worldwide. India does not have specific laws on data protection, but we have the IT Act. Here are a few Sections of this Act that are significant. Section 43 (b) of the IT Act provides protection against unauthorised downloading, copying, extracting information, data or a database, by imposing heavy civil compensation which could run into crores of rupees. The compensation is provided under Section 43 (c) in case of unauthorised introduction of computer viruses or other contaminants. Clause (i) provides compensation for destroying, deleting or altering any information residing in a computer or diminishing its value. Data is an intangible asset worth millions of dollars, but Section 43 does not quantify the compensation to be paid. Hence, a complainant relies on the mercy of our courts and the intelligence of his lawyer. Section 66 of the Act protects against data theft, while Section 72A deals with the punishment for disclosure of information in breach of a lawful contract. Both these Sections provide for a penalty that includes imprisonment of up to three years or fine of up to Rs. 5 lakhs or both. In context to the above Act, research analysts have complete dependency on data which is acquired, produced or purchased by them. Information Technology Act, 2000 provides them remedies to safeguard their data bank from being damaged, theft or destroyed by any unauthorised user.

 

Legal Advice for the Corporations rendering Stock Advisory Services: Best Corporate Legal Advice for Stock Advisory Companies

1. Proficient Documentation & Paper Work: The companies should enter into various agreements like non-solicitation agreement, non-compete agreement, non-disclosure agreement and assignment agreement. The Client, any third party or anyone else have no rights to forward or share advisor’s investment ideas or SMS or report or any information provided by the advisor, which have been received directly by them. The Advisor reserves its rights to take any legal action in such an event.
2. Conducting Due Diligence before disclosing Intellectual Property: Intellectual property (IP) due diligence is an integral part of the legal due diligence process as often tremendous worth is associated with the intangible assets of the business particularly in contemporary times. Accordingly, IP due diligence includes evaluating the intangible assets of a business, ensuring valid intellectual property rights existing therein and scope of their protection, evaluating the risks concerned with regard thereto and in turn, reviewing their potential value. Disregarding aspects of intellectual property during the due diligence process can cost a buyer /investor profoundly. An appropriate IP diligence helps setting an agenda for treating relevant IP rights, assessing the risk involved in relation to the target’s IP assets and strategizing to resolve the issues.
3. Putting appropriate Policies and Terms & Conditions in the Websites and Mobile Apps: The Advisor shall not be liable to indemnify to the Client with respect to any losses which the Client, its affiliates, its directors, its employees and, or, its agents may suffer insofar as such losses arise out of or result from any investment advice provided by the Advisor to the Client. Further, the Client should acknowledge the risks associated with the stock market and that profits and losses in equity are subject to market risk.
4. Putting a Disclaimer with an Advice: The investment advice provided by the Advisor does not guarantee any return. Further, the Client acknowledges that the Advisor does not guarantee the performance of any of the securities purchased or any specific level of performance, the success of any investment decisions or strategy that the Advisor may use pursuant to the Investment Advice of the Advisor.
5. Data Mining & its Automation: Extraction of information from different resources is a key factor for an analyst. Online research is one of the important parts of the process. Keeping a step ahead, automatic extraction of data on a real time basis has become a USP for analysts. Creating algorithms and projection of charts based on research and extraction gives accurate output which helps them to increase their productivity. It also helps to eliminate manual errors. Research analysts can focus more on providing strategic insights from the data extracted, which would help their clients take business decisions in a better way. Stock advisory companies can easily differentiate themselves from the competitor by providing faster, accurate and more insightful information to their clients, thereby gaining a major competitive edge in the equity research space. Clients can also expect better insightful market research analysis, due to the bandwidth of research analysts freed from conducting repetitive mundane web extraction activities.

Equity research provides a very useful function in today’s financial market. Research analysts share industry insights and knowledge with investors who may or may not have the time to develop them. Relationships with equity research teams can also provide valuable advantages, including corporate access to institutional investors. A few stocks simply don’t lend themselves to reliable research. They might have volatile financial consequences, an unproven business model, unreliable management, or a history of limited operation, all of which can lead to significant margins of error for earnings growth and intrinsic value. The business cycle’s phase is also extremely important. Research shows that forecasts are less reliable in downturns, but investors are confident to rely on research during these times. Lack of knowledge on these issues can severely limit one’s ability to glean full value out of their research.
Authored By: Adv. Anant Sharma & Aashita Khandelwal