Traditionally, investing in the Indian market has been broker-driven. True, brokers do act as analysts, but their importance has not been great.
Recently many companies have been raising funds in international markets. Many analysts track the price movements in international markets which have led to an increase in the number of companies being tracked by analysts. Corporate India is slowly, but surely, progressing by embracing analysts. Soon the analysts may even influence price formation in the domestic market as well.
If we believe that stock markets are efficient, then it means that all available information has been factored into the stock price. But ultimately prices are driven by the market expectations of the company's future prospects. This is where the estimates of analysts play a critical role. A quantitative analysis can be conducted to determine the correlation between changes in a stock's price and the publication of a research report. For that one has to filter out the effect of "noise", the impact of news releases, competitor news releases, economic reports, as well as other macro-economic factors. Even after all that work, the results may not give any statistically significant results. In addition, the results can be manipulated by a change in the length of the time period being studied. On a qualitative basis, it has been proven that having more information about a company in the marketplace is better than less information, but the return on the investment in research is nevertheless hard to calculate.
While quantifying the benefits is difficult, most of the value of research lies in the un-quantifiable benefits provided to investors: • Comparative operating and valuation data on a company: An analyst, over other investors, has a better understanding and intricate knowledge of the company and the industry in which it operates. For instance, the valuation technique used for Reliance Industries is different from that used to value Infosys Technologies. Using the same techniques is likely to give skewed results resulting in wrong investment decisions. • A reliable source of independent third-party information on a continuous basis so that investors can track performance and evaluate an investment • First hand information from the companies: For instance, corporates normally hold meetings to brief analysts about the latest happenings in the industry. The reason why information is disclosed to analysts is because their estimates play a crucial role in the price formation process. It is also advantageous for the analyst as he is in a position to glean potentially important information.
It is also important to differentiate between objective fee-based research and research that is promotional. Many of reports are freely available today making it essential to bring about transparency in the reports published by analysts. However, there is no regulation or guideline by market watchdogs like SEBI covering equity research. Fundamental analysts, technical analysts and a new breed called techno-fundamental analysts are at hand to dispense advice to anyone willing to listen to them.
What can SEBI or the exchanges do about this? Research and analysis are subjective and based on the judgment of even serious analysts and as such it would be extremely difficult to set standards. But SEBI and the exchanges can at least consider the following steps to begin with. • All analysts who wish to publish research reports on stocks in the public domain should be registered with SEBI • Minimum professional training levels should be prescribed for registration of analysts. Alternately, they may be asked to clear a qualifying examination to be conducted by SEBI • Analysts or their clients should not hold any position in the stock at the time of publishing the report • SEBI and exchanges should ensure better reporting standards from smaller companies and ensure that the data available is sufficient and accurate • Company managements should be asked to disclose to exchanges all information they provide to analysts. Exchanges should make such information available to all potential investors through their websites • SEBI should advice the media to set internal standards for ensuring quality of published research reports
Research is a function of the market and is influenced by bull and bear swings. Bull market invariably sees the mushrooming of research analysts. With an increase in the retail investors and growing equity culture in India, analysts have a significant role to play in the Indian markets now than, say, five or ten years ago.
