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NISM Certifications · NISM-Series-XV: Research Analyst · Legal and Regulatory Environment (NISM XV)

A research analyst's report on Sundaram Textiles Ltd states: Current EPS is Rs 20, and the target P/E is 15, so the target price is Rs 300. The firm's research team holds 0.8% of Sundaram's shares through the analyst's relative's account, which the analyst does not disclose, as the holding is below 1%. Which assessment is correct under the Research Analysts Regulations?

Disclosure is required. A research analyst must disclose financial interest of the analyst, relatives or associates in the subject company in the report, whatever the recommendation or target price. The EPS times P/E calculation giving Rs 300 is unrelated to this duty, so staying silent breaches the conduct requirements.

  1. ANo disclosure is needed, since 0.8% is below the 1% threshold
  2. BDisclosure is needed only if the report gives a Buy rating
  3. CDisclosure of the holding is required, because the holding by the analyst or associates must be stated and the 1% threshold test applies to the shareholding of the analyst or the associates taken together, but any financial interest, including a relative's, must be disclosed regardless of recommendationCorrect
  4. DDisclosure is needed only if the target price exceeds Rs 300

Explanation

The regulations require disclosure of the analyst's or associates' financial interest in the subject company, including holdings by relatives, in the report. The recommendation type or the target price does not change this. The target price of Rs 300 (20 x 15) is arithmetically fine but irrelevant to the disclosure duty. Note that the 1% test relates to a disclosure of beneficial ownership at the specified level, but the financial interest must be disclosed in any case.

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