Equity Research in India

Every morning when you scan the pages of a financial newspaper you would come across some Buy/ Sell recommendations. The 24 hour business channels dish out these recommendations throughout the day. How reliable are these equity research reports for the common investor? Presently, most of the research is carried out by brokerages, and their efficacy can be questioned because of the direct conflict of interest as the brokerage recommending a particular scrip may be having positions in that particular scrip. As the system of disclosures in India is inadequate, it is difficult for the retail investor to rely on these reports. Further, less than 6% of the companies listed on Indian bourses are covered by the analysts.

There has been a long impending need for independent equity research in india. Ideally the research agency should be independent of the marketing function in independent research. Globally, there are three models for independent research:

• Sponsorship of ratings by the company as followed in Hong Kong
• Paid research by Stock Exchanges, as practiced in Singapore
• Research reports commissioned by investors.

One of the frontline rating agency CRISIL (A subsidiary of Standards & Poor),  has recently stepped into the field of independent equity research. It remains to be seen which of the above models will be used by CRISIL for its equity research. However, this will be the first serious attempt at independent equity research in India. CRISIL plans to cover not only the frontline stocks but also mid cap and small cap stocks through its research. Grades will be awarded to the stocks on a scale of 1-5, and the rating agency will abstain from giving a Buy or Sell recommendation. CRISIL has come out with first set of research ratings on 13 companies in its first report. This appears to be a good opportunity for retail investors to get an access to unbiased research reports. It is sincerely hoped that this trend will gather momentum in the future.