P&H HC Upholds SEBI’s License Requirement For Analysts Sharing Inventory-Associated Data On Social Media

The Punjab and Haryana High Court has held that a requirement by the Securities & Exchange Board of India (SEBI) for its Research Analysts to obtain a license for sharing stock-related recommendations on social media is not violative of their Constitutional right to free speech and trade.

A Division Bench of Justices Ramchandra Rao and Harminder Singh Madaan held the requirement is in line with International Organizations of Security Commissions’ (IOSCO’s) objectives and principles of Securities Regulation- that the entities that offer investors analytical or evaluative services should be subject to oversight and regulation, appropriate to the impact their activities have on the market or the degree to which the regulatory system relies on them.

The petitioner is an expert in equity research and market assessment with an experience of over 14 years in the securities market. He registered himself with the SEBI as a Research Analyst. It is the grievance of the petitioner that the SEBI (Research Analyst) Regulations, 2014 place unreasonable restrictions by making it mandatory for the petitioner to take Licence/ Registration from the respondents to speak or write regarding listed stocks and for sharing stock-related recommendations with others and on social media.

He argued that the regulations deprive him of the fundamental right of freedom of speech and expression [Article 19(1)(a)]the right to practice the profession/business of his choice [Article 19(1)(g) and 19(6)]and also the right to liberty [Article 21].

He submitted that citizens have a right to receive information and ideas. Suppose the petitioner is prevented from exercising his right of free speech by making stock-related recommendations, in that case it will amount to denial to the general public of its right to receive information and ideas. He alleged that the restrictions imposed by the said Regulations do not fall within the ambit of reasonable restrictions [Article 19(2)].

It was also submitted that the regulations violated his right to equality [Article 14] Because there are many businesses in India where citizens are doing consultancy without regulation. Moreover, the impugned Regulations are also not in accordance with the Directive Principles of State Policy guaranteed by Part IV of the Constitution of India.

Judgment of the Court

The Court perused the regulations and held that the power to impose restrictions on fundamental rights is essentially a power to ‘regulate’ the exercise of these rights. “In fact, ‘regulation’ and not ‘extinction’ of what is to be regulated is generally the extent to which permissible restrictions may satisfy the test of reasonableness.”

It referred to the Supreme Court’s decision in Bennet Coleman, where it was held that the true test is whether the effect of the impugned action is to take away or abridge fundamental rights. It was held that where more than one fundamental right guaranteed by Part II of the Constitution is alleged to have been violated, the true test for determining the validity of a restriction is to see that against which of the freedoms the restriction is directly leveled.

The Court studied the definition of Research Analyst under Section 2(u) of the Regulations. It held that the true nature and character of the regulation suggest that there is no direct abridgement of the right of free speech.

“There might be only an incidental interference with the said right,” it said.

It held that the definition is indicative of ensuring that only professionally qualified people registered under regulations are engaged and associated with a Research Analyst to prepare research reports.

The Court held that this is intended to maintain the high quality and neutrality of the reports and to discourage people with sketchy or no knowledge of the subject from getting associated with the Research Analysts.

So far as the argument of Equality vix. other consultancy business is concerned, the High Court held,

“The fact that the Astrologers or Management consultants are allowed to give consultancy, and are not regulated, does not mean that Research Analysts who provided investors with information on the basis of which investment decisions are made, should also be excluded from regulation. So the plea based on Article 14 of the Constitution of India in that regard cannot be countenanced.

Case Title: Manish Goel v. Securities & Exchange Board of India Through its Chairman & Anr.

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