Under SEBI regulations, when a research analyst utilizes rating terminology (such as 'Buy', 'Hold', 'Sell', 'Overweight', or 'Underweight'), what mandatory disclosure must accompany the recommendations?

[ A ]The research report must clearly define the precise meaning of each rating, including the specific time horizon (e.g., 12 months) and expected percentage return bands or benchmark comparison criteria on which the rating is based.[ CORRECT ]

[ B ]The analyst must provide a written guarantee that every 'Buy' rating will deliver exactly 100% profit within 24 hours.

[ C ]The report must state that all stock ratings are determined by secret lottery draws conducted at the stock exchange.

[ D ]No definitions are needed because all financial words have universal legal definitions that can never be modified.

Takeaway

Option A is correct: The research report must clearly define the precise meaning of each rating, including the specific time horizon (e.g., 12 months) and expected percentage return bands or benchmark comparison criteria on which the rating is based.

Derivation

Under Regulation 20(2) of SEBI (Research Analysts) Regulations, 2014, any research analyst or entity that employs a rating system must clearly define the meaning of each rating (e.g., 'Buy' = expected return >10% over 12 months; 'Hold' = return between -10% and +10%; 'Sell' = return <-10%; 'Overweight' = outperforming benchmark index). The time horizon and benchmark must be explicitly stated and consistently applied across all reports. This ensures retail and institutional investors understand the exact operational thesis behind the recommendation. This tests rating disclosure rules. The common trap is assuming ratings have standardized universal meaning without definitions.

Why the others fail

B — The analyst must provide a written guarantee that every 'Buy' rating will deliver exactly 100% profit within 24 hours.

Research analysts are strictly prohibited from promising or guaranteeing investment returns under SEBI regulations.

C — The report must state that all stock ratings are determined by secret lottery draws conducted at the stock exchange.

Stock ratings are the rigorous output of fundamental financial analysis and valuation models, never lottery draws.

D — No definitions are needed because all financial words have universal legal definitions that can never be modified.

Different brokerage firms use varying definitions for ratings; hence, explicit definitions in every report are legally mandatory.