Sebi introduces new measures to curb misleading investment return claims

Sebi announced that a credit rating agency would act as the verification agency, while a stock exchange will serve as the data centre

In a bid to clamp down on individuals and entities making lofty return claims, the Securities and Exchange Board of India (Sebi) has introduced a “Past Risk and Return Verification Agency” (PaRRVA), which will be tasked to verify the risk-return metrics of services offered by investment advisors, research analysts (RAs), algorithmic trading platforms, and other such entities.

 

Industry players said that for any claims such as “best performing”, “safety during volatility”, “top ranked”, or those on high returns, it would be mandatory to seek verification of the same.

 

In its board meeting on Wednesday, the market regulator announced that a credit rating agency will act as the verification agency while a stock exchange will serve as the data centre.

 

Industry players said PaRRVA validation will be akin to an ISI-mark when it comes to making any claim in any presentation or promotional material.

 

Sources said that the National Stock Exchange (NSE) has already set up a firm, which will serve as a data centre. However, a final decision on which exchange will be recognised to take up the task is yet to be taken. Further, Sebi is yet to finalise a credit rating agency to act as PaRRVA.

 

“We don’t have the data so far for validation or verification. Either the Association of Mutual Funds in India (Amfi), or Sebi will have to provide the data for the same. Based on this data, the verification will be done. Discussions are ongoing on the roles among various stakeholders to get this project going. Further, the model and costing is also still under discussion,” said a person familiar with the development. 

 

Sebi had first proposed such an agency for performance validation in September 2023.

 

In 2022, the market regulator had also issued a circular, barring stock brokers from associating with any algo platform making any claim or reference to past performance, or expected future return.

 

Several industry players said that it may still take time to make the agency operational as a lot of systems and processes need to be placed before that.

 

“We will have to look at the cost aspect and also the technological requirements for all the data entries. This may add to the costs of individual entities but will help bring trust in the ecosystem,” said an executive with a research firm.

 

The need for such validation was felt as many entities and individuals were seen on social media making false claims to draw investors or traders to their platforms, training institutes, or services, which had caused uproar.

 

Even if an investment advisor or research analyst creates a customised basket of offerings on platforms like smallcase, or offers small portfolios, they must get any claims verified through PaRRVA, according to industry sources. The smallcase platform is a financial technology platform that offers pre-built portfolios of stocks and exchange-traded funds (ETFs) to help investors build diversified, low-cost portfolios.

 

Initially, PaRRVA will operate on a pilot basis for two months, during which it will refine its processes and technology based on industry feedback. After this trial period, the agency will transition to regular operations.

 

Interestingly, Sebi has decided to not make it mandatory for entities to avail the services of such a validation agency. However, then they will not be able to make a claim regarding their past risk-return metrics. Further, the risk-return metrics’ verification will be made only on a prospective basis from the effective date of opting for the PaRRVA service.