The capital markets regulator Securities Exchange Board of India (Sebi) has proposed the creation of a performance validation agency (PVA) that would validate claims of performance by Sebi-registered intermediaries and other entities, thereby facilitating them to showcase their performance to investors to grow the reach of their services to investors.
What is the need for a new body?
The regulator says that there has been a demand from registered intermediaries to showcase their performance to investors so as to establish their credibility in the eyes of investors and to help grow the reach of their services to investors.
Currently asset management companies (AMCs) calculate the performance of mutual fund schemes and portfolio managers report their performance against certain benchmarks. The claims made by these entities are mostly self-verified and there is no specified agency to verify the same.
What will the new body do?
The regulator has proposed to create an independent body called PVA that will be entrusted with the task of validating the claims related to investment advice, mutual fund scheme, portfolio management service by Sebi-registered intermediaries and other entities such as investment advisors, portfolio manager, AMC, stock broker, etc.
The body will be permitted to charge a reasonable fee for its services.
The claims will be validated by the agency based on specified parameters such as returns, risk, volatility and other suitable parameters as may be decided later.
The agency would be free to join hands with other knowledge partners such as credit rating agencies. However, the PVA will be expected to maintain confidentiality of the information received by it during the process.
What kind of claims will be validated?
There will be four kinds of claims that would be validated by the PVA. The first would be the claim of actual profit made by clients. The second would be the performance claim of Sebi registered intermediaries/ other entities and algorithms.
The third would be the performance of recommended stock/ portfolio and finally, there would be any other performance claims subject to no selective cherry-picking of favourable events/ strategies/client and other results.
What kind of structure of agency is proposed?
The agency would be required process the data and claims of intermediaries with privacy of customer data on strategies. So, it is vital that the entity that handles the data is able to shoulder the responsibility to gather, process and validate the huge amount of data.
It is proposed that PVA become a wholly-owned subsidiary of market infrastructure institutions (MII) or a jointly supported entity by multiple MIIs.
Sebi has invited comments on these proposals which can be sent to the regulator by Sept 21, 2023 at the email ID: consultationMIRSD@sebi@gov.in.
