Market regulator Sebi bats for new body to vet performance claims

Move to put a stop to potentially misleading info spread by individuals and entities

The Securities and Exchange Board of India (Sebi) has proposed to form a performance validation agency (PVA) in a bid to provide more legitimacy to the claims made by registered intermediaries.

PVA will be an independent body, which will be allowed to charge a fee for its services such as validation of claims related to actual profits made by clients of an entity, investment advice and stock recommendations, among others. It will even validate the performances of algorithms, mutual fund schemes and portfolio management services.

Sebi's consultation paper for the same comes at a time when there has been a lot of uproar over individuals and entities making false claims on social media in a bid to draw investors towards their products, services and training courses. Certain brokerages -- such as Zerodha and Fyers --  have already launched their own verification tools in a bid to curb misinformation.

The markets regulator plans to grant PVA recognition to a wholly-owned subsidiary of a market infrastructure intermediary (MII), which includes stock exchanges and depositories, or a joint entity of multiple MIIs. Such an agency would enable other entities to market their products based on validations made by them.

In the consultation paper, Sebi pointed out that there will be no cherry-picking of favourable events, strategies or clients and claims will have to be independently verifiable from sources other than the entity making the claim.

Performance claims will have to be validated by PVA, based on specified parameters such as returns, risk, volatility, and other suitable parameters decided by the industry forum and partnerships with credit rating agencies.

"As PVA would need to process the data and claims/performance of intermediaries/other entities, with attendant privacy concerns over customer data on strategies, it is crucial that the entity that handles the data is able to shoulder the responsibility to gather, process and validate a large amount of data," said Sebi, reasoning its decision to allow only subsidiaries of MIIs for eligibility as a PVA.

Sebi has sought comments on the proposals by 21 September, seeking responses on whether there should be a PVA and if entities should be required to validate their claims.

What’s new

> PVA will be an independent body, which will be allowed to charge a fee for its services

> These could include validation of claims related to actual profits made by clients, investment advice, stock recommendations, among others

> Such an agency would enable other entities to market their products based on validations made by them

> Sebi's consultation paper comes at a time when there has been a lot of uproar over false claims being made on social media