Inside Sebi’s plan to verify investment performance claims

To address the issue, the Securities and Exchange Board of India (Sebi) issued an advertisement code in 2023 that barred regulated players from exhibiting their performance. While the move curbed misleading promotions, it impacted those who had built a credible track record for many years. 

Sebi, on 4 April, issued a circular formalising the plan to start a ‘past risk and return verification agency’ or PaRRVA that will validate the performance claims of regulated entities, including investment advisors, research analysts, and algorithmic trading providers. Let’s understand how it works and what it means for advisors.   

Also Read: Sebi’s PaRRVA to verify risk-return metrics claims of IAs, algo providers

How will it work?

There will be three entities involved in the process. Sebi will grant credit rating agencies licence to act as ‘PaRRVA’. For a fee from investment advisors, research analysts, and algorithmic trading providers, they will decide how the performance will be calculated and captured. On the other hand, stock exchanges will be granted the ‘PaRRVA Data Centre’ (PDC) licence. They will do the legwork, such as collecting the details of buy/sell orders and seeing how much return they have generated.

The PDC will pass on this data to PaRRVA, and after verification, they will make the performance live on their website. In simple words, an investment advisor, research analyst, and algo trading provider will give buy and sell calls to PDC just like how they advise a client. The performance of this portfolio or calls will be used as their report card through the PaRRVA site, which the public can view at any point. 

PaRRVA and PDC will work together, where PaRRVA will avail PDC services to get the risk-return metric. However, the final responsibility for the verification work shall lie with the PaRRVA.

How will RIAs verify performance?

The investment advisor licence allows the scope of financial planning according to the client’s risk profile. The underlying portfolio of each individual will, therefore, vary significantly according to their risk and reward ratio. This becomes a challenge while measuring performance. To be sure, taking the service of PaRRVA is kept optional. Four RIAs who provide financial planning said they will not apply for the PaRRVA return verification as they make unique portfolios for each client based on the client’s risk appetite.

That said, some investment advisors do provide specific strategies, and they can choose to get their returns verified. Rohan Borawake, an IA and co-founder of Finsharp, runs a quant-based equity strategy. For IAs like Borowake, they can maintain a model portfolio with PaRRVA, which they can later use to show the performance to potential clients.

To be sure, there was confusion surrounding whether research analysts can make model portfolios for their clients by assigning what weightage to give to each security in their portfolio. Due to this, some people had taken IA licence but Sebi clarified that research analysts (RAs) can also provide model portfolio services to its clients.

Also Read: Why you cannot complain to Sebi about unregistered investment advisors

Can historical records be shown?

Some RA and IA have been in the business for more than a decade and have built a track record. However, the current regulations don’t allow them to showcase their past performance. Some RAs feel that they now have to start from scratch if they cannot show their previous track record.

In the recent Sebi report, there was no mention of showing the performance and risk metric that was achieved before PaRRVA was formulated. At a Mint event, Sebi chairperson Tuhin Kanta Pandey had said he would look into this matter. 

“This creates a concern for them because they can’t recognize their previous work,” said the market regulator chief. As it now stands, past performance before PaRRVA cannot be shown to the public.

How will the performance be presented?

Sebi has said that those taking the service of PaRRVA cannot show selective data. This means that if a regulated entity has submitted five portfolios to be validated, they are not allowed to show the performance of only those that are doing well. 

“Any claim using risk-return metrics of one of the PaRRVA verified portfolio/algo shall always be accompanied with information about the total number of portfolios/ algos verified by the PaRRVA, during the relevant period, and shall also refer to the range of positive/negative returns and other risk-return metrics pertaining to those portfolios/algos,” said a Sebi circular dated 4 April, 2025.

While showing the performance, there shall be no mention of specific stocks/derivative instruments. There shall also be no arbitrary selection of dates to show the performance to present a favorable outcome, Sebi said.

For physical ads, Sebi said the document must contain the overall summary of risk-return metrics pertaining to the concerned regulated person as provided by PaRRVA with a QR link that provides an overall summary. Also, client-specific claims of returns shall not be allowed.

Also Read: How Sebi’s reforms could transform India’s investment advisory landscape