Establishing Performance Validation Agency: Examining SEBI’s Consultation Paper

[Daksh Kasliwal and Prakhar Singh are 3rd year BSW LL.B. (Hons.) students at Gujarat National University, Gandhinagar]

Recently, the Securities and Exchange Board of India (SEBI) has taken multiple steps to enhance the regulatory landscape to foster a more reliable and secure market environment for investors and entrepreneurs. Weeks after releasing a consultation paper to control unregistered finfluencers, SEBI on 31 August 2023 released a consultation paper to establish a Performance Validation Agency (PVA). The primary objectives of the PVA are to facilitate SEBI-registered intermediaries in disclosing their performance to investors for credibility enhancement and growth, while safeguarding investors’ interests against unverified claims. This post assesses SEBI’s proposal to establish a PVA, and its possible impact on the Indian financial market.

What is a PVA?

A PVA is proposed to be established as an independent body to validate claims and performance related to investment advice, buy/sell/hold recommendations, algorithms, and more, as offered by intermediaries and other similar entities like investment advisors (IA), research analysts (RA), and portfolio managers. While SEBI is yet to provide the complete eligibility criteria for PVA, it is proposed to operate as a wholly-owned subsidiary of market infrastructure institutions (MII) or multiple MIIs. This choice is motivated by the expected need for PVA to handle vast amounts of data, for which MIIs possess the requisite expertise.

PVA’s Validation Spectrum: What Lies in its Mandate?

The consultation paper sets out an inclusive list of claims and suggestions that the PVA can verify. It would be entrusted with the task of verifying:

  • The actual profits earned by clients of intermediaries based on the services provided. Such validation is to be carried out for all clients of an intermediary, and no cherry-picking of clients is permitted.
  • Performance claims of intermediaries and other entities, along with claims regarding the performance of their algorithm. These algorithms are to be tested during a prospective reasonable test period.
  • Performance of recommended stock/portfolio. For this, the concerned intermediary shall provide the PVA with the details of actual recommendations given to their clients.

Further, the PVA may verify any other claim, provided it does not involve cherry-picking favourable events or strategies. Furthermore, all such claims must be verified from independent sources other than the entity making the claim.

This validation of performance or claim by the PVA will be based on specific parameters like return, risk, and volatility, which are to be determined by the industry forum in consultation with the PVA and SEBI. To determine this criterion, the PVA will be free to collaborate with other knowledge partners, such as credit rating agencies. However, the paper makes it a mandate for the PVA to maintain confidentiality throughout the process. Notably, the PVA can charge a reasonable fee for its validation services.

Showcasing Validations: Transparency through Digital Avenues

Upon completion of validation by the PVA, the validated information must be displayed on the entity’s website and/or the PVA’s website, depending on the nature of the claim or performance being verified. For instance, the entity should display performance validation for client-specific recommendations on its website, with restricted access only to the client to which that information pertains. In contrast, validations for publicly made recommendations must be displayed on the same day on both PVA’s and the intermediary’s websites. This display should be in a format as may be prescribed by the industry forum in consultation with the PVA and SEBI. Similarly, the performance of all the algorithms shared with the PVA for validation shall be disclosed and displayed on the website of the PVA.

The Rationale Behind PVA

SEBI’s proposal to establish the PVA stems from a twofold need. First, there exists a lacuna for verifying the investment-related claims made by entities, as there is no standardised mechanism. For instance, although the SEBI circular already requires that IA/RA refrain from making false or exaggerated claims, investors lack the means to verify the accuracy of these claims independently. This led to an increased number of entities making exaggerated claims regarding their recommendations to attract investors. It is pertinent to note that verification from a single brokerage firm can mislead investors since they do not provide a complete picture of a person’s trading performance across all accounts.

Second, there has been consistent demand from some entities like IAs and RAs, who are not permitted to make reference to their past performances while giving advice. Similarly, stock brokers, too, cannot refer to past performance or expected future performance of the algorithm. There has been consistent demand to allow them to showcase their performance to increase their business. To address these challenges, there is a need for an independent and impartial body like the PVA to undertake impartial verification of investment-related claims made by entities.

PVA’s Role in Transforming Investment Culture: Prospects and Concerns

The proposal to establish the PVA is a commendable initiative. Past performance is a crucial factor for investors when making investment decisions, and there is substantial reliance on historical data when selecting investment avenues. The establishment of the PVA will introduce uniform criteria for claim verification, potentially shifting the paradigm from self-declaratory practices (which can be misleading) to a more rigorous validation approach. This initiative benefits both investors and intermediaries. Intermediaries with truthful and accurate claims will receive validation from the PVA, enhancing their credibility. Simultaneously, investors will be protected from unverified and potentially misleading claims from other intermediaries and entities.

One noteworthy aspect of the proposal is that though the PVA possess the power to validate the claims, it does not have the discretion to select the claims or performances to be verified to benefit a particular stock or person. For instance, validation of actual profits is to be made for all the investors of a specific intermediary or entity, and no cherry-picking is permitted. If only the gain of a particular investor is verified, then such a report will be accessible only to that investor.

The PVA’s validation standards may be more challenging to meet for smaller intermediaries and companies as the majority of them have limited financial resources and operational capacity compared to larger counterparts. Compliance with the validation standards would not only be limited to the payment of fee but would also require data gathering and reporting, which could lead to an unequal playing field. Furthermore, smaller participants might face trouble raising the necessary funds to comply with the PVA’s rules. Investors and lenders can be reluctant to fund or make investments in companies under more stringent regulatory scrutiny.

According to the proposal, the PVA should verify claims using criteria including returns, risk, volatility, and other appropriate measures. However, the validation process may result in delays in reporting and informing investors. Investors could not have access to the most recent information while making investment decisions if the PVA takes an extended period to evaluate allegations. The proposal suggests that the PVA would process intermediaries’ data and claims or performance, including the privacy of customer data on strategies. This raises concerns about how the agency would handle sensitive information and ensure data privacy and security, as the data is very sensitive in nature, data breaches or leaks could have significant consequences.

Lastly, as the PVA would be a SEBI-recognised entity, investors may cultivate an unwarranted sense of assurance by placing exclusive reliance on claims that have undergone PVA validation. It is imperative to emphasize that historical performance, albeit a significant metric, is not an unequivocal determinant of future outcomes in the realm of investment. Instead, prudent investment decisions necessitate a comprehensive consideration of multiple variables beyond historical performance data.


SEBI’s proposal to establish the PVA is a commendable step toward enhancing transparency and credibility in India’s financial markets. This initiative aims to provide investors with verified performance data, fostering a more informed investment culture. While there are concerns, such as potential challenges for smaller players and data privacy issues, these can be addressed through tailored regulations and robust security measures. The prospects offered by the PVA are promising. It can introduce standardised validation processes, shifting the focus from self-declared claims to accountable and verified performance data. Investors will benefit from reliable information, and credible intermediaries will gain recognition. To succeed, the PVA must strike a balance between transparency and the need to prevent overburdening market participants. Collaboration, innovation in validation methods, and data protection measures are essential. Ultimately, this initiative requires collective efforts from stakeholders to build trust in the financial ecosystem, benefiting investors and the market.

Daksh Kasliwal & Prakhar Singh

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