SEBI Introduces Framework for Verification of Risk-Return Metrics: Operationalisation of PaRRVA

The Securities and Exchange Board of India has issued a circular dated April 4, 2025, introducing a framework for the recognition and operationalisation of the Past Risk and Return Verification Agency (“PaRRVA”). This framework represents a significant regulatory development aimed at standardising the manner in which performance-related claims are made by market intermediaries and ensuring that such claims are independently verified, transparent, and not misleading.

Regulatory Context and Objective

The circular has been issued pursuant to amendments to the SEBI (Intermediaries) Regulations, 2008, and other related regulatory frameworks governing intermediaries such as investment advisers, research analysts, and stock brokers. It enables such entities to refer to risk-return performance in advertisements and other communications, subject to independent verification by a recognised agency.

The framework seeks to address concerns relating to selective and potentially misleading performance claims, while promoting consistency, transparency, and investor protection in the securities market.

Institutional Framework

The circular establishes a structured framework based on a principal-agent model. Under this model, a SEBI-recognised credit rating agency is designated as PaRRVA and is responsible for defining the verification methodology, overseeing the verification process, and disseminating verified outputs. A recognised stock exchange is designated as the PaRRVA Data Centre (“PDC”) and is responsible for providing technological infrastructure, processing data, and executing the verification process in accordance with the methodology prescribed by PaRRVA.

While operational responsibilities are undertaken by the PDC, the ultimate responsibility for verification rests with PaRRVA.

Eligibility and Recognition Process

SEBI has prescribed eligibility criteria to ensure that only institutions with adequate experience, financial strength, and operational capability are entrusted with these functions. A credit rating agency seeking recognition as PaRRVA is required to have a minimum track record of fifteen years, a net worth of at least ₹100 crore, a substantial rating portfolio of listed or proposed-to-be-listed debt securities, and a robust grievance redressal mechanism, including an Online Dispute Resolution (“ODR”) system. A stock exchange acting as PDC is required to meet similar thresholds in terms of experience and governance, including a minimum net worth of ₹200 crore, nationwide infrastructure, and an effective grievance redressal framework.

The recognition process is structured in two stages, comprising in-principle approval followed by final recognition. Upon receipt of in-principle approval, the applicant is required to establish the necessary technological infrastructure and systems within the prescribed timeline. This is followed by system audits, cybersecurity compliance checks, and inspection by SEBI prior to the grant of final recognition.

The framework also mandates a two-month pilot phase, during which the systems and processes are tested and refined based on stakeholder feedback. Verified metrics are not made publicly available during this phase. Full operationalisation is permitted only upon successful completion of the pilot phase and regulatory assessment.

Verification Process

The verification process under the PaRRVA–PDC framework is designed to be standardised and technology-driven. It involves the collection of data from multiple sources, including market infrastructure institutions, the Association of Mutual Funds in India (for mutual fund net asset value data), and regulated intermediaries such as investment advisers and research analysts.

Such data is submitted through technological interfaces, including application programming interfaces (APIs) or file uploads, on a real-time, end-of-day, or such other basis as may be appropriate, depending on the nature of the data and services. The PDC processes the data in accordance with the methodology specified by PaRRVA and generates verified outputs in a predefined format. These outputs are then transmitted to PaRRVA, which publishes the verified risk-return metrics on its platform for access by intermediaries and investors.

This framework is intended to ensure consistency, traceability, and auditability of performance data.

Roles and Responsibilities

The circular delineates the respective roles of PaRRVA and PDC. PaRRVA is responsible for defining the verification methodology, designing operational workflows, entering into necessary agreements with stakeholders, addressing grievances, and disseminating verified metrics. It is also required to maintain records and make its verification methodology publicly available.

The PDC is responsible for developing and maintaining the verification systems, establishing connectivity with relevant data sources, processing verification requests, ensuring data confidentiality and security, and conducting periodic internal audits. It is also required to support PaRRVA in handling investor queries and operational issues.

Presentation and Disclosure Requirements

The framework introduces strict rules on how verified performance data can be presented. It requires that any performance claim must be complete and not selective. Intermediaries cannot highlight elective display of verified returns of any specific product or service, selection of arbitrary dates/time-periods to present favorable outcome and any claim using risk-returns metrics giving out a selective presentation of risk-returns metrics or amounting to willful omission of certain specific risk-return metrics. They must ensure holistic and proper presentation of data.

The rules also restrict the use of client-specific performance claims and do not allow reference to specific securities in such claims. In addition, any communication must provide access to detailed information, such as through a link or QR code, so that investors can review the full data.

Disclaimers and Investor Protection

The circular mandates the inclusion of standard disclaimers in all communications involving verified risk-return metrics. These disclaimers clarify that past performance is not indicative of future results, that verified returns do not guarantee future performance, and that such information should not be relied upon as the sole basis for investment decisions. They also highlight that actual returns may vary due to market conditions and execution-related factors.

These requirements are intended to ensure that investors interpret performance data with appropriate caution.

Governance and Oversight

The framework requires the constitution of an Oversight Committee within two months from the date of in-principle approval. The committee comprises non-independent directors (excluding the Managing Director) of PaRRVA and PDC, public interest directors, representatives of intermediaries, and at least one member from a SEBI-recognised investor association.

The Oversight Committee is responsible for monitoring the functioning of PaRRVA and PDC, ensuring data protection and system integrity, reviewing methodologies, and conducting periodic audits. It also serves as a forum for dispute resolution and plays a role in reviewing and approving changes to the operational framework. The committee is required to submit its recommendations to the respective Boards for strengthening systems and addressing any deficiencies.

Data Sharing, Record Maintenance and Dispute Resolution

The framework imposes obligations on all relevant entities, including market infrastructure institutions (depositories, clearing corporations, and stock exchanges), the Investment Adviser Administration and Supervision Body (IAASB), the Research Analyst Administration and Supervision Body (RAASB), the Association of Mutual Funds in India (AMFI), and regulated intermediaries, to provide accurate and timely data to the PDC for verification.

PaRRVA is required to maintain records for a minimum period of five years, including verified outputs received from the PDC and verified metrics disseminated to its clients.

The framework also provides for a structured dispute resolution mechanism. Disputes are initially addressed through internal mechanisms established by PaRRVA, followed by escalation to the Oversight Committee, and, if unresolved, may be referred to the online dispute resolution platform. Investor complaints continue to be addressed through SEBI’s existing grievance redressal system, including SCORES.

Regulatory Impact

The circular introduces a significant change to the existing regulatory position. Investment advisers, research analysts, and stock brokers are now permitted to refer to past performance or risk-return metrics in their communications, provided such metrics are verified by PaRRVA and presented in accordance with SEBI guidelines.

This represents a shift from a regime that largely restricted performance-based claims to one that permits such claims within a regulated and verification-based framework.