Sebi's PVA to help investors make right choice

Deepak from Lucknow is interested in investing in a mutual fund. He has been receiving continuous messages from an Asset Management Company (AMC) advertising a special scheme promising excellent returns. However, Deepak is wondering how he can trust the claims made by the AMC regarding returns or performance.

To address concerns like Deepak’s, the market regulator SEBI is taking a new step. SEBI’s preparations will put a check on extravagant claims made about the performance of schemes. SEBI has proposed the creation of a Performance Validation Agency (PVA) that will examine such claims and put a stamp of approval on them. This agency will function independently, similar to a rating agency, and provide common investors with a rating for various mutual fund schemes and other investment avenues.

This move by SEBI aims to enhance transparency and credibility in the investment industry, helping investors make more informed decisions and reducing the risk of misleading claims by AMCs and other financial entities.

The PVA will be tasked with validating claims related to investment advice from SEBI-registered intermediaries, mutual fund schemes, portfolio management services, and more. For this purpose, the PVA will charge a reasonable fee from mutual fund houses or other organizations.

These claims, including returns, risks, fluctuations, and other relevant parameters, will be validated by the agency. SEBI has released a consultation paper on this proposal to gather public input and opinions.

What’s the need of PVA?

Often, many organizations exaggerate claims about their performance or make recommendations to customers in their quest to attract more clients and expand their business. This can mislead investors. The calculation of the performance of mutual fund schemes is typically done by the Asset Management Company (AMC) itself. Similarly, portfolio managers provide information about their performance based on some benchmarks. Their claims are currently somewhat self-verified, meaning they confirm it themselves, and there is no third-party agency that verifies them.

Similarly, Investment Advisors (IAs) and Research Analysts (RAs) provide advice on investing in shares, whether it’s buying, selling, or holding. Even intermediaries were requesting such an agency so that they could establish or increase their credibility in the eyes of investors. So, SEBI is planning to enable Registered Intermediaries to promote their performance and maintain checks and balances from an investor’s perspective.

What will be the framework of PVA?

The Performance Validation Agency (PVA) will be an independent body. PVA may collaborate with a knowledge partner, similar to a credit rating agency. PVA will need to maintain complete confidentiality of the information obtained during this process.

Through PVA, four types of claims will be validated. First, a claim of actual profits received by a client based on an advisor’s recommendation. Second, claims about the performance or algorithm of SEBI-registered intermediaries or other entities. Third, claims about the performance of suggested shares or portfolios of any entity. Fourth, any other claims of a similar nature. The agency will need to process the data and claims of intermediaries in such a way that customer data privacy is preserved. SEBI has sought public opinion on these proposals, and the deadline for submitting feedback is September 21, 2023.