The securities market abounds with investment schemes, products and services offered by various intermediaries. Although their overall financial performance is subject to audit requirements, the scheme-wise, product-wise or offering-wise performance claims over different spans of time is not required to be particularly validated by any independent agency. The investor is left to wonder whether the performance shown by these entities are real; this hampers investments.
At present, SEBI permits portfolio managers and asset management companies managing mutual funds to report their self-verified performance against benchmarks. This is akin to blowing one’s own trumpet, and it can only lead to so far. However, investment advisors, research analysts or brokers offering algorithmic trading products are not permitted to make any reference to past performance. This restriction makes it difficult to attract investors.
To address these woes, SEBI came up with a proposal on August 31 to create an independent body called Performance Validation Agency (PVA), to verify and validate the performance claims relating to investment advice, analyst recommendations, mutual fund schemes, portfolio management services and others. This will require sifting through reams of sensitive data. This requires information technology infrastructure that is both robust and secure. Since market infrastructure institutions (MII) like stock exchanges and depositories already have the bandwidth necessary to handle and process such data, SEBI proposes to set the PVA up as a subsidiary of an MII or it could be jointly supported by multiple MIIs.
The PVA will use parameters like returns, risk, volatility and others as decided by industry forum. It can validate: claim of actual profit made by clients, performance claims of SEBI-registered intermediaries, performance of recommended stock or portfolio and such other claims. The overarching principle here is that the claim should be independently verifiable and cherry-picking of favourable instances or clients will not be allowed. This will ensure that the performance claims reflect the truth, the whole truth and nothing but the truth.
It seems that there will be a single agency, but will that suffice? And, since it may be a subsidiary of an MII, will its verification be impartial? Only time will tell.
Krishnan is a sustainability consultant; Subramanian is a company secretary