SEBI's New Framework: Enhancing Transparency and Trust in Investment Advisory Services

The Securities and Exchange Board of India (SEBI) has made significant strides in ensuring transparency and trust within the investment advisory sector through its recent circulars. As of April 4, 2025, the introduction of the Past Risk and Return Verification Agency (PaRRVA) is set to revolutionize how Investment Advisers (IAs) and Research Analysts (RAs) communicate their performance metrics to clients, addressing a long-standing industry demand.

The Need for Verification

There has been a growing demand from IAs and RAs to display their performance data to clients. To accommodate this necessity, SEBI has established PaRRVA as a framework to validate the performance claims of these entities. From the date of onboarding, PaRRVA will prospectively verify the performance of IAs and RAs, ensuring that clients receive accurate and dependable risk-return metrics.

Interim Arrangement for Past Performance Data

In a bid to provide clarity and facilitate the advisory process, SEBI's new circular allows IAs and RAs to disclose past performance metrics. However, this is permitted only under strict conditions. IAs and RAs can share past performance data certified by a member of the Institute of Chartered Accountants of India (ICAI) or the Institute of Cost Accountants of India (ICMAI) but only upon specific client request. Furthermore, the data must be communicated on a one-to-one basis, refraining from public disclosures through websites or other media.

Significance of Disclaimers

To bolster investor protection, all communications containing past performance data must be accompanied by an explicit disclaimer. This disclaimer outlines that the performance data is unverified by PaRRVA, encouraging clients to exercise due diligence before making investment decisions. It also stresses that past performance is not indicative of future results and that investments are inherently subject to market risks.

Future of Performance Communication

Looking ahead, IAs and RAs will have a two-year transition period following the operationalization of PaRRVA. After this period, they will be restricted from using past performance data dating back before its establishment and will instead rely solely on PaRRVA-verified metrics. Additionally, within a month of the circular's issuance, industry bodies must define standard templates for the certified performance data to ensure uniformity and clarity.

Regulatory Compliance and Enforcement

Entities failing to comply with the provisions set out in the SEBI circular will face stringent enforcement actions, including summary proceedings as outlined in the SEBI (Intermediaries) Regulations, 2008. This step reflects SEBI's unwavering commitment to promoting transparency and safeguarding investor interests.

Facilitating Second Opinions

Further enhancing investor confidence, SEBI has reformed its policies regarding second opinions on assets under pre-existing distribution arrangements. IAs can now charge fees on assets held under external distribution arrangements when providing second opinions, subject to a cap of 2.5% of the asset value per annum. The revision allows for greater advisory flexibility and aligns with industry demands.

Clarifications on Fee Structures

Investment advisers must disclose and seek annual consent from clients for fees incurred in conjunction with advisory services and distributor fees for the assets they oversee. This transparency aims to foster trust and ensure that clients were fully informed of the costs associated with their investment decisions.

Progress Towards T+0 Settlement Cycle

In addition to these measures, SEBI is advancing the implementation of a T+0 settlement cycle, following initial enhancements announced in December 2024. Qualified Stock Brokers (QSBs) are now required to have the necessary systems in place for this optional settlement cycle by November 1, 2025. This extension was granted in light of challenges faced by QSBs, ensuring that investors can eventually enjoy more efficient settlement processes within the equity markets.

Conclusion: A Robust Framework for Investment Advisory

SEBI’s recent initiatives reflect its ongoing commitment to nurturing a transparent, competitive, and investor-friendly landscape in the securities market. By implementing frameworks like PaRRVA and revising fee structures for advisory services, SEBI is paving the way for increased trust between investors and their advisers. As the market continues to evolve, these regulatory advancements aim to protect investor interests while fostering an environment conducive to growth and stability.