FROM PROHIBITION TO VERIFICATION: A CRITICAL ANALYSIS OF SEBI’S PARRVA FRAMEWORK

This post is authored by Harsh Jain, third-year B.A. LL.B (Hons.) student at NLIU, Bhopal.

INTRODUCTION

On 8 December, 2025, the Securities and Exchange Board of India (SEBI) launched the Past Risk and Return Verification Agency (PaRRVA), developed in collaboration with CareEdge Ratings and the National Stock Exchange of India (NSE). PaRRVA is an independent, regulator-mandated performance verification mechanism for investment intermediaries. This initiative directly addresses a persistent regulatory paradox: while SEBI-registered intermediaries have historically been barred from marketing their performance records, unregistered financial influencers have operated with impunity, making unverified and often exaggerated claims. This blog provides a critical examination of the rationale, structure, and implications of the PaRRVA initiative. It incorporates comparative insights from international standards and highlights the limitations while scrutinizing the technological, operational, and challenges involved in its implementation. Strategic recommendations are offered for SEBI and market participants, with a specific focus on its fair implementation and the needs of smaller intermediaries.

THE PARRVA FRAMEWORK: THE REGULATORY PARADOX AND STRUCTURAL ARCHITECTURE

The SEBI Advertising Code prohibits Investment Advisers (IA) and Research Analysts (RA) from making any reference to past performance in their marketing communications. This blanket prohibition produced unintended consequences. Legitimate, regulated professionals, who are mostly subjected to compliance and oversight, were prevented from establishing their credentials and track records. This created an information vacuum for investors seeking to evaluate the competence of regulated advisers. Meanwhile, unregistered market participants, including a burgeoning class of finfluencers, exploiting social media platforms and informal channels, continued to market investment services based on unverified, often manipulated performance claims. This is affirmed by SEBI’s 2025 investor survey, which revealed that 62 per cent of prospective investors rely on influencers for investment guidance despite acknowledging inadequate market knowledge. The PaRRVA framework represents SEBI’s solution to this paradox; permitting regulated intermediaries to showcase their performance records while simultaneously implementing rigorous verification mechanisms to eliminate the possibility of selective disclosure, cherry-picked time periods, or manipulated metrics.

Under the PaRRVA framework, SEBI has designated registered CRAs as potential entities for PaRRVA, with stringent eligibility criteria that include a minimum operational history of 15 years, a net worth of at least ₹100 crores, issuance of ratings for 250 or more debt security issuers, and the establishment of an investor grievance redressal mechanism that includes Online Dispute Resolution (ODR) systems. The NSE serves as the PaRRVA Data Centre (PDC), responsible for providing data infrastructure, maintaining verified records for a period of five years, managing data exchanges, and ensuring compliance with SEBI’s Cybersecurity and Cyber Resilience Framework (CSCRF).

COMPARATIVE ANALYSIS: INTERNATIONAL PERFORMANCE VERIFICATION STANDARDS AND BEST PRACTICES

The Global Investment Performance Standards (GIPS), formulated by the CFA Institute, provide a voluntary framework for calculating and presenting investment performance through an independent third-party review. The GIPS standards assist both organizations that create investment performance reports and the investors who read them, ensuring transparency and enabling global comparison across different jurisdictions. Structurally, PaRRVA differs in at least two respects. Firstly, unlike GIPS’s voluntary framework, the PaRRVA requires mandatory verification, and second, PaRRVA is embedded in a public law framework with explicit eligibility criteria, grievance redress and SEBI oversight, rather than self-regulation by an industry association. It is necessary to understand that GIPS cannot be evaluated in isolation from the compliance culture and enforcement capacity of the market in which they operate. The voluntary character of GIPS highlights a divergence between mature capital markets and India’s retail-dominated, finfluencer-shaped market with low voluntary compliance. As per CFI India, the adoption of GIPS in India is voluntarily low. Despite more than 1,700 firms claiming GIPS compliance worldwide, only a small number of Indian managers have opted in, such as Multi‑Act and later SBI AMC, both positioning themselves towards the higher end or globally benchmarked capital.  By contrast, PaRRVA relies on mandatory verification precisely because SEBI cannot assume that voluntary industry self‑regulation will emerge organically in the retail-dominated market of India. Therefore, PaRRVA can be seen as an explicit response to India’s low baseline of voluntary compliance, rather than as a departure from these models.

The US SEC’s Rule 482 governs mutual fund advertising, requiring disclosure of past performance alongside prominent disclaimers that past results do not guarantee future returns. However, funds can change benchmarks with minimal disclosure, and are only required to disclose previous benchmarks for one year after a change. This has enabled funds to move the goalposts by adding low-return benchmarks to improve apparent performance, attracting investor flows despite continued underperformance. In contrast to the SEC’s approach, which allows benchmark manipulation within technical compliance, PaRRVA combines disclosure with strict third-party verification and anti-cherry-picking provisions that prevent selective representation. However, in US, Mutual fund performance advertisements are extensively regulated.  Rule 482 advertisements are deemed prospectuses under Section 10(b) of the Securities Act; therefore, subjected to antifraud rules. The SEC policing includes reviewing whether standardized performance, though technically accurate, omits material facts necessary to avoid misleading investors. For instance, the SEC has charged nine registered investment advisers for improperly advertising hypothetical performance without complying with the Marketing Rule, with all firms agreeing to settle and pay a total of $850,000 in penalties. The US SEC’s Rule 482 is sustained by a long history of SEC enforcement against misleading performance advertising, active litigation involving class actions, and an active investor market. On the contrary, India lacks this dense web of deterrents. SEBI’s enforcement resources are spread thinly across a rapidly expanding pool of intermediaries and digital platforms. Therefore, PaRRVA’s can be read as SEBI’s attempt to hard‑wire into the regulatory architecture the kind of scrutiny that, in the United States, is supplied by a combination of litigation, enforcement, and sophisticated institutional monitoring.

Similarly, the UK FCA’s Conduct of Business Sourcebook (COBS) imposes detailed requirements on past‑performance communication and focuses on disclosure standards. Under COBS 4, the FCA places the onus on the firm to verify its own data, but includes mandatory risk warnings. In contrast to it, SEBI mandates that any past performance claims must be independently validated by PaRRVA before being disseminated. Furthermore, under FCA COBS 4.5.2, a firm cannot mention a benefit (like high returns) without giving equal prominence to the risks. Drawing inspiration from this provision, PaRRVA could introduce a dynamic risk-adjusted metric to be displayed alongside every verified return to ensure investors don't chase high returns without understanding the volatility involved.

ISSUE OF BEHAVIOURAL EFFECTIVENESS AND RECENCY  BIAS

A.     Does verified performance protect investors?

One of the issues that strikes at the core of PaRRVA is whether verified performance protects investors. Behavioral biases affect the investment decisions of retail investors in the Indian capital markets. Psychological factors play a powerful role in shaping investor behavior, often more than technical analysis or economic indicators. Behavioral research documents that retail investors heavily overweight recent returns (Recency Bias) when selecting funds, a pattern attributed to representativeness heuristics and the “law of small numbers”. PaRRVA, by itself, does not directly tackle these heuristics; it primarily ensures that the numbers being chased are accurate, comprehensive and non-cherry-picked. Survey‑based work in Chennai and other Indian regions finds that heavy exposure to finfluencers and finance groups on social media significantly reinforces herd behavior and last‑minute, easily digestible decision‑making, often at the expense of independent analysis. According to the SEBI Investor survey, approximately 23% of first-time investors are driven by the lure of quick gains. These individuals are less likely to read a full risk report and more likely to just scan for the highest verified percentage.

B.    Display of Verified Metrics to reduce Behavioural Impact

From a behavioural law perspective, accurate numbers are necessary but not sufficient. If investors continue to chase whatever verified metric appears most impressive, then the rationale behind PaRRVA may be defeated. Therefore, it is necessary to align the PaRRVA framework with behavioural realities. The behavioural impact of PaRRVA will depend heavily on how verified metrics are displayed.  

The author suggests that instead of just showing 1, 3, and 5-year returns, PaRRVA should mandate verified Maximum Drawdown (MDD) for all regulated performance claims. It is a metric that tracks the most significant potential percentage decline in the value of an investment over a given period. The MDD data can be placed in immediate proximity to the best trailing return figures to ensure simultaneous cognitive processing by the investor and identify the volatility risk associated with the claims.

Figure 1: Maximum Drawdown illustration

Further, every verified figure must be accompanied by a standardised Bell Curve Visualisation representing the performance distribution of all registered intermediaries within the same category.  The specific intermediary’s verified return must be plotted as a distinct point on the bell curve.  The relevant market benchmark must be clearly marked on the same distribution curve to show if the entire herd moved upward together (Refer to Figure 2). By visualising the intermediary's performance within a Peer Distribution, it allows investors to frame an informed decision, eliminating the recency bias and to see if a high return is a rare outlier or simply the result of a general market wind. Moreover, such a mandate would shift the behavioural pattern, to some extent, to Risk-Adjusted consistency rather than chasing the peak.

Figure 1: PaRRVA Bell Curve illustration

SUBSTANTIVE LIMITATIONS, PRACTICAL CHALLENGES AND RECOMMENDATIONS

While the PaRRVA framework offers several advantages, certain limitations and practical challenges arise in its implementation.

A.     Absence of Clear Fee Guidelines

One of the significant challenges lies in ensuring that verification services are accessible and affordable for smaller intermediaries.  The absence of clear fee guidelines raises concerns that market-based pricing could exclude those most vulnerable to competition from unregistered actors. SEBI should establish clear fee guidelines for verification services, potentially incorporating tiered structures reflecting intermediary size and verification complexity. Allowing one-year advance fees for IA demonstrates a clear regulatory willingness to adapt financial norms to support the viability of smaller players. This approach would preserve pricing flexibility while preventing fee-induced exclusion of smaller regulated entities. International experience with GIPS and similar frameworks confirms that cost and complexity are major barriers to adoption for smaller firms. SEBI must balance the need for rigorous verification with the imperative to avoid stifling competition or innovation.

B.     Cyber Security and DPDP Act. 2023

Another critical concern is cybersecurity. The PaRRVA system is run by a CRA and PDC. Both of these are SEBI-regulated entities (REs) and, therefore, must comply with the CSCRF. A lack of proper network segmentation, as mandated by the CSCRF, could critically compromise the PDC because PaRRVA systems will aggregate highly granular transaction‑level data and client recommendation histories across multiple intermediaries, which may contain personally identifiable information and sensitive financial data, which constitute attractive targets for cyber‑attacks. India’s Digital Personal Data Protection (DPDP) Act, 2023 and sectoral data‑protection norms require purpose limitation, data‑minimisation, and strict safeguards when processing such information. However, in the absence of any clarification from SEBI in this regard, the author proposes that PaRRVA could be classified as a Significant Data Fiduciary (SDF) under the DPDP Act, 2023.

Under Section 10(1) of the DPDP Act, 2023, the Central Government has the authority to notify any Data Fiduciary as an SDF based on an assessment of relevant factors. PaRRVA qualifies for this classification because it processes a high volume of personal data belonging to millions of investors and handles sensitive financial information where any inaccuracy or breach could cause significant risk of harm to the data principal. Furthermore, given its role as an SEBI-recognised Performance Validation Agency, its operations are critical to public order. This classification as SDF would require PaRRVA to adhere to stricter compliance standards than standard fiduciaries, such as mandatory appointment of an India-based Data Protection Officer (DPO), Independent Data Auditor and the conduct of periodic Data Protection Impact Assessments (DPIA). DPIA would force organisations to identify and fix security gaps before they can be exploited. Further, having a mandatory DPO would ensure direct and efficient line of communication with the Data Protection Board, and the requirement for Annual Independent Audit would ensure the internal processes are audit-ready,  leading to faster regulatory approvals and fewer surprises during inspections. This would bring the PaRRVA framework within the ambit of the Act, ensuring a degree of data protection and cybersecurity compliance. PaRRVA clarifications or guidance must specify the precise purposes for which PaRRVA may use transaction data and prohibit secondary uses such as proprietary analytics or commercial sale of anonymised datasets without regulatory approval.

C.     Inclusion of Mutual Fund Distributors

Also, the current framework excludes mutual fund distributors (MFDs). At present, MFDs are regulated primarily through the SEBI mutual fund regulations and AMFI’s distributor framework, rather than through the Investment Advisers Regulations. AMFI’s FAQs make clear that MFDs are only permitted to offer incidental advice, and that they are explicitly barred from providing holistic financial planning or full‑fledged investment advice unless separately registered as Investment Advisers (IAs). Despite the legal distinction, most retail investors view MFDs as their primary financial advisers. Excluding them creates a regulatory gap where a large segment of advice remains unverified.  Recently, SEBI has constituted a working group to resolve the long-running dispute between MFDs and RIAs regarding the outdated distinction between advisory services and distribution practices. As these boundaries blur, many distributors are acting in advisory roles, particularly in smaller cities. Therefore, first MFDs that are already registered as IAs can be brought under PaRRVA without any new category creation, by treating all their advisory communications, whether fee‑based or bundled with distribution, as subject to the same verification obligation as other IAs. Second, SEBI could allow MFDs to voluntarily use PaRRVA services if they wish to showcase the historical returns of their curated model portfolios to prospective clients, as the goal is to ensure transparency across all forms of investment advice.  The framework’s effectiveness hinges on PaRRVA and the PDC having a robust technological infrastructure capable of processing large volumes of data without compromising verification quality.

CONCLUDING REMARKS

The PaRRVA framework represents a significant advancement in regulatory measures aimed at addressing longstanding inefficiencies within India’s investment advisory sector. By institutionalising mandatory third-party verification and allowing regulated intermediaries to highlight verified performance, the PaRRVA framework incorporates advanced regulatory structures and a comprehensive oversight mechanism. However, the successful implementation of PaRRVA requires careful attention to several identified practical challenges and limitations. Ultimately, the effectiveness of PaRRVA will be evaluated not only by its formal launch but also by its meaningful contributions to market integrity and investor protection.