SEBI's framework for performance validation agency PaRRVA is finally here

(Representational image)

The market regulator has finally launched the framework to recognise and operationalise the performance validation agency or Past Risk and Return Verification Agency (PaRRVA). A credit rating agency (CRA) which meets a few criteria including having been in existence for 15 years and having a minimum networth of Rs 100 crores can register as a PaRRVA.

After an agency is recognised as PaRRVA, the concerned CRA (CRA)and stock exchange (SE) will initiate the verification services of risk-return metrics in respect of services of regulated persons, on a pilot basis for a period of two months.

The agency can validate claims of research analysts, investment advisors and algo providers.

In the circular issued on April 4, the Securities and Exchange Board of India (SEBI) said that a credit rating agency (CRA) be recognized as a PaRRVA, in terms of Regulation 12A of the ‘SEBI (Credit Rating Agencies) Regulations, 1999’ (“CRA Regulations”) read with Regulation 16E of the Intermediaries Regulations.

It added, "Such CRA shall engage with a recognized SE (stock exchange) which will serve as PaRRVA Data Centre (“PDC”).

Also read: SEBI launches new official account on X named @SEBI_updates

The circular said that the responsibility of the verification of returns claims will lie with PaRRVA; the agency will merely use the help of PDC to provide its services. According to SEBI's circular, PaRRVA-PDC will have principal and agent relationship, wherein PaRRVA will avail the services of PDC for verification of risk-return metrics.

Criteria for a CRA to qualify as a PaRRVA has been given as below:

1.Number of years of existence of the CRA should be minimum 15 years;

2.Minimum net worth of the CRA should be INR 100 crores;

3.Number of issuers which have obtained ratings of listed or proposed to be listed debt securities from the CRA should be 250 or more; and

4.CRA should have Investor grievance redressal mechanism including Online Dispute Resolution (“ODR”) Mechanism.

Criteria for a stock exchange (SE) to act as a PDC has been given as below:

1.Number of years of existence of the SE should be minimum 15 years;

2.Minimum net worth of the SE should be INR 200 crores;

3.The SE should have nation-wide terminals;

4.SE should have Investor grievance redressal mechanism including Online Dispute Resolution (“ODR”) Mechanism

Approval process

A CRA that wants to set up as a PaRRVA will need first sign on an SE to act as a PDC and then apply to SEBI. If they meet the necessary eligibility criteria, they will be given in-principal approval. Then they will need to set up the necessary infrastructure within three months, and then after an inspection of the site by SEBI, the final approval will be given.

Then the PaRRVA-PDC will offer their services to RA, IA and algo providers on a pilot basis for three months. During this pilot period, the risk-return metrics the agency has checked will not be made available to the public. After the pilot period, and based on the of the Oversight Committee1 and subject to relevant changes in the operational framework (if required), the agency can start providing its services to the regulated entities and investors.

Methodology for verification

A CRA, interested to seek recognition as PaRRVA shall develop the verification methodology and verification system, in line with the recommendations of the technical group initially and by the Oversight Committee on ongoing basis, said the circular.