The Securities and Exchange Board of India (SEBI) has recently introduced an important amendment to the Securities and Exchange Board of India (Intermediaries) Regulations, 2008. The Securities and Exchange Board of India (Intermediaries) (Second Amendment) Regulations, 2025 aims to enhance the transparency and accuracy of financial performance metrics disclosed by financial intermediaries in India. These new provisions, which come into force immediately upon their publication in the Official Gazette, introduce a dedicated chapter focusing on the verification of past risk and return metrics. This move is set to have significant implications for investment advisers, research analysts, and algo providers, aiming to ensure that claims made regarding past performance are reliable and based on verified data.
New Chapter on Risk-Return Metrics Verification
The most notable change introduced by the amendment is the addition of Chapter IIIC, titled “Verification of Past Risk and Return Metrics,” to the Securities and Exchange Board of India (Intermediaries) Regulations. This new chapter introduces specific provisions concerning the verification of risk-return metrics by financial service providers.
Applicability and Scope
Regulation 16D outlines the applicability of these new provisions. According to the regulation, the provisions will apply to investment advisers, research analysts, algo providers (who are empaneled with a recognized stock exchange), and other intermediaries authorized by SEBI to provide investment advisory services, research analysis, and algorithmic trading services.
The definition of an algo provider is also clarified in this regulation, which refers to entities empaneled with recognized stock exchanges to provide algorithmic trading services. Algorithmic trading, which involves using automated systems and algorithms for executing trades, has gained significant traction in global financial markets. With the increasing complexity and volume of trades, SEBI’s focus on ensuring transparency and accuracy in the reporting of performance metrics is highly relevant.
Verification of Risk-Return Metrics
Regulation 16E sets out the process for verifying risk-return metrics. Under this regulation, intermediaries covered under Regulation 16D will be permitted to claim returns or performance data in the form of verified risk and return metrics. However, the key requirement is that such claims must be verified by a credit rating agency recognized by SEBI to act as a Past Risk and Return Verification Agency.
The use of independent third-party verification by recognized credit rating agencies is a significant step towards ensuring that claims about past performance are not misleading. This also helps to build investor confidence, as verified data provides a more accurate picture of the risk and return profile associated with a particular financial service.
Furthermore, Regulation 16E(2) stipulates that any claims regarding verified risk or return metrics must be made in a manner specified by SEBI. This ensures consistency and standardization in how performance metrics are communicated, enhancing the clarity and comparability of the data across different intermediaries.
Action for Violations
SEBI has also outlined the consequences for non-compliance with these new provisions. According to Regulation 16F, if an intermediary fails to adhere to the verification requirements outlined in Regulation 16E, SEBI may take appropriate action. This could include punitive measures under Chapter V of the regulations, which details the enforcement actions SEBI can take against non-compliant entities.
This regulatory provision highlights SEBI’s commitment to ensuring that financial intermediaries are held accountable for the accuracy and transparency of the performance data they provide to investors. It reinforces the importance of maintaining high standards in the financial services industry, especially in areas that directly impact investors’ decision-making.
Implications for the Financial Services Industry
The introduction of these new regulations represents a step forward in SEBI’s ongoing efforts to enhance investor protection and market integrity in India’s financial ecosystem. For investment advisers, research analysts, and algo providers, these amendments will require a higher level of accountability in how past performance data is presented. These professionals will need to work closely with recognized credit rating agencies to ensure that their performance claims are verified in accordance with SEBI’s guidelines.
Moreover, for investors, the new regulations provide an added layer of assurance. By ensuring that claims about past performance are independently verified, SEBI is working to reduce the risk of misleading or false information being used to attract investments.
In conclusion, the Securities and Exchange Board of India (Intermediaries) (Second Amendment) Regulations, 2025 is a significant development aimed at promoting transparency and accountability within India’s financial services industry. As financial intermediaries navigate these new requirements, they will need to focus on collaborating with accredited agencies and adhering to SEBI’s standards to maintain compliance. This move is expected to enhance the overall integrity of the market, fostering greater trust and confidence among investors.
The SEBI has further issued the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations)
(Second Amendment) Regulations, 2025. The amendment provides that the activity of a Past Risk and Return Verification Agency Data Centre as referred to in sub-regulation (2) of Regulation 12A of the Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999, may be carried out by a recognised stock exchange, with the approval of the Board, on such terms and conditions as may be specified by the Board.
