Sebi Releases Guidelines On Investor Protection Fund, Investor Services Fund

Sebi has issued revised guidelines to stock exchanges and depositories on how the Investor Protection Fund and Investor Services Fund will be governed. These changes aim to strengthen investor protection measures and promote financial literacy and participation in the securities market
Sebi Releases Guidelines On Investor Protection Fund, Investor Services Fund

In a bid to strengthen investor protection and promote investor education, the Securities and Exchange Board of India (Sebi) on May 30, 2023 released guidelines for the Investor Protection Fund (IPF) and the Investor Services Fund (ISF).

What Are These Funds?

Earlier in 2004, Sebi had mandated that stock exchanges should keep a dedicated fund, known as IPF to compensate investors in case of defaults or expulsions of trading members.  

Previously, in 1992, Sebi had advised stock exchanges to establish the ISF, aimed at bolstering investor education, awareness programs, and training initiatives to improve securities market literacy and enhance participation in the securities market.

Sebi has now issued a new circular modifying provisions of these funds. The provisions of the circular will come into effect on June 29, 2023. These modifications aim to further strengthen the protecti

New Provisions Related To IPF

Stock exchanges and depositories are required to establish IPF administered through separate trusts. The IPF Trust will consist of five trustees including directors, investor association representative, and compliance office.

The stock exchanges have also been asked to ensure that funds are well segregated and immune from liabilities of exchange and depository.  

Stock exchanges are further required to contribute to the IPF through various means, such as a quarterly contribution of one percent of listing fees, interest earned on one percent security deposits held by issuer companies during securities offerings, penalties collected from trading members, and contributions based on transaction charges imposed on trading members.  

Sebi has further specified that the IPF should receive a minimum of 70 per cent of interest or income derived from any investments made using the IPF corpus.

Stock exchanges should use the fund to address investment claims from clients of defaulting trading members and provide interim relief to affected investors. Depositories, on the other hand, should utilise the fund to promote investor education, meet legitimate claims of beneficial owners, support initiatives of depository participants, and fulfil other purposes permitted by Sebi.

To streamline the process of settling claims from the IPF, Sebi has also introduced a new standard operating procedure (SOP).

New SOP For Settling Claims From IPF

According to the new SOP, if a stock exchange disables a trading member (TM) on a specific day (T), it must promptly inform investors through public notices, SMS alerts, and emails the following day.

Clients of the defaulting TM will receive pre-filled claim forms within 15 days, containing comprehensive details of their funds, securities balances, and trade data.  

These clients are also required to review the forms, make necessary changes, and submit supporting documents, including statements of their bank and dematerialised account, within 75 days. The stock exchange will then verify the claims and, if complete, processes them, subject to audit and approval by the Member and Core Settlement Guarantee Funds Committee (MCSGFC).

Claims submitted within the specified timelines will be settled within 135 days from submission. In instances where the assets of the defaulter are insufficient, the MCSGFC may recommend the payment of approved claims from the IPF. Clients also have the option to file a review of their claims with the MCSGFC, and if unsatisfied, they can file a review petition with a committee of Public Interest Directors (PIDs) within 90 days.

Provisions Related To ISF

Stock exchanges have also been directed to allocate 20 per cent of listing fees to the ISF, which will be utilised for public services, including investor education, awareness programs, and training initiatives. The Regulatory Oversight Committee will oversee the management and utilisation of the ISF funds. Notably, at least 50 per cent of the ISF corpus should be spent on activities in Tier-II and Tier-III cities. The interest earned on the ISF will remain with the IPF corpus.

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