What exchanges do for investor protection?

There is always a bleak chance for investors to not receive securities they have bought, or not receive proceeds from the sale of stocks from a defaulter/expelled broker member of NSE or BSE which prompted them to set up a trust fund to safeguard the interests of investors. That fund is called Investor Protection FUND (IPF).

Objectives of the fund

The aim of establishing the fund was to compensate investors in the case of defaulter’s assets not being sufficient to meet given claims of investors and to promote investor education, research and awareness. The trust created for the purpose is called IPF trust and is managed by trustees comprising of public representatives, investor association representative, senior officials and Board members of the exchange.

Compensation Policy

The fund compensates the investors to the extent of funds found insufficient in the account of defaulter to meet the admitted claim value, subject to maximum limit of Rs. 15 lacs per defaulter/ expelled member per investor. (25 lakhs per defaulter/expelled member per investor in context of claims arising on expulsion/declaration of members defaulting on or after January 6, 2017)

Funding Sources

A similar fund has been created by BSE which manages its fund by taking contribution from the members of Re. 0.01 per Rs.1 lakh of gross turnover, which is debited to their General Charges Account while BSE itself contributes 1% of the listing fees collected by it on a quarterly basis.

The entire interest received by BSE on 1% security deposit held with it by companies making public/rights issue is ascribed to the Fund. As per the SEBI’s mandate, auction proceeds that have been seized in certain circumstances where price manipulation / rigging were suspected are transferred to the Fund. The surplus lying in the account of the defaulters after meeting their liabilities on BSE is released to them after transferring 5% of the surplus amount to this Fund. The interest received on amounts invested from the corpus of the fund is credited to the fund at the end of each financial year. 

BSE follows similar policy in compensating its members through this fund with the limit recently revised from Rs. 10,000 of the 1988 level.

Hence, investors feel comparatively safer now as the exchanges have set up trust funds to safeguard their interests in the event of defaults by members.



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