Sebi unveils uniform norms for investor protection funds

Mumbai, Oct 28 | Updated: Oct 29 2004, 05:47am hrs
The Securities and Exchange Board of India (Sebi) has come out with comprehensive guidelines for investor protection funds (IPF), with a view to bringing about uniformity in the practices followed by stock exchanges (SEs). The regulator has issued guidelines with respect to the constitution, management and utilisation of IPFs.

According to the new guidelines, the management of IPFs will be administered by way of a trust created for the purpose which will consist of at least one public representative, one representative from the registered investor associations recognised by Sebi and executive director of the respective stock exchange.

The corpus of IPF will be formed by crediting 1% of the listing fees received, on a quarterly basis.

The issuer companies pay security deposits to the exchanges while coming out with initial public offerings (IPO). This deposit is paid at the rate of 1% of the total amount to be mobilised and stays with the exchange for a certain period of time. The interest earned on this deposit is to be fully credited to IPF, the Sebi guidelines said.

A certain portion of transaction charges collected from the broker-members is also to be contributed to IPF. Sebi said, SEs should continue the present practice of contributing to the IPF from these charges.

Sebi said to determine the legitimacy of the claims received from claimants, the IPF trust may adopt the arbitration mechanism at the SE level and seek the advice of the defaulters committee to sanction and ratify the payments to be made to investors.

The guidelines also suggests a lower limit of a single claim of an investor arising out of default by a member-broker of the SE. Sebi said SEs are free to fix suitable compensation limits, in consultation with the IPF trust. However, the amount of compensation available against a single claim of an investor should not be less than Rs 1 lakh in case of major SEs like The Stock Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) and Rs 50,000 in case of other SEs. This limit can be reviewed upwards every three years by SEs in consultation with the IPF trust, it said. u

Post-demutualisation, the balance of the IPF lying unutilised with the SEs should continue to be utilised only for such purposes as prescribed by Sebi. However, if the SE is wound up post-demutualisation, then the balance in the IPF should be transferred to Sebi. The fund will be maintained in a separate account and Sebi would act as trustee of these funds. Sebi may use these funds for purposes of investor education and awareness, research etc, the guidelines added.