The Securities and Exchange Board of India has issued detailed guidelines on setting up of an investor protection fund at the stock exchanges.
According to the comprehensive guidelines the Investor Protection Fund or the Customer Protection Fund has to be administered by way of a trust created for the purpose.
The trust should consist of at least one public representative, one representative from the registered investor associations recognized by Sebi and the executive director of the concerned stock exchange.
The onus is on the exchanges to ensure that the funds in the IPF or CPF are well isolated and that it is immune from any liabilities of the exchanges.
Contributions to the fund by the exchange will be made in the following way - one per cent of the listing fees received, on a quarterly basis; 100 per cent of the interest earned on the one per cent security deposit kept by the issuer companies at the time of the offering of securities for subscription to the public, immediately on refund of the deposit; the difference of amount of auctions and close-out price; the amount received from the proceeds from the sale of the securities written off among others.
The exchange has to ensure that the members contribute at least one per cent of the transaction fees charged by it to the to the IPF.
This amount shall be contributed on an annual basis based on the turnover of the broker for the previous year.
In respect of filing claims the exchanges have to publish a notice inviting the legitimate claimants to file claims against the defaulter member brokers within a specified period of time, called as the "specified period".
The claims received against the defaulter members during the specified period shall be eligible for compensation from the IPF.
The IPF Trust may adopt the arbitration mechanism at the stock exchange to determine the legitimacy of the claims received from the claimants.
The maximum amount of compensation available against a single claim of an investor arising out of default by a member broker shall be Rs 100,000 in case of major Stock Exchanges, and Rs 50,000 in case of other exchanges.
The exchange can in consultation with the IPF Trust fix higher compensation limits.
The IPF Trust will disburse the amount of compensation to the investor and such a compensation shall not be more than the maximum amount fixed for a single claim of an investor.
