What is “Investor Protection Fund” of BSE and NSE?

What will happen to you when you will not receive securities you purchased or when you not receive payment towards your sale of securities from the Broker member of NSE or BSE, who is declared as defaulter or expelled his membership?? To protect the investors from such untoward incidents, NSE and BSE have set up the fund called “Investor Protection Fund”. Now let us look at it’s features.

1) Collection of Fund-The members of stock exchanges at present contribute to this Fund Re.0.15 per Rs.1 lakh of gross turnover, which is debited to their general charges account. The Stock Exchange contributes on a quarterly basis 2.5% of the listing fees collected by it. Also the entire interest earned by the Exchange on 1% security deposit kept with it by the companies making public/rights issues is credited to the Fund. As per the SEBI directive, auction proceeds in certain cases, where price manipulation / rigging was suspected, have been impounded and transferred to the Fund. Also, the surplus lying in the account of the defaulters after meeting their liabilities on the Exchange is released to them after transferring 5% of the surplus amount to this Fund.

2) Current Compensation available-Presently the maximum compensation available for investor is Rs.10,00,000 but it will be reviewed as and when so desire. For example compensation was Rs. 5,000 in the year of 1988 but now it stands to Rs.10,00,000.

3) Management of Fund-The Investors’ Protection Fund as above shall be held in trust and shall vest in the Exchange or any other entity or authority, as may be specified by the Relevant Authority from time to time. The Investors’ Protection Fund shall be managed by the Trustees appointed under the Trust Deed created and executed and in accordance with the provisions contained in the Trust Deed and the Rules, Bye-laws and Regulations of the Exchange. Interest earned on such fund may be utilized fully or partly according to the discretion relevant authority for the purpose of imparting education or training to investors, for creating awareness among investing community or for any research connected with this.

4) How claims settled-The arbitration award obtained by investors against defaulters are scrutinized by the Defaulters Committee, a Standing Committee constituted by the Exchange, to ascertain their genuineness, etc. Once the Defaulter Committee is satisfied about genuineness of the claim, it recommends to the Trustees of the Fund for release of the award amount or Rs.10.00 lacs, whichever is lower. After the approval of the Trustees of the Fund, the amount is disbursed to the clients of the defaulters from the Investor Protection Fund.

5) Few important things about settlement of claims- A) Claim will be settled after producing the relevant proof of transactions like payment or delivery. Hence proof of document is a must.

B) But for orders or trades recorded on the ATS of the Exchange, may also be treated as the proof of transactions and for which no other proof presentation is required.

C) Claims are settled for actual loss which includes any difference receivable by the claimant arising out of the transactions. But you will not receive any amount for the damage, interest or notional losses.

D) Claim must be furnished in the prescribed form which is available at the time of claiming.

E) Where a claim is not considered for compensation, whether in part or in full, the Relevant Authority may cause a notice to be served on the concerned claimant, stating details for such disallowance.

These are few important features of this fund. Hope it may be useful for you.