NSE’s investor protection fund set to triple to Rs 1,500 crore after Sebi advisory

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The size of the National Stock Exchange’s Investor Protection Fund (IPF) will increase three times after a new framework was laid out for it by the Securities and Exchange Board of India (Sebi). The market regulator has mandated a higher IPF be maintained in relation to trading volumes.

The IPF is used to refund investors who lose money in the event of a default by brokers. Investors are paid up to Rs 25 lakh under this arrangement.

A safety net

The NSE had around Rs 585 crore of IPF money, less than the Bombay Stock Exchange, which has about Rs 750 crore. Sebi chairman Ajay Tyagi had raised concerns about IPF money during a recent conference on capital markets.

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A note from the NSE said: “SEBI has also advised NSE to increase the size of its IPF corpus to Rs 1,500 crore in order to protect the interests of investors in light of recent broker defaults. The adequacy of the IPF corpus will be reviewed on a half-yearly basis and incremental contributions will be made to the IPF, if required. NSE is focussed and committed to further strengthening investor protection through a variety of measures, including focussed investor education, enhanced broker supervision and surveillance in view of the recent defaults of Trading Members”.

A source close to the development told Moneycontrol: “Sebi had formed a sub-committee to look into this matter and the regulator gave instructions to increase the IPF.”

Moneycontrol had reported on October 21 about Sebi increasing IPF money and setting up a new mechanism. The Sebi chairman had stated then that the IPF was woefully inadequate, and that the regulator would work with exchanges to increase the fund size.

The IPF is maintained by exchanges. The Bombay Stock Exchange (BSE) has around Rs 750 crore, while the National Stock Exchange (NSE) has less than Rs 500 crore, sources told Moneycontrol.

Trading volume link

Sebi has linked the IPF amount with trading volumes. “This may see more money being raised on the NSE, which, unlike the BSE, derives 95 percent of its volumes from cash and derivatives trade,” a source said.

Currently, exchanges collect money for the IPF in two ways — from the 1 percent listing fee they receive from companies on a quarterly basis, and the interest earned on the 1 percent security deposit kept by issuer companies, or brokers, at the time of offering securities to the public for subscription.

Since the number of companies on the NSE is low, its capacity to collect IPF is weak. This means that even if an investor loses money, the IPF may not be enough to compensate him. There has therefore been a demand from investors to link IPF to trading volumes.