SEBI produces new rules for investor protection funds

Chris Hamblin

21 July 2016

The new rules fall into the following categories: each IPF's constitution and management; contributions to the fund; the instruments in which the fund is allowed to invest; and the uses to which each IPF can be put. The following is an up-to-date picture of these areas, taking the new rules into account.

Constitution and management

The IPF has to be administered by way of a trust created for the purpose. This trust should consist of at least one "public interest director" of the depository, one person of eminence from an academic institution from the field of finance and/or an expert in the field of investor education and/or a representative from one of the investors' associations on the SEBI register and the managing director of the depository. The depository must provide the secretariat for the IPF trust and ensure that the funds in the IPF are kept in a separate account earmarked for this purpose. Every IPF must immune from the depository's liabilities.

Contributions to an IPF

Each depository must make the following contributions to its IPF.

5% of profits from depository operations every year, transferable as specified in the SEBI (Depositories and Participants) (Amendment) Regulations 2016.
All fines and penalties recovered from depository participants (and other users including clearing member pools).
Interest or income received out of any investments made from the IPF.
Any other sums as may be prescribed by SEBI from time to time.
Funds lying to the credit of the depository's investor protection reserve or beneficial owners' protection fund or any other of its funds/reserves must be transferred to the IPF.

Investments that each fund can make

Funds of each trust are to be invested in instruments such as central government securities, fixed deposits of scheduled banks and any such instruments allowed by the investment policy approved by the depository's board. The object of such an investment policy must always be to protect capital in the safest and least risky way.

The balance available in the IPF at the end of the month and the amount used during the month (including the manner of use) must be reported in the despository's monthly development report.

The uses of an IPF

Firms may now use IPFs, with a focus on depository-related services, to promote "investor education and investor awareness programmes" that encourage retail investors, including HNWIs, to participate in the securities markets. They may also use them to help, subsidise, support and promote research activities for the promotion/ development of those markets.

Depositories have until 7th September or thereabouts to conform with the new rules. SEBI is advising them to disseminate the changes on their websites and keep it informed about their progress towards compliance in their monthly development reports.