From the Viewsroom

Investor protection fund matters

PALAK SHAH | Updated on November 19, 2020

SEBI must ensure the corpus stock exchanges hold is adequate

Investor protection was the founding principle of the Securities and Exchange Board of India (SEBI). Yet, for a long time, the regulator displayed sheer apathy towards the investor protection fund (IPF) corpus maintained by stock exchanges, especially the National Stock Exchange (NSE), which enjoys 90 per cent market share. On Wednesday, the NSE said SEBI had directed it to hike the corpus of its IPF to ₹1,500 crore from ₹550 crore currently. SEBI’s direction to the NSE came after BusinessLine raised the concern of low IPF corpus with SEBI chairman Ajay Tyagi in October at a virtual conference.

Tyagi agreed that the issue required urgent attention. While higher allocation by the stock exchanges is a step in the right direction, more needs to be done on this front. IPF is utilised for payment to investors whose brokers have defaulted on their obligation. Stock exchanges are responsible for the behaviour of brokers as they accord them registration to trade and other rights. In just three years, more than a dozen stock brokers have defaulted on their payment to clients. It is no secret that the default amount could easily be ₹3,000-6,000 crore. But in several cases, exchanges delay in declaring brokers as defaulters for the fear of a piling up of investor claims, which have to be ultimately settled by exchanges.

Even after the increased amount, the NSE’s annual profit will be more than double its IPF corpus. While stock exchanges keep making profits for their marquee shareholders, they cannot leave investors, who are the key contributors to their bottomline, to fend for themselves. SEBI needs to formulate a policy that ensures that the IPF corpus is in line with the rise in trading volumes of the stock exchange and define the matrix for minimum corpus that corresponds with those volumes. It should also be reviewed periodically. If investor protection is the motto, there should be adequate funds for them as well.

Published on November 19, 2020

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