Investor Protection Fund

If your broker collapses owing you money, the clearing corporation's guarantee does not help you — it guarantees settlement between members, not between you and your broker.

The Investor Protection Fund is the layer that does. It is a pool of money, held in a separate trust, built up out of listing fees, penalties and interest, and used to meet the legitimate claims of clients of a trading member who has been declared a defaulter or expelled.

It is not insurance and it is not unlimited. Each exchange fixes a per-investor compensation limit, and some kinds of claim are shut out altogether.

One naming trap before you read on: this page is the exchange-administered Investor Protection Fund (IPF), which is what the Series VII workbook teaches. SEBI's separately constituted Investor Protection and Education Fund (IPEF) is a different fund altogether — the Series VII workbook does not mention it, and the distinction is drawn under the insider-trading framework, on the contra-trade restriction page.

The obligation dates to Central Government notification No. F. No. 14/4/SE/85 dated 22 August 1985; SEBI's current comprehensive guidelines (May 2023) require all stock exchanges and depositories to establish an IPF, each administered through a separate trust.

What flows in, at a stock exchange:

• 1 per cent of listing fees received, quarterly;
• 100 per cent of the interest earned on the 1 per cent security deposit kept by issuer companies at the time of a public offering, paid in immediately on refund of the deposit;
• penalties collected from trading members for deficiency in client code modification;
• penalties for default in pay-in during periodic call auction for illiquid scrips;
• penalties collected from listed companies for non-compliance with the LODR Regulations, 2015;
• penalty for an investor's default in pay-in on an Offer For Sale — 10 per cent of the order value;
• a contribution out of transaction charges, per the exchange's own policy;
• at least 70 per cent of the interest or income earned on IPF investments.

Of the interest or income received each year, at least 70 per cent is ploughed back into the IPF and up to 25 per cent may be used for investor education and awareness.

On the way out: once a trading member is declared a defaulter, claims go before the Member Committee for sanction and ratification, and the sanctioned legitimate claims go to the IPF Trust for immediate disbursement, capped at the maximum fixed for a single investor claim. Exchanges review the adequacy of the corpus half-yearly, by the end of March and September, disclose the corpus on their website monthly, and share data on clients of a defaulting or disabled member with other exchanges within 10 days of disablement so that the same claim is not paid twice.

A trading member with 4,200 clients is declared a defaulter. Three clients file claims.

Assume the exchange has fixed a per-investor limit of Rs 25 lakh (each exchange sets its own, in consultation with the IPF Trust and SEBI — the figure here is illustrative).

Client D files four years after the specified period expires. Any claim received after three years from the date of expiry of the specified period may be dealt with as a civil dispute — the IPF route is closed and D is left to the courts.

Note also what feeds the fund on a busy day. A single trade annulment application costs 5 per cent of the value of the trades, subject to a minimum of Rs 1 lakh and a maximum of Rs 10 lakh, and that fee is credited to the IPF of the exchange concerned.

Chapter 7 (section 7.4) covers the IPF and, immediately after it, the Investor Services Fund. The chapter's sample questions include the plain one — "Investor protection fund is established and maintained by ___", answer: stock exchanges — and the examinable detail sits in the contribution percentages and the eligibility carve-outs. Chapter 3 feeds it too: client code modification penalties and trade annulment fees are both credited to the IPF.

• IPF is not IPEF. The Investor Protection Fund on this page is established and maintained by stock exchanges and depositories, each through its own trust, and compensates clients of a defaulting trading member. SEBI's Investor Protection and Education Fund (IPEF) is a separate fund that the Series VII workbook does not cover at all — if a question names the education fund, it is not asking about this one. The contra-trade restriction page, in the insider-trading syllabus, carries what IPEF is.
• Speculative claims are not eligible. The fund exists for legitimate investment claims of a defaulter's clients. This is the single most repeated exclusion.
• 70 per cent ploughed back, up to 25 per cent for investor education. Do not confuse this with the Investor Services Fund, which is a different fund funded by at least 20 per cent of listing fees and usable only for investor education and awareness.
• 1 per cent of listing fees to the IPF, at least 20 per cent to the ISF. Two funds, two percentages, same source.
• Three years from the expiry of the specified period, after which a claim is a civil dispute. Do not import the one-year SCORES limitation here.
• The per-investor cap is fixed by the exchange, in consultation with the IPF Trust and SEBI. There is no single national figure to memorise — a question quoting one is testing whether you think there is.
• Clients who dealt through a registered authorised person of the defaulting member are eligible too. Being one step removed from the member does not disqualify the claim.
• The IPF is a trust, separate from the exchange, and depositories must run one as well — not just exchanges.