Investor Protection Fund
Also written IPF · Investor Protection Fund (IPF) · Customer Protection Fund · CPF
A trust-administered fund at every stock exchange and depository that compensates clients of a trading member who has been declared a defaulter or expelled, up to a per-investor limit the exchange fixes.
In plain language
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.
How it works
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 worked example
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 | Claim | Nature | Outcome |
|---|---|---|---|
| A | Rs 8,00,000 | Undelivered shares from a settled trade | Paid in full |
| B | Rs 40,00,000 | Credit balance in the running account | Paid Rs 25,00,000 — capped at the per-investor limit |
| C | Rs 6,00,000 | Notional profit on speculative positions | Rejected — claims arising out of speculative transactions are not eligible |
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.
Why NISM asks about it
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.
Common exam traps
- 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.
Where this is taught
- Series IV · Chapter 10: Code of Conduct and Investor Protection Measuresintroduced here
- Series XVI · Chapter 7: Clearing, Settlement and Risk Managementintroduced here
- Series I · Chapter 10: Codes of Conduct and Investor Protection Measuresintroduced here
- Series VIII · Chapter 7: Clearing, Settlement and Risk Managementintroduced here
- Series VII · Chapter 7: Investor Grievances and Arbitrationintroduced here
Related terms
- Investor CharterSEBI's published statement of what an investor is entitled to from an intermediary — the services, the rights, the dos and don'ts, and a table of activities with the timeline each one must be completed in.
- SCORESSEBI's centralised web-based system for processing investor complaints, on which the company or intermediary must upload an Action Taken Report and the investor can watch the status online.
- ArbitrationQuasi-judicial dispute resolution under the Arbitration and Conciliation Act, 1996, run online by an ODR Institution once conciliation fails; the award binds unless challenged under Section 34.
- Investor Services FundA fund at each stock exchange, built from at least 20% of listing fees and overseen by the Regulatory Oversight Committee, used solely for investor education and awareness programmes.
- Member CommitteeThe body that sanctions and ratifies an investor's claim against a defaulting trading member before the Investor Protection Fund Trust disburses compensation.
- Contra trade restrictionThe cooling period of not less than six months — two months for mutual fund units — during which a designated person who has been permitted to trade may not take the opposite side of that trade.
- Settlement Guarantee FundA fund held by the clearing corporation, built from contributions by the exchange, the clearing corporation and clearing members plus a share of settlement penalties, used to complete settlement if a member defaults.
- Investor Education and Protection FundThe government fund that takes in dividends, deposits and shares left unclaimed for seven years, spends the income on investor education, and refunds the rightful owner whenever they finally claim.
- Nodal OfficerThe Director, CFO or Company Secretary a company nominates to verify claims for shares and money it has sent to the IEPF and to coordinate with the IEPF Authority on the claimant's behalf.
- Stabilizing AgentUnder a green shoe option, the merchant banker who uses over-allotment money to buy the newly listed shares when they fall below the issue price — buying only, for 30 days, up to the over-allotment.
- Authorised personTwo different entities share this name: under SEBI, an agent appointed by a stock broker to give clients access to the trading platform; under FEMA, a dealer authorised by RBI to deal in foreign exchange.
- MCSGFCThe Member Core Settlement Guarantee Fund Committee that sanctions and ratifies a claim against a defaulter trading member before it is sent to the Investor Protection Fund Trust for disbursement.
- Investor Protection and Education FundThe fund SEBI administers under the SEBI Act, credited with profits disgorged after a banned contra trade and with monetary sanctions collected under a firm's own code of conduct.
- Margin trading facilityA SEBI-regulated facility in which a stock broker lends part of the purchase price of eligible shares or equity ETFs to a client, holds the bought stock as pledged collateral and charges interest.
- Dabba tradingIllegal off-exchange "trading" by unregistered operators who record deals against exchange prices in private books and settle only price differences in cash, with no delivery, guarantee or investor protection.
- TradeThe binding transaction created the moment a buy order and a sell order are matched on the exchange, after which it can be modified only in narrow, regulated ways and never simply cancelled.
- Investors Grievance DivisionThe department of a stock exchange that investors approach to resolve complaints against its trading members, working with the member and the complainant before any escalation to SEBI SCORES.
- Standard Operating Procedure (SOP) on defaultSEBI's laid-down sequence of actions for exchanges, clearing corporations and depositories on warning signs of a member default, including settling small investors' credit balances under Rs 25 lakh first.
- Trade Guarantee FundA fund every active exchange member contributes to at inception, used to guarantee settlement of members' bona fide transactions and protect investor interests.