SEBI Guidelines for Investor Protection Funds and Investor Services Funds

As per reports[i], India Market Capitalization accounted for USD 3,840.5 billion in September 2023 making it the world's fourth largest market by value, surpassed only by the United States, China, and Japan. However, increased investor participation requires enhanced investor protection as well. In 2004, the Indian securities market regulator, SEBI, had issued comprehensive guidelines for Investor Protection Funds (IPF), to bring uniformity in the investor protection practices followed by the stock exchanges. An IPF is usually set up by the stock exchanges as a compensation fund to address the legitimate investment claims of the clients of a defaulting member.

On 30 May 2023, SEBI has issued comprehensive guidelines for IPF and investor services fund (ISF) maintained by stock exchanges and depositories (Guidelines)[ii], modified pursuant to the discussions with and feedback of various market participants, and deliberations in Secondary Market Advisory Committee of SEBI. The Guidelines cover the constitution and management of the IPF, contribution to IPF by exchanges as well as depositories, and utilization of IPF. Additionally, SEBI has issued a standard operating procedure indicating the process and timelines for the declaration of default of a trading member, processing of investor claims out of IPF and review of claims. The new Guidelines have become effective from 29 June 2023.

The key highlights of the Guidelines are as follows:

Constitution: All stock exchanges and depositories are required to establish an IPF, which will be administered through separate IPF trusts. The IPF trust of the stock exchange and depository will consist of five trustees comprising of three public interest directors, one representative from the investor associations, and a chief regulatory officer or compliance officer. The maximum tenure of a trustee (excluding the chief regulatory officer or compliance officer) would be five years.

Contribution: The stock exchanges are required to make various contributions to the IPF, including the contribution of: (a) 1% of the listing fees received quarterly; (b) the entire interest earned on the security deposit kept by the issuer companies for offering securities for subscription to the public; (c) penalty collected by exchanges from trading members; etc.

In respect to the depositories, the contributions include the following: (a) 5% of annual profits from depository operations, (b) all fines and penalties recovered from depository participants and other users, and (c) income received out of any investments made from the IPF.

Utilization of IPF: The amount in the IPF will be used to address investment claims from clients of defaulting trading members, to provide interim relief to affected investors, and to promote investors' education. The stock exchange must utilize 25% of interest earned on the investments made from the IPF for administrative and statutory expenses, while up to 70% must be ploughed back to IPF. The depositories must plough back the entire interest earned to the IPF.

Eligibility for claims: The claims received against the defaulter trading members will be eligible for compensation from the IPF. Further, claims from the clients who have dealt through the authorized persons of the defaulting trading members are also eligible for compensation from the IPF. The stock exchanges will determine appropriate compensation limits per investor, in consultation with the IPF Trust and SEBI.

Review of corpus: The stock exchanges and depositories need to review the IPF corpus twice a year to ensure that it is sufficient. If the review reveals that the corpus is inadequate, it must be increased accordingly.

Other requirements: The guidelines also provide disclosure requirements for the stock exchanges and the depositories, including: (a) disclosure of the corpus of the IPF on its website; (b) dissemination of the policy to process claims, and FAQs on the same; and (c) adequate notice to the investors before implementing any amendment in the policy on processing of claims.

Investor Services Fund (ISF): In respect of the ISF, stock exchanges are required to set aside at least 20% of the listing fees received by ISF for providing services to the investing public. It must be supervised by the Regulatory Oversight Committee of the stock exchanges, set up for the purpose of better management and control of the contributions and utilization of the ISF corpus. ISF will be used for the purpose of the promotion of investor education and investor awareness programs, with at least 50% of the corpus should be spent in Tier II & Tier III cities.

Our Thoughts

It is relevant to note that with the implementation of the Guidelines, several circulars have been rescinded including the provision with respect to utilization of the IPF[iii]. While the previous circulars provided that all transactions executed on exchange platform were eligible for settlement from IPF,[iv] the Guidelines allows all claims against a trading member, thereby allowing a wider eligibility of claims. The IPF and ISF are two important mechanisms designed to safeguard the interests of investors in the financial market. By providing a safety net in case of broker defaults, the IPF not only protects investors from financial losses but also contributes to the overall stability and credibility of the securities market. The modifications under the Guidelines aim to further strengthen the protection of investors’ rights and streamline the utilisation of these funds, as well as promoting financial literacy and participation in the securities market. As the financial landscape continues to evolve, the IPF's role will remain crucial in upholding investor confidence and facilitating healthy market participation.

Authors: Souvik Ganguly, Altamash Qureshi and Paridhi Rastogi

The information contained in this document is not legal advice or legal opinion. The contents recorded in the said document are for informational purposes only and should not be used for commercial purposes. Acuity Law LLP disclaims all liability to any person for any loss or damage caused by errors or omissions, whether arising from negligence, accident, or any other cause.


[i] To view India's Market Capitalization from Jan 1993 to Sep 2023, please click here

[ii] To view the circular, please click here

[iii] To view the circular, please click here

[iv] Paragraph 2D of 2017 circular states- “Admissibility of claim for making payment out of IPF in Stock Exchanges: In the event of default by the member, all transactions executed on exchange platform shall be eligible for settlement from IPF (subject to maximum limit),subject to the appropriate norms laid down by the Defaulters’ Committee.”