On Wednesday, the National Stock Exchange (NSE) admitted that the Securities and Exchange Board of India (SEBI) has directed the Exchange to conduct a review and to ascertain the adequacy of its investor protection fund (IPF), disclose the corpus on its website and update it on a monthly basis.
SEBI has also asked NSE to increase the size of its IPF corpus to Rs1,500 crores in order to protect the interests of investors in the light of the recent broker defaults. The adequacy of the IPF corpus will be reviewed on a half-yearly basis and incremental contributions will be made to the IPF, if required.
Accordingly, NSE has announced that it will enhance the total corpus to Rs1,200 crores by 26 November 2020. Further, Rs300 crore will be maintained as a reserve fund to be transferred to Investors Protection Fund Trust (IPFT) to meet any shortfall in IPF.
Moneylife has been pointing out that the National Stock Exchange (NSE), which churns out 85%-90% higher volumes, has a significantly smaller IPF of Rs594.12 crore compared to that of the Bombay Stock Exchange’s (BSE) Rs784.24 crore as on 31 March 2020. Annual profits and earnings of both BSE and NSE are way higher.
Subsequently, last month, SEBI Chairman
Ajay Tyagi acknowledged that IPF with stock exchanges is 'woefully insufficient’ while speaking at the CII's financial market summit. He had said that the market regulator would take corrective measures soon.
In the past couple of years, broker defaults have been on the rise and the IPF corpus would be grossly inadequate if every investor has to be paid. This is one of the main reasons both stock exchanges delay declaring brokers as defaulters, and have a cap of Rs25 lakh for each investor. Clients are allowed to claim money from stock exchanges only after a broker is officially declared a defaulter.
The statement from NSE says “In order to enhance the effectiveness of the Investor Protection Fund (IPF) and to improve the investor experience while making claims against defaulting Trading Members, SEBI has advised Exchange to operationalise a detailed Standard Operating Procedure (SOP).
"The SOP inter alia covers procedures and timelines for obtaining information from investors, processing investor claims, review of claims and timeline for declaration of a Trading Member as a defaulter. The SOP strengthens existing processes and includes electronic claim submission, pre-filled forms with information as available with the Exchange, claim processing policy, review by independent auditors etc. The SOP is being operationalized to significantly reduce the timelines for making payments to the investors in case of Trading Member defaults.”
NSE has stated that a detailed policy for evaluating investor claims is available on NSE's website. All eligible investor claims of a defaulting trading member will be paid as per the policy without any aggregate limit per trading member subject to a maximum of Rs25 lakh per client.
Meanwhile, BSE in a similar statement, said that it had received a letter from SEBI, dated 13th November “to enhance the effectiveness of IPF as the regulator has decided to revamp the grievance redressal mechanism at stock exchanges with regard to clients of defaulting trading members.” The BSE, in its statement, added that SEBI had asked it to implement the prescribed Standard Operating Procedure (SOP) for processing of investors’ claims and a timeline for declaration of defaulters.
