BackSebi may review norms related to use of investor protection funds
Misuse of investor protection funds under the guise of investor education have prompted the creation of a centralized investor protection fund
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Mumbai: The Securities and Exchange Board of India (Sebi) is likely to review guidelines related to the utilization of the investor protection fund (IPF), which is currently managed separately by individual stock exchanges.
The idea of moving away from individual IPFs and creating a centralized IPF that would be under the control of the capital market regulator was discussed at a recent meeting between senior officials of Sebi and three stock exchanges, according to two people familiar with the development, one of whom was present at the meeting.
The issue was raised after concerns related to the misuse of IPFs under the guise of investor education surfaced, said one of the two people cited above.
“Exchanges have a large fund at their disposal and while Sebi has laid down broadly the norms for its utilization, there tends to be some amount of misuse while using the funds for promotional activities," said the person requesting anonymity as the discussions are not yet public.
The corpus of the IPF is maintained by stock exchanges to compensate investors in the event a broker defaults. An exchange can also use the funds to compensate the investor temporarily in cases where a dispute between the broker and the investor is in the process of arbitration.
While initially the IPF was formed to compensate investors, Sebi allowed exchanges to utilize interest income earned on the fund for investor education, awareness and research in August 2000. As on 31 March, the IPF corpus of BSE Ltd and National Stock Exchange of India Ltd (NSE) stood at ₹ 647 crore and ₹ 590 crore, respectively. MCX Stock Exchange Ltd (MCX-SX) declined to share details of its IPF.
The issue of alleged misuse of IPF monies has also been raised by MCX-SX in a letter to Sebi. MCX-SX proposed that all stock exchanges should pursue a common approach towards investor education and Sebi should have tighter control over how the IPFs are used.
“In the absence of any broad guidelines regarding actual usage of public money under IPF, at times, exchanges do go astray while undertaking activities under this head. This dissipated effort by the exchanges, if consolidated, might give a better, time-bound, measurable result," said the letter addressed to Sebi whole-time member Prashant Saran. Mint has reviewed a copy of the letter.
“For better management of the public money, MCX-SX would request Sebi to consolidate the investors’ protection fund of all the exchanges and bring it under its ambit. This fund may be released once the regulator is satisfied by the fund utilization report sent by the individual exchanges," the letter added.
To be sure, discussions are at a nascent stage and a review does not necessarily mean that the regulator would amend the guidelines.
According to the second person cited above, this is not the first time the regulator is considering moving towards a centralized investor fund to be managed by the regulator.
“A few years back, an internal note was prepared by Sebi highlighting some of the ways in which IPF was being misused by the bourses and that Sebi should take control of the fund," he said on condition of anonymity as he is not allowed to speak to reporters.
Stock exchanges, however, deny there has been any kind of misuse of the IPF and say that money from the fund is utilized in keeping with the guidelines laid down by the markets regulator. According to Sebi, the IPF has to be managed by a trust and the trustees should comprise a public representative, an investor association representative, board members and senior officials of the exchange.
Responding to queries mailed by Mint, all three exchanges denied that any kind of “advertisement and promotional activities" were being conducted using the IPF.
A BSE spokesperson said that the exchange conducted a total of 2,578 investor awareness programmes during the financial year 2013-14 using the IPF. It also opened 15 investor service centres apart from publishing research reports on 1,445 thinly traded companies for the aid of retail investors.
“The broad activities, inter alia, include undertaking education campaigns, investor seminars, road shows, distribution of related education materials as well as for publishing certain company-related research reports through reputed rating agencies, so that investors can take informed decisions," said an NSE spokesperson while responding to a query related to activities undertaken using the IPF.
An MCX-SX spokesperson also said that the IPF funds are used for “investors’ claim against defaulter members, interim release of funds pursuant to admissible claims of investors as determined by investor grievance redress committee and investor education, awareness and research".
There is a need to look at the accountability mechanism, according to M.S. Sahoo, secretary of Institute of Company Secretaries of India and a former whole-time member of Sebi.
“There have also been complaints of occasional misuse of funds to promote private business interests. Time has come to look at centralizing the IPFs with stock exchanges and other agencies and using this fund for compensating investors for any loss to them on account of fraud," said Sahoo.
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