Streamlining Investor Protection: Revised Guidelines For Investor Protection Fund And Investor Services Fund For Commodity Derivatives Exchanges

On May 30, 2024, the Securities and Exchange Board of India (“SEBI”) issued revised guidelines for the Investor Protection Fund (“IPF”) and Investor Services Fund (“ISF”) applicable to recognized stock exchanges with commodity derivatives segment.[1] This is in a move to strengthen investor protection in the commodity derivatives market,

This circular replaces previous guidelines on the subject and clarifies the process for stock exchanges to manage these funds. The revised framework aims to ensure efficient handling of investor claims arising from defaults by trading members, while also promoting investor education and awareness initiatives.

Key Aspects

1. Establishing and Managing the IPF
   Composition: The circular mandates each exchange to establish an IPF governed by a Trust with five trustees, including representatives from public interest, investor associations, and the exchange itself.
   Funding: Contributions to the IPF come from exchange fees, investment income, penalties, and other SEBI-specified sources. These funds are segregated from the exchange’s finances and invested prudently with a focus on safety.
2. Investor Claims Process
   Eligibility: Investors can claim compensation from the IPF if they suffer losses due to defaults by trading members.
   Time Limits: Claims must be filed within a specified period (minimum one year) after the default declaration. The exchange is obligated to actively notify investors through newspapers, SMS, and email.
   Claim Assessment: A committee assesses claims, which are then forwarded to the IPF Trust for disbursement. There’s a predetermined maximum compensation per investor, reviewed every three years.
3. Disbursement and Utilization of IPF Funds
   Prompt Compensation: The IPF disburses compensation without waiting for asset recovery from defaulters. Recovered assets replenish the IPF.
   No Indemnity: The circular eliminates the requirement for indemnity undertakings from investors for claims.
   Investor Education and Awareness: Income generated from the IPF corpus can be used for investor education, awareness programs, setting up Investor Service Centers (ISCs), and research activities, subject to Trust approval.
4. Transparency and Accountability

• Regular Reviews: Stock exchanges are required to conduct half-yearly reviews of the IPF corpus to ensure its adequacy.
• Disclosure Requirements: IPF balance and utilization details must be publicly disclosed in monthly reports and on exchange websites.
• Policy Clarity: Policies on claim processing and compensation limits must be readily available along with FAQs. Any policy amendments need clear communication and cannot be retrospectively applied.

  5. ISF

• Establishment and Management: The circular outlines the establishment and management of ISFs by stock exchanges. An oversight committee supervises the ISF which maintains a separate account for investor education, awareness programs, and price ticker boards.
• Funding and Utilization: ISF contributions come from exchange fees and fund income, invested in secure instruments.
• Investor Service Centers (“ISCs”): Funded by the ISF, ISCs offer facilities like newspapers, complaint registration, dispute resolution assistance, real-time price displays, and educational resources. They aim to efficiently handle investor inquiries and complaints while promoting market literacy through trained staff and educational programs.

This revised framework strengthens investor protection in the commodity derivatives market. The segregation and prudent management of the IPF corpus provide a financial safety net for investors in case of defaults. The streamlined claims process with clear timeframes and elimination of indemnity requirements further facilitates investor recourse. Additionally, the focus on investor education through ISCs and awareness programs empowers market participants with essential knowledge and safeguards their interests. The emphasis on transparency and regular reviews ensures the proper functioning of the IPF and ISF, fostering trust in the regulatory framework.

6.Standard Operating Procedure (“SOP”) for handling investor claims

Furthermore, Annexure 2 of the circular provides the SOP concerning the process for handling investor claims from the IPF in case of defaults by trading members on a stock exchange.

• The SOP begins with the exchange disabling the trading member (T Day) and notifying investors through its website, SMS, and email (T Day & T+1 Day). Clients then receive prefilled claim forms detailing their account balances with the disabled member (T+15 Days). These forms can be modified and submitted with supporting documents by the client within a designated timeframe (T+75 Days).
• Following due process, the exchange declares the member a defaulter (T+120 Days, with potential extensions).  Investors are then informed again via the exchange website, SMS/email, and a public notice in national and regional newspapers (within 1 & 3 Days of declaration).
• The claim processing stage involves scrutinizing documents, verifying claims against exchange records with auditor involvement, and obtaining approval from the Member and Core Settlement Guarantee Funds Committee (“MCSGFC”). If defaulter assets are insufficient, the MCSGFC recommends claims to the Investor Protection Fund Trust (“IPFT”) for disbursement from the IPF. The IPFT then approves and disburses claims to eligible clients, with the exchange communicating the decision.  Disbursement timelines vary depending on when the claim was submitted:
• Claims submitted within the designated window (T+75 Days) are settled within T+135 days upon IPFT approval.
• Claims submitted after the window but before default declaration are settled within 60 days of approval if supported by relevant statements.
• Claims received after the default declaration are settled within 60 days of receipt and approval.
• Finally, clients unsatisfied with the claim process can request a review: a first review by the MCSGFC (within 90 days of the IPFT decision) and a second review by the Committee of Public Interest Directors (“PIDs”) if necessary (within 90 days of the first review decision).

Conclusion

SEBI’s revised guidelines for the IPF and ISF represent a significant step forward for investor protection in the commodity derivatives market. The segregated and well-managed IPF corpus acts as a financial safety net for investors facing defaults. The streamlined claims process with clear timelines and the elimination of indemnity requirements empower investors to seek recourse more easily.  Furthermore, the focus on investor education through ISCs and awareness programs equips market participants with essential knowledge and safeguards their interests. The emphasis on transparency and regular reviews ensures the proper functioning of the IPF and ISF, fostering trust in the regulatory framework. Looking ahead, it will be important to monitor the effectiveness of these revised guidelines and the SOP for handling investor claims. This will involve assessing factors like investor awareness of the IPF and ISF, the efficiency of the claims process, and the overall impact on investor confidence in the commodity derivatives market.

[1] https://www.sebi.gov.in/legal/circulars/may-2024/comprehensive-guidelines-for-investor-protection-fund-ipf-and-investor-services-fund-isf-for-stock-exchanges-having-commodity-derivatives-segment_83718.html.