The National Stock Exchange (NSE) has warned investors that they may lose the protection of its Investor Protection Fund (IPF) if they fall for false promises or share their credentials.
On April 3, NSE announced paying Rs 414 crore from IPF to 34,497 clients of Karvy Stock Broking Ltd., accused of misappropriating power of attorney by transferring securities into one of its demat accounts. Against this backdrop, let’s examine what IPF is and how it offers protection.
Investor Protection Fund
Stock exchanges register brokers and give them rights to trade and other privileges, so they are responsible for their behaviour. When a listed company or a trading member is declared a defaulter or expelled, IPF steps in and compensates the investors if the defaulters’ assets fall short of claims.
Thirty-three members are declared defaulters or expelled as of March 31, 2023. NSE’s website broadcasts the details like the number of claims processed, those under process, etc.
Protection Offered
A fund trust recommends compensating investors for insufficient funds in the defaulters’ account to meet the admitted value of their claim, subject to a maximum of Rs 25 lakh per investor. If the trading member fails to issue know-your-customer documents to an investor, or if the investor has not received funds, securities, margins or security deposits, he/she may seek the dispute resolution mechanism.
Investors can also seek redress against non-receipt of corporate benefit or disputes related to auction value debited or securities that have got auctioned. Further, trades executed without consent, excess brokerage charged, and non-receipt of credit balance can also be the subject of a complaint.
If the order is in favour of the investor, NSE blocks the amount from the trading member’s available deposits with NSE and pays the investor if the trading member decides not to file an arbitration. If the trading member decides to file arbitration, an interim amount is released to the investor from IPF.
“In case the appeal award is in favour of the investor and the trading member opts for making an application U/s 34 of the A&C Act, 1996, then 75 per cent of appellate award amount or Rs five lakh, whichever is less, shall be released,” NSE website said.
The IPF corpus has been increased to match the platform’s trading volume at the behest of the Securities and Exchange Board of India (Sebi). However, many stakeholders have called for a further increase due to the mismatch between the profits the NSE makes and the IPF corpus. In 2021-22, the fund provided claims worth Rs 535 crore, compared to around Rs 16 crore in 2015-16. The fund’s closing corpus in 2022 was Rs 1,603 crore, approximately three times its 2016 closing amount.
