What Is the Investor Protection Fund (IPF) in India?
The Investor Protection Fund is the pool that pays clients when a broker fails. Every recognised stock exchange and every depository in India has to establish one, hold it through a separate trust, and keep it out of reach of its own liabilities. It is the closest thing the Indian securities market has to a depositor safety net, and it is narrower than most people assume: it covers the claims of clients of a defaulting trading member, on a clock, up to a limit the exchange itself sets.
Definition
Investor Protection Fund
is a fund that every stock exchange and depository must establish and administer through a separate trust, funded by prescribed contributions and penalties, and used at a stock exchange to meet the legitimate investment claims of clients of a defaulting trading member. Supervision of its use rests with the IPF Trust. Source: SEBI circular SEBI/HO/MRD/MRD-PoD-3/P/CIR/2023/81 dated 30 May 2023.
Who runs the Investor Protection Fund?
A trust, deliberately staffed to sit at arm's length from the institution that funds it. The IPF Trust of a stock exchange or a depository has exactly five trustees: three Public Interest Directors, one representative from an investor association recognised by SEBI, and the Chief Regulatory Officer or Compliance Officer. Trustee tenure is capped at five years, except for the regulatory or compliance officer whose trusteeship runs with the job.
Two structural safeguards sit alongside that. The exchange or depository must ensure the IPF funds are well segregated and that the fund is immune from any of its own liabilities. And supervision of utilisation of the IPF, and of the income it earns, rests with the trust rather than with the exchange or depository board.
How is it funded?
The two sides are funded on completely different logic. An exchange feeds the fund out of listing fees and penalties; a depository feeds it out of profit.
| Contributor | What goes into the IPF |
|---|---|
| Stock exchange | 1% of listing fees received, quarterly |
| Stock exchange | 100% of interest earned on the 1% security deposit kept by issuers at the time of a public offer, on refund |
| Stock exchange | Penalties for client code modification deficiencies, pay-in default in periodic call auctions for illiquid scrips, LODR non-compliance penalties from listed companies, and 10% of order value for pay-in default in an offer for sale |
| Stock exchange | A contribution based on transaction charges collected from members, per the exchange's own policy |
| Stock exchange | At least 70% of interest or income earned on IPF investments, ploughed back |
| Depository | 5% of profits from depository operations every year |
| Depository | All fines and penalties recovered from depository participants and other users |
| Depository | Interest or income from IPF investments, and any balance in an older Investor Protection Reserve or Beneficial Owners Protection Fund |
5% of annual profits
A depository's mandatory yearly contribution to its Investor Protection Fund, from profits on depository operations
Source: SEBI (Depositories and Participants) Regulations, 2018, regulation 73(2), read with SEBI circular dated 30 May 2023, paragraph 3.I.C
The depository contribution is also written into the regulations themselves, at regulation 73 of the SEBI (Depositories and Participants) Regulations, 2018, which additionally bars the fund from being used to indemnify a beneficial owner under section 16 of the Depositories Act.
What the two funds are actually used for
They are not used for the same thing, and this is the distinction that trips people up.
At a stock exchange, the IPF meets the legitimate investment claims of the clients of defaulting trading members, and pays interim relief where applicable. That is compensation.
At a depository, the IPF is primarily an investor education and awareness fund: seminars, lectures, workshops, publications, training programmes, and support for participants' own awareness programmes. It can also meet legitimate claims of beneficial owners up to a cap the depository determines, but only where the claim is not settled by the beneficial owner indemnity insurance. Anyone assuming a depository IPF works like broker default compensation is reading the wrong fund.
Who can claim, and by when
The exchange starts the clock by declaring a trading member a defaulter and publishing a notice inviting claims within a specified period, which cannot be less than one year from the date of declaration of default. That notice runs in at least one English national daily and one regional language daily chosen by where the defaulter's clients are concentrated, goes out by SMS or email to all clients of the defaulter, and is displayed at the exchange, at its Investor Service Centres and on its website for the whole period. The notice must state the specified period and the maximum compensation limit for a single claim.
After that, the eligibility rules are strict:
- Claims filed within the specified period are eligible.
- Clients who dealt through authorised persons of the defaulter, registered with the exchange, are also eligible.
- A claim arising within three years after the specified period expires is eligible where the defaulter's own funds are inadequate, provided the trust satisfies itself the claim could not have been filed earlier for reasons beyond the claimant's control. Where the defaulter's surplus has already been returned, that claim is borne by the exchange instead of the IPF.
- A claim received more than three years after the specified period expires may be dealt with as a civil dispute.
- Claims of a trading member or its associates are never eligible, and claims arising out of speculative transactions are not eligible.
Sanction runs through the Member Core Settlement Guarantee Fund Committee, whose advice on legitimate claims goes to the IPF Trust for disbursement.
The limit is set by the exchange, not by SEBI
There is no single national compensation figure. Stock exchanges fix suitable per investor compensation limits in consultation with their IPF Trust and SEBI, must review and progressively increase the amount at least once every three years, and must disseminate the limit and any change by press release and on their website. If you want the number that applies to you, read your exchange's current disclosure rather than a secondary source, because the review cycle moves it.
The IPF is one of three separate investor redress routes and it is the narrowest. A service complaint against an intermediary goes through SCORES; a dispute that survives that goes to the Online Dispute Resolution portal; and a depository participant default is a different animal from a trading member default. The IPF is what is left when a member has actually been declared a defaulter and the money is gone.
Flock reports the filings themselves, each one dated and linked to its source. What any disclosure means for your money is your call to make. Not investment advice.
Frequently asked questions
What is the Investor Protection Fund?
A fund every stock exchange and every depository must establish, administered through a separate trust, used at exchanges to meet the legitimate investment claims of clients of defaulting trading members. Its five trustees include three Public Interest Directors and one representative of a SEBI recognised investor association. Source: SEBI circular SEBI/HO/MRD/MRD-PoD-3/P/CIR/2023/81 dated 30 May 2023, paragraph 3.I.A.
How is the Investor Protection Fund funded?
A stock exchange contributes 1% of listing fees received quarterly, 100% of the interest on the 1% issuer security deposit, various penalties it collects, a share of transaction charges per its own policy, and at least 70% of income earned on IPF investments. A depository contributes 5% of its annual profits from depository operations plus all fines recovered from participants. Source: SEBI circular dated 30 May 2023, paragraphs 3.I.B and 3.I.C.
Is there a fixed compensation limit per investor?
No single SEBI wide figure. Each stock exchange fixes its own per investor compensation limit in consultation with its IPF Trust and SEBI, must review and progressively increase it at least once every three years, and must publish it by press release and on its website. Source: SEBI circular dated 30 May 2023, paragraph 3.I.J.
How long do I have to file a claim against a defaulting broker?
Claims must be filed within the specified period the exchange announces, which cannot be less than one year from the date of declaration of default. A claim arising within three years after that period can still be eligible where the defaulter's funds are inadequate. Anything later may be dealt with as a civil dispute. Source: SEBI circular dated 30 May 2023, paragraphs 3.I.H and 3.I.I.
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Disclosures shown are public regulatory filings. Data may be delayed or incomplete. Smart-money entities may no longer hold positions shown. Not investment advice.