Norms for Investor Protection Fund for commexes issued

To further strengthen the commodity market, the Securities and Exchange Board of India (Sebi) on Monday issued a detailed framework on Investor Protection Fund (IPF), which can be used for investor education and awareness programmes.

Spelling out detailed guidelines of constitution and management of IPF, contribution to the Fund and eligibility of claims, Sebi asked exchanges to ensure that the funds in the IPF are well-segregated from that of the bourse and that the IPF is immune from any liability of the exchange.

All the penalties levied and collected by the commodity exchanges, except for the settlement-related fines, including penalties from delivery default, would be part of the IPF.

Besides, one per cent of the turnover fee charged by the exchanges from the brokers or Rs 25 lakh, whichever is lower in a financial year, would go to IPF.

Sebi has started regulating the commodity market after the merger of Forward Markets Commission (FMC) with it in September last year.

This circular is being issued to consolidate and update such norms prescribed for commodity bourses by erstwhile FMC.

Sebi said that IPF would be administered by a Trust created for this purpose. The Trust would comprise two eminent persons, the exchange's MD and CEO and its one independent director (these names will be suggested by the bourse and approved by Sebi).

The bourses would have to disclose in their financial statements, the IPF trust as a related party as well as the details of transactions between the respective exchanges and IPF trust as per new accounting standards.

With regard to filing of claims, Sebi said that exchanges would have to publish a notice inviting legitimate claimants to file claims against the defaulter member within 90 days. The claims received against the defaulter member during the specified period would be eligible for being considered for compensation from the IPF.

"If any eligible claim arises within three years from the date of expiry of the specified period, such claims will be processed at the discretion of the IPF Trust. Any claim received after three years from the date of expiry of the specified period and not processed by the IPF Trust will be dealt with as civil dispute," Sebi said.

Any appeal against the non-entertaining of claims by the Trust would be referred to the bourse's board for decision. The claims of the retail clients alone would be eligible for compensation form the IPF.

The IPF Trust may adopt the arbitration mechanism at the exchange to determine the legitimacy of the claims received from the claimants. The trust may also seek the advice of the exchange's defaulters committee to sanction payments to be made to the investors.

Sebi said that exchanges are free to fix suitable compensation limits in consultation with the IPF Trust.

However, the maximum amount of compensation available against a single claim of an investor arising out of default of a member of an exchange would be Rs 2 lakh.

"The maximum available compensation arising out of default by a member of an exchange shall be Rs 2 crore in those commodity derivatives exchanges whose size of corpus of IPF is Rs 15 crore or above and shall be Rs 25 lakh if the size of corpus is less than Rs 15 crore," Sebi said.

Sebi would review the amount of compensation available against a single claim from an investor from time to time.

The IPF Trust would disburse the amount of compensation from the IPF to the investors and such compensation shall not be more than the maximum amount fixed for a single claim of an investor.

In case the exchange is wound up, then the balance in the IPF lying un-utilised with the IPF Trust, would be transferred to Sebi. In such an event, the funds will be maintained in a separate account and Sebi would act as trustee of these funds.

The funds shall be utilised for purposes of investor/client education, awareness, research or other such programme as may be decided by Sebi.

According to the Finance Act, 2015, all rules, directions, guidelines, instructions and circulars made by FMC or the central government applicable to recognised associations under the Forward Contracts (Regulation) Act, 1952, would remain in force for one year from the date of repealing FCRA or till such time as notified by Sebi, whichever is earlier.

FCRA was repealed on September 29, 2015.