The stock market is like a wizard, one cannot time it perfectly. Sometimes it’s outperformed the expectation, while sometimes it downbeat the expectation. The 2008 financial crisis was an excellent example, in which billions of dollars of investor money disappeared in a few minutes, after the collapse of investment bank Lehman Brother. It led to a contagious effect, affecting every country simultaneously making it a global economic crisis unseen since the Great Depression. Afterward, Government across the world feels the urgent need to protect the interests of investors in order to boost confidence in the financial system. India too has felt the heat of the global financial crisis. Before the start of the Financial Crisis, the BSE Sensex was at 21,000 but after the collapse, the Sensex had come to 9,000.
It’s led the whole confidence of investors into a tailspin. The government of India and SEBI feels the need to establish a fund to protect the investor’s interest. The exchange feels the urgent need to establish and maintain a fund to protect the interests of the clients of the trading members of the Exchange, who may have been declared defaulters or expelled, under the provisions of the Rules and the Exchange regulations.
The investor protection money is collected by charging a one percent turnover fee by the stock exchange from the broker. It is set up by the interconnected Stock Exchange (ISE) in accordance with the guidelines issued by the ministry of finance for investor protection, in order to compensate the claims of investors against the members of the exchange who have defaulted or failed to pay.
- A trust is created for the administration of the Investor provident Fund.
- SEBI approved administration include the MD’s and CEO of a stock exchange.
- The trust of Investor Protection Fund may opt for arbitration mechanism (resolving of dispute outside courts) to decide the legitimacy of the claims received.
- It has allowed the exchanges to fix suitable compensations with proper consultations of SEBI.
Let’s try to understand the IPF means for an investor:
- Claims of the retail investors alone will be eligible for compensation from the IPF.
- A claim against the default member during a time period will be eligible for consideration for compensation from the IPF.
- Any claim received after three years from the date of expiry of the specific period and not proceed by the IPF trust will be dealt in the civil court.
- The IPF will be administered by a trust, which will comprise two eminent person and one independent director on the board of exchange.
- IPF doesn’t exceed the maximum compensation amount that is fixed for a single claim made by an investor.
- The exchanges can use the interest earned on the IPF corpus for the maintenance of price ticker boards.
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*Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing.