SEBI Allows Depositories to Utilize Up To 5% of IPF Income for Admin Expenses

SEBI Allows Depositories to Utilize Up To 5% of IPF Income for Admin Expenses​

Securities and Exchange Board of India (SEBI) has introduced a significant operational flexibility regarding Investor Protection Funds (IPF). The regulator has permitted depositories to use a limited portion of the investment income generated from their IPF for administrative purposes. This move aims to bring greater uniformity across market infrastructure institutions.

The decision follows representations received from various depositories. Previously, SEBI's framework mandated that 100 percent of the interest or income earned from IPF investments must be added back into the fund corpus. The new circular, issued on July 8, changes this mandate substantially.

##Revised Mandate for IPF Investment Income

Under the revised rules, depositories are now allowed to utilize up to five percent (5%) of the annual investment income generated by the IPF. This small portion is designated to cover administrative and statutory expenses related to the functioning of the IPF Trust.

The bulk of the earnings must, however, be reinvested back into the fund. Specifically, SEBI mandates that depositories must plough back at least ninety-five percent (95%) of the interest or income generated from their investments every financial year.

##Permissible Expenses and Accountability

SEBI has clearly defined the types of expenditures covered by this 5% allocation. These expenses include necessary salaries for employees dedicated to the IPF Trust. They also encompass audit fees, applicable taxes, Charity Commissioner's fees, and other administrative costs.

The regulator has ensured robust accountability mechanisms are in place. If any operational expenses exceed the permitted five percent limit, the excess amount must be borne entirely by the depository itself. Similarly, any unused portion of the 5% allowance must be transferred back to the IPF at the close of the financial year.

##Background on Investor Protection Funds

Investor Protection Funds are crucial mechanisms maintained by market infrastructure institutions. Their primary role is safeguarding investor interests in the event of defaults or other specified circumstances involving depositories or exchanges. These funds compensate eligible investors when such events occur.

This adjustment marks a departure from earlier requirements. The previous structure left zero scope for meeting operational administrative expenses using the investment income generated by the IPFs.

##Current Status of Depositories' IPF Corpus

As of May 31, financial data indicates varying corpus sizes across key depositories. CDSL's Investor Protection Fund was reported to be at approximately Rs 116 crore. NSDL's corresponding IPF corpus stood at around Rs 95.5 crore.