Consultative Paper - Investor Protection and Education Fund

Securities and Exchange Board of India



Consultative Paper on Draft Securities and Exchange Board of India (Investor Protection and Education Fund) Regulations, 2008
March 18, 2008



1.0 Background

1.1 In terms of section 11 of the SEBI Act it is the duty of SEBI to protect the interests of investors in securities and to promote the development and to regulate the securities market by such measures as it thinks fit and such measures may provide for promoting investors education and training of the intermediaries. Investor education is very relevant in the context of complexities involved in the securities market. In order to enable the investors to understand and appreciate the risk factors associated with investments in securities, investor education and awareness is very important. Therefore, to achieve the objective of investor protection by investor education and investor awareness it is desirable to set up the Investor Protection and Education Fund under the aegis of SEBI.

1.2 Dr. N.L. Mitra in his study on investor protection had recommended establishment of a separate fund namely Investor Protection Fund to be administered by SEBI.?

1.3 The Joint Parliamentary Report (JPC) on Securities scam of 2001 had recommended that in order to enable SEBI to undertake investor education and awareness campaign effectively, the investor education and protection fund established under section 205A of the Companies Act and investor education resources of RBI should be shifted to SEBI and a joint campaign for investor education and awareness under the leadership of SEBI be undertaken.

1.4 The Honble Finance Minister in his Budget Speech for the year 2006-2007 had inter alia proposed as under :-

?to set up an Investor Protection Fund under the aegis of SEBI, funded by fines and penalities recovered by SEBI. This will bolster confidence among retail investors who should be the key drivers of the capital market.

1.5 The expert group headed by Justice M. H. Kania, Former Chief Justice of India had also recommended amendments to SEBI Act, 1992 to provide for establishment of an Investor Education and Protection Fund under the SEBI Act, 1992 and crediting of certain amounts including the unclaimed monies lying with the intermediaries for 7 years and amounts realized by way of penalties under the SEBI Act, the Depositories Act, 1996 and the Securities Contracts (Regulation) Act, 1956 to the said Fund.

2.0 International Practice

2.1 In United States of America the Fair Funds established under the Sarbanes Oxley Act, 2002 comprising of amount of disgorgement proceeds received under any judicial or administrative action by SEC or under the settlement proceedings are used for the benefit of the injured investors.

3.0 Legislative Precedents in India

3.1 The Pension Fund Regulatory and Development Authority, Ordinance, 2004 which mandated the Pension Fund Regulatory and Development Authority (PFRDA) to protect the interest of subscribers to the schemes of pension funds had provided for establishment of the Subscriber Education and Protection Fund under the aegis of PFRDA.

3.2 The Telecom Regulatory Authority of India ( TRAI) which has similar objectives as that of SEBI with respect to protection of interests of service providers and the consumers of the telecom sector has similar duties and functions as that of SEBI under section 11 of the SEBI Act. Its regulation making power under section 36 of the Telecom Regulatory Authority of India, Act, 1997 ( TRAI Act)? is pari materia the regulation making power of SEBI under section 30 of the SEBI Act.

3.3 In order to carry out one of the purposes of the TRAI Act to protect the interests of consumers of the telecom sector, TRAI has made ?Telecommunications Consumer Education and Protection Fund Regulations, 2007? under section 36 of the TRAI Act.? ?????????

4.0 Creation of SEBI Investor Protection and Education Fund

4.1 Under section 14 of the SEBI Act, the SEBI General Fund can be applied for meeting inter alia the expenses on objects and for purposes authorized under the SEBI Act. One of such purpose if investor education and protection. While the amendment to SEBI Act is yet to be effected for the purpose of crediting certain amounts as stated which can be credited by suitable amendments in the SEBI Act, SEBI has, by way of an executive order under section 11 of the SEBI Act passed on 23rd July, 2007, has created an ?Investor Protection and Education Fund? (Fund) by crediting an initial corpus of Rupees 10 Crores out of SEBI General Fund.

5.0 ?The draft Regulations ?

5.1 In order to maintain the transparency in the administration of Fund and for proper utilization of Fund for identified objects it is appropriate for SEBI to make regulations to carry out the purposes of the SEBI Act with respect to the investor education and protection.

5.2 As stated above SEBI has duty to protect interests of investors and such duty takes within its fold the duty to specify the manner of utilization of monies? which belongs to investors but cannot be refunded to the concerned investor and are lying unclaimed and also the other? monies which can be used for the investor protection.

5.3 ? The mechanism of crediting such monies and utilization of such monies for investor protection and education is proposed to be specified by way of regulation made under section 30 of the SEBI Act. Accordingly, the Draft Securities and Exchange Board of India (Investor Protection and Education Fund) Regulations, 2008 ( the Draft Regulations)? is annexed with this Consultative Paper.?

6.0?? Salient Features of the Draft Regulations

6.1?? The regulations provides for object of utilization of the Fund and the mechanism for administration of the Fund. The Fund shall be used for the purpose of protection of investors and for educating the investors. Funds shall be utilized by the Board for the specified objective on the recommendation of a Committee constituted in accordance with the proposed Regulations which shall inter alia consist of members from amongst the officials of SEBI, representatives of intermediaries and Stock Exchanges and Investors Associations.

6.2?? The Regulations also provide for the procedure to be adopted by the Committee and the maintenance and audit of accounts.

?7.0? Regulatory Impact Assessment

7.1?? The Regulations are proposed to carry out the purposes of the Act effectively ???as suggested by various Expert Groups and The Joint Parliamentary Committee on a stock market scam. In implementing the regulations there will be a cost attached to the administration of the Fund like expenses relating to meetings of the committee, audit of the committee, etc. On the other hand, benefits attached to their implementation includes awareness amongst investors relating to risks involved in the market which will help in developing an informed investor base and safer market in India. Thus benefits justify the cost involved.



8.0?? Comments are invited from the public on the Securities and Exchange Board of India (Investor Protection and Education Fund) Regulations, 2008. The comments may be sent by e-mail upto April 10, 2008 to the following addresses





santoshs@sebi.gov.in (Mr. Santosh Shukla, Deputy Legal Adviser)

anubhavr@sebi.gov.in (Mr. Anubhav Roy, Legal Officer)



Comments may also be sent physically to the following address, so as to reach latest by April 10, 2008 ?



Mr. Santosh Shukla, Deputy Legal Advisor,

Division of Policy, Legal Affairs Department,

Securities and Exchange Board of India,

SEBI Bhavan, C-4A, G-Block,

Bandra Kurla Complex, Mumbai ? 400051