SEBI Revises Investor Protection Fund Framework Allowing Depositories to Utilise Five Percent of IPF Income for Administrative Expenses

The Securities and Exchange Board of India (SEBI) has revised the framework governing the utilisation of income earned from the Investor Protection Fund (IPF) maintained by depositories. The circular, bearing reference number HO/47/14/13(4)2026-MRD-POD3/I/15577/2026 and dated July 7, 2026, came into effect on September 1, 2026. Under the revised norms, depositories may now utilise up to 5 percent of the annual interest or income generated from IPF investments for specified administrative expenses, reversing the earlier requirement that 100 percent of such income be added to the IPF corpus.

Background: The Investor Protection Fund at Depositories

Every recognised depository in India, namely the National Securities Depository Limited (NSDL) and the Central Depository Services (India) Limited (CDSL), is required to maintain an Investor Protection Fund. The IPF serves as a dedicated pool of funds to compensate investors who suffer losses due to the default or negligence of a depository participant. The fund is constituted through contributions from depository participants, penalties levied by the depository, and interest earned on the corpus.

The IPF is governed by the SEBI Master Circular for Depositories dated December 3, 2024, which prescribes the terms of contribution, corpus management, investment guidelines, and utilisation norms. Under the pre-amendment framework, 100 percent of the interest or income earned from investments made out of the IPF was required to be added back to the corpus. No portion of the income could be used for administrative or operational expenses of the IPF Trust.

The Revised Framework

The July 2026 circular introduces a significant relaxation. Under the revised norms, at least 95 percent of the annual interest or income generated from IPF investments must continue to be added to the corpus. The remaining amount, up to a maximum of 5 percent, may be utilised for specified expenses incurred in the administration of the IPF Trust.

The permissible expenses are narrowly defined. They include salaries and benefits of employees dedicated exclusively to the IPF Trust, statutory audit fees for the IPF Trust accounts, applicable taxes on the trust's income and operations, fees payable to the Charity Commissioner or other regulatory authorities, and other administrative and statutory expenses directly attributable to the management of the IPF Trust. General overheads of the depository that are not directly attributable to the IPF Trust remain excluded.

Rationale for the Change

The circular states that the revision was issued pursuant to representations received from depositories, recommendations of the Secondary Market Advisory Committee (SMAC), a public consultation process, and internal deliberations within SEBI. The depositories had represented that the requirement to add 100 percent of IPF income to the corpus created an administrative burden, as the costs of maintaining the IPF Trust, including dedicated personnel, audit, and regulatory compliance, had to be borne entirely from the depository's own funds.

In practice, the IPF corpus at both NSDL and CDSL has grown substantially over the years, and the actual utilisation of the fund for investor compensation claims has been relatively modest. The 5 percent carve-out for administrative expenses is designed to make the fund self-sustaining from an operational perspective, without materially depleting the corpus available for investor protection.

Legal Framework

The IPF framework for depositories derives from the Depositories Act, 1996 and the SEBI (Depositories and Participants) Regulations, 2018. Section 16 of the Depositories Act empowers SEBI to issue directions to depositories in the interest of investors and the securities market. The IPF norms form part of the comprehensive regulatory framework that SEBI has established for depositories, which also covers net worth requirements, business conduct rules, and investor grievance redressal mechanisms.

The Supreme Court in BSE Brokers' Forum v. SEBI, (2001) 1 SCC 355, upheld SEBI's authority to mandate the creation and maintenance of investor protection funds by market infrastructure institutions, holding that such funds are an integral part of the investor protection framework envisaged by the SEBI Act, 1992. The Court observed that the statutory scheme contemplates a multi-layered protection system in which investor protection funds serve as the last resort for investors who cannot recover their losses through other means.

Implications for Market Participants

The revised framework has limited direct impact on investors or depository participants. The 5 percent carve-out applies only to the income earned on IPF investments, not to the corpus itself, and the permissible expenses are narrowly defined. The corpus remains protected and continues to grow at a rate of at least 95 percent of the annual investment income.

For the depositories, however, the change is operationally significant. NSDL and CDSL can now fund the day-to-day administration of their IPF Trusts from the trust's own income, reducing the cross-subsidisation from their commercial operations. This aligns the IPF Trust structure with standard trust management practices, where trust income is routinely used to meet the administrative costs of the trust.

Sources and References

• SEBI Circular No. HO/47/14/13(4)2026-MRD-POD3/I/15577/2026, dated July 7, 2026 (Revised IPF income utilisation norms for depositories)

• SEBI Master Circular for Depositories, dated December 3, 2024

• Depositories Act, 1996, Section 16 (SEBI's power to issue directions to depositories)

• SEBI (Depositories and Participants) Regulations, 2018

• BSE Brokers' Forum v. SEBI, (2001) 1 SCC 355 (SEBI authority over investor protection funds)

Disclaimer: This article is for informational purposes only and does not constitute legal advice. Readers should consult a qualified legal professional for advice specific to their circumstances.