SEBI has relaxed rules on utilization of Depository Investor Protection Fund proceeds

SEBI has relaxed norms on how it can use the proceeds from its Investor Protection Fund, allowing it to spend a smaller portion of the annual proceeds on administrative and statutory expenses. The regulator said at least 95% of the interest or income earned every year from investments made from the Investor Protection Fund should be added back to the fund. The remaining amount, capped at 5%, can be used to meet expenses connected with the operation of the fund. The new norms will come into effect from September 1, 2026.

This change modifies the earlier rule under SEBI’s master circular for depositories, which required 100% of the interest or income earned from investor protection funds to be treated as part of the fund corpus. Sebi said it reviewed the rule after receiving submissions from depositories and to bring consistency between the rules of depositories and stock exchanges.

SEBI’s Secondary Market Advisory Committee discussed the proposal. The final decision was taken after considering the comments received through the panel’s recommendations, public consultation and internal discussions.

Under the revised framework, depositories will be allowed to use up to 5% of the annual interest or income from the fund’s investments to meet the expenses related to the dedicated staff of the Investor Protection Fund Trust. The amount can also be used for administrative and statutory expenses such as applicable taxes, audit fees and charity commissioner’s fees.

SEBI has also added safeguards. If the cost exceeds the 5% limit, the excess cost will have to be borne by the depository. If the permitted amount is not utilized in the same financial year, it must be added back to the Investor Protection Fund.

Investor Protection Funds are maintained by market infrastructure organizations to protect the interests of investors and support investor-related activities. The latest change gives depositories limited flexibility to meet the fund’s operating costs while ensuring that most of the income continues to bolster the corpus.

SEBI has directed Market Infrastructure Organizations to set up necessary systems for its implementation. They have also been asked to amend the relevant by-laws, rules and regulations wherever necessary.

Depositories have to bring the circular to the notice of market participants including investors and publish it on their website.