Investor fund: FinMin to seek Cabinet nod

The finance ministry plans to approach the Cabinet for clearance of the Securities and Exchange Board of India Amendment Act to set up an investors' protection fund.

"We are preparing a note on an investors' protection fund that will be placed before the Cabinet for its assent for amending the Sebi Act. The amendment is expected to be introduced in the next session of Parliament," a finance ministry official said.

The proposed amendment will enable Sebi to use money collected in the investors' protection fund by way of fines and penalties from the listed companies and brokers who violate the market regulator's guidelines.

At present, the fines and penalties collected go into the Consolidated Fund of India and without amendment to the Sebi Act, the market regulator will not be able to use them for investor protection.

The source said funds collected through disgorgement would also go to the investors' protection fund. However, money to be collected through the recent disgorgement order of Sebi will not go to the fund as it was not supposed to be operational with retrospective effect. Disgorgement refers to repayment of funds that were received through illegal or unethical business transactions.

Passing a disgorgement order for the first time in India last month in the initial public offering scam, Sebi had asked National Securities Depository Ltd and Central Depository Services (India) Ltd and their eight participatories to cough up Rs 115.81 crore. The investors who might incur financial losses due to any scam in the stock market would be compensated from the fund, the official said.

However, Sebi has not yet decided how to compensate retail investors from the money to be collected from the two depositories and eight depository participants. Fines and penalties imposed by the stock exchanges would also be credited to the investors' protection fund, the official said.

The amendment will also provide access to funds for investors' education. Since all fines and penalties collected go into the Consolidated Fund of India, it denies Sebi direct access to the money for investors' education.

Finance Minister P Chidambaram in Budget 2006-07 had promised to set up the fund to provide compensation to investors in case of losses incurred due to any major upheavals in the market.