Norms to protect retail investors against broker defaults will soon be put in place by FMC (Forward Markets Commission), the regulator of commodity futures trading on five national and 16 regional stock exchanges .
The moot point at a review meeting between FMC and 5 commodity stock exchanges was whether the IPFs (Investor Protection Funds) created by stock exchanges should be held in a trust under the Charitable Trusts Act or managed as Section 25 companies under The Companies Act.
Mr, Ramesh Abhishek, Chairman, FMC said, "A few of the exchanges were in favour of holding the IPF in trust, as is the case in the equity market, when one exchange suggested it could be managed as a Section 25 company, Following this, we asked the stock exchanges to look into the pros and cons of both structures and revert to us in two weeks. We will then frame IPF guidelines for the protection of retail investors."
Also, he said, unlike in a trust, whose monies could be invested only in assets which protected the principal amount and assured some returns akin to government bonds, a Section 25 company could invest in higher-yielding assets so long as income or profit generated from these were used only for the company's objectives. However, under both structures, no dividends can be issued either to shareholders or trustees.
While exchange officials were also asked by FMC to examine tax implications under both structures, tax counsel Bhupendra Shah said,''There was no issue on this front. Ultimately, a Section 25 company which registers with the respective regional charity commissioner and gets requisite certification from income-tax authority will be exempt from paying tax."
IPF comes into play when a broker defaults in making payment to his clients and when his cash and non-cash deposits with an exchange are not enough to compensate all of them. For instance, if a member defaults to the tune of Rs. 5 crore and his deposits with the exchange amount to just Rs. 1 crore, all his clients may not be able to get compensation. In such an event, a minimum sum of, say, Rs. 1 lakh, can be paid to each of his clients from the IPF.
FMC's keeness on IPF comes at a time when commodity futures market turnover has doubled to Rs. 1 lakh crore from Rs. 60,000 crore a few months ago.
Apart from IPF, the regulator will come out with instructions on brokers taking third party cheques or demand drafts from clients.
"There have been many cases when somebody else claims the money deposited in the client's account belonged to him/her. So, we need to also address this issue."
Exchanges, at FMC's behest, may appoint mediators to sort out client-member disputes, as these often result in arbitration and are costly for small investors.
"Instead of going to courts, it would be more desirable for these issues to be resolved at the exchange level," said Abhishek.
Source: ET
The moot point at a review meeting between FMC and 5 commodity stock exchanges was whether the IPFs (Investor Protection Funds) created by stock exchanges should be held in a trust under the Charitable Trusts Act or managed as Section 25 companies under The Companies Act.
Mr, Ramesh Abhishek, Chairman, FMC said, "A few of the exchanges were in favour of holding the IPF in trust, as is the case in the equity market, when one exchange suggested it could be managed as a Section 25 company, Following this, we asked the stock exchanges to look into the pros and cons of both structures and revert to us in two weeks. We will then frame IPF guidelines for the protection of retail investors."
Also, he said, unlike in a trust, whose monies could be invested only in assets which protected the principal amount and assured some returns akin to government bonds, a Section 25 company could invest in higher-yielding assets so long as income or profit generated from these were used only for the company's objectives. However, under both structures, no dividends can be issued either to shareholders or trustees.
While exchange officials were also asked by FMC to examine tax implications under both structures, tax counsel Bhupendra Shah said,''There was no issue on this front. Ultimately, a Section 25 company which registers with the respective regional charity commissioner and gets requisite certification from income-tax authority will be exempt from paying tax."
IPF comes into play when a broker defaults in making payment to his clients and when his cash and non-cash deposits with an exchange are not enough to compensate all of them. For instance, if a member defaults to the tune of Rs. 5 crore and his deposits with the exchange amount to just Rs. 1 crore, all his clients may not be able to get compensation. In such an event, a minimum sum of, say, Rs. 1 lakh, can be paid to each of his clients from the IPF.
FMC's keeness on IPF comes at a time when commodity futures market turnover has doubled to Rs. 1 lakh crore from Rs. 60,000 crore a few months ago.
Apart from IPF, the regulator will come out with instructions on brokers taking third party cheques or demand drafts from clients.
"There have been many cases when somebody else claims the money deposited in the client's account belonged to him/her. So, we need to also address this issue."
Exchanges, at FMC's behest, may appoint mediators to sort out client-member disputes, as these often result in arbitration and are costly for small investors.
"Instead of going to courts, it would be more desirable for these issues to be resolved at the exchange level," said Abhishek.
Source: ET
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