All you wanted to know about investor education funds
August 26, 2015
Recently, the SEBI chairman expressed his displeasure at half-hearted attempts by some fund houses on conducting investor awareness programmes. But not just SEBI, but other regulators such the RBI and Ministry of Corporate Affairs also require their constituents such as banks, companies and the stock exchanges to do their bit towards educating and protecting investors.
What is it?
Most institutions which deal with public money are required by law to chip in with investor awareness initiatives. For starters, the NSE and BSE both operate Investor Protection Funds which are funded by contributions from their members (Rs. 15 per Rs.1 crore of gross turnover) and a part of the listing fees and security deposits collected by the exchanges. Two, the MCA manages an Investor Education and Protection Fund (IEPF), where monies unclaimed by shareholders for seven years — be it dividends, matured deposits or debentures and share application money — are supposed to be transferred by companies. Three, the RBI has created a fund with a rather humorous acronym — Depositor Education and Awareness Fund (DEAF) — into which banks must transfer money from accounts that have not been operated for over 10 years.
Four, SEBI operates an Investor Protection and Education Fund (IPEF), which houses its own contributions and donations from the Centre and States, to be spent on investor awareness. Five, each mutual fund scheme is required to set aside 0.02 per cent of its assets to conduct investor education and awareness initiatives.
Why is it important?
Just look at the dozens of ponzi schemes unearthed in the last ten years where investors have been defrauded of their money. From pseudo-chit schemes such as Saradha, to fictitious teak and orchard schemes, to money-laundering gigs masquerading as deposits, there’s been no dearth of rackets run by sharp operators.
So the thought behind setting up investor protection and education funds is two-fold — increase investor awareness and protect them from fraud. For example, SEBI can use IPEF to compensate investors for any losses from capital market irregularities. RBI’s fund, managed by a committee, uses the money to organise seminars and conduct research on banking practices.
These funds are important not just for their noble cause, but also for the sizeable kitty at their disposal. The IPF balance at the BSE and NSE together were over Rs. 1,200 crore. Government data show that IEPF has over Rs. 1,000 crore in its account. Estimates by the SEBI chairman peg money set aside by mutual fund houses between October 2012 and April 2015 for investor education program at Rs. 500 crore.
Why should I care?
The financial markets are always in flux with new rules, products and risks cropping up as markets evolve. So as an investor, it is important to be aware of these developments and know what to look for in the products you plan to invest in..
If you’re a beginner, there are tonnes of material available from investor meets and seminars, educational material (videos, books) and portals, both online and offline for you to learn the ABCs of investing. If you do happen to be the victim of fraud, you can probably rest easier knowing that financial compensation can be made through these funds.
The bottom line.
Don’t skip those investor education programmes. If you’re an investor in a mutual fund, company share or bank deposit, you’re already paying for them.
Meera Siva
This article was published on August 10, 2015, in BusinessLine (The Hindu)