The Securities and Exchange Board of India (SEBI) has issued a consultation paper on 11 May 2026 proposing an amendment to the framework governing the Investor Protection Fund (IPF) of depositories. The proposal seeks to allow depositories—National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL)—to utilise up to 5% of the interest or income earned from their IPF investments to meet the administrative expenses of the IPF Trust, bringing them at parity with the existing rules for Stock Exchanges.
⏰ Key Dates — Act Now
Paper Issued
11 May 2026
Comment Deadline
01 June 2026
Current Status
Open for Comments
💡 What is this Proposal in One Line?
SEBI proposes to end the requirement that depositories pay IPF Trust administrative expenses out of their own pockets, allowing them to use up to 5% of the IPF's investment income for this purpose instead.
⚠️ Crucial Distinction: 5% of Income, NOT Corpus
To be absolutely clear: SEBI is not proposing to allow depositories to dip into the principal IPF corpus. The 5% limit applies strictly to the interest or yield generated by the corpus's investments during the financial year. The principal amount remains completely untouched and dedicated to investor protection.
For ordinary investors, this proposal mainly affects how depositories internally manage investor protection infrastructure and does not reduce the safety of investor funds.
📈 Section 1 — The Disparity: Why SEBI Is Proposing This
Currently, there is an uneven regulatory framework between Stock Exchanges and Depositories regarding how Investor Protection Funds are managed.
- For Stock Exchanges: They are already permitted to use a maximum of 5% of the interest or income generated from IPF investments to meet expenses related to dedicated IPF Trust employees, administration of Investor Service Centres (ISCs), taxes, audit fees, and charity commissioner fees.
- For Depositories: No such provision exists. Currently, 100% of the interest or income from the depository's IPF is treated strictly as the corpus. All administrative and statutory expenses relating to the IPF Trust must be borne by the depositories from their own corporate income.
To understand the financial scale, here is the official IPF corpus held by India's two depositories as of March 31, 2026:
| Depository | Total IPF Corpus (as of 31 March 2026) |
|---|---|
| CDSL (Central Depository Services (India) Limited) | ₹95.18 Crore |
| NSDL (National Securities Depository Limited) | ₹87.78 Crore |
This proposal was heavily deliberated upon by SEBI’s Secondary Market Advisory Committee (SMAC). After reviewing the disparity in cost structures, the SMAC formally agreed with and endorsed the proposal to extend this 5% allowance to depositories.
In essence, the proposal seeks to create regulatory parity between Stock Exchanges and Depositories by harmonising the treatment of IPF investment income across both market infrastructure institutions.
📂 Section 2 — How the IPF is Currently Utilised
To understand the impact of the 5% carve-out, it is important to know what the Depository IPF currently funds. As highlighted in the consultation paper, the primary purposes of the Depository IPF are strictly regulated to protect and educate the market:
- Investor Education and Awareness: Funding nationwide programmes to promote financial literacy.
- Supporting Depository Participants (DPs): Aiding initiatives undertaken by DPs that directly benefit investors.
- Settling Beneficial Owner Claims: This is arguably its most critical function. The IPF is used to compensate legitimate claims of beneficial owners in the event of losses, specifically when such claims are not adequately covered by the depository's beneficial owner indemnity insurance.
- SEBI Permitted Uses: Any other specific use explicitly authorised by SEBI for investor protection.
🚀 Section 3 — The Proposed Amendments in Detail
⚠️ Crucial Conditions Attached
- Excess Expenses: If the administrative expenses of the IPF Trust exceed the 5% threshold of the investment income, the excess amount must be borne by the depository out of its own corporate pocket.
- Unspent Funds (Plough-back Rule): If the permitted 5% amount is not fully utilised during a financial year, the unspent portion cannot be carried forward as an expense reserve. It must be ploughed back into the main IPF corpus.
📊 Section 4 — Before vs After: Complete Comparison
| Parameter | Current Framework (Depositories) | Proposed Framework |
|---|---|---|
| Treatment of IPF Interest / Income | 100% added back to the IPF corpus | Up to 5% can be used for trust administration |
| Trust Administrative Expenses | Borne entirely by the Depository's own income | Subsidised by the 5% IPF income carve-out |
| Expenses Exceeding 5% | N/A | Must be borne by the Depository |
| Unutilised Permitted Income | N/A | Must be ploughed back into the corpus at year-end |
❓ Section 5 — Frequently Asked Questions
📝 Bottom Line — What This Means for the Market
✅ Financial Relief for Depositories: CDSL and NSDL will no longer have to subsidise the IPF Trust's audits, taxes, and salaries from their own profit margins, slightly improving their operational efficiency.
✅ Regulatory Parity: This reform simply corrects an anomaly where stock exchanges were granted this 5% buffer, but depositories were excluded.
✅ Zero Risk to Investors: Because the 5% cap applies only to the income generated by the fund—not the principal—and any unspent money is ploughed back, the core protection and compensation mechanisms for beneficial owners remain mathematically secure.
✅ No Change to Investor Claim Rights: The proposal does not alter the eligibility or rights of beneficial owners to seek compensation from the IPF under existing SEBI mechanisms.
Source: SEBI Consultation Paper on Review of Utilization of Interest or Income from IPF Corpus of Depositories (Dated: May 11, 2026). Public comments invited at sebi.gov.in by 1 June 2026.
This article is for informational purposes only and does not constitute legal or financial advice.
