It has found a novel way—wining and dining in a five-star hotel! It is sponsoring the Morning Star mutual fund awards, as if this benefits the (dwindling) investor population in any way

This week, the Bombay Stock Exchange (BSE) sent out an invite in which BSE's Investor Protection Fund was claimed to be sponsoring an award function with a foreign entity at a local five-star hotel.

How is it in the investors' interest that funds that are specifically earmarked for investor protection are being used to sponsor expensive, five-star award functions?

And who has a say in deciding the use of these funds?

Trying to get an answer to this simple question launched us on an interesting journey. We first discovered that the entire "new professional management team" at the BSE, starting with Madhu Kannan, the CEO, would not answer any questions about this blatant misuse of money that rightfully belongs to investors.

Secondly, although the investor fund has apparently swollen to a fat Rs510 crore (a fact that came out after going back and forth on text messages with Mr Ashish Chauhan, the deputy CEO of the BSE), the use of the fund is not part of the annual report (because it is a separate trust), nor is any activity easily available in the public domain.

The last available number about the corpus of the Investor Protection Fund is a huge Rs370 crore.

Technically, the Securities and Exchange Board of India (SEBI) specifies the utilisation of the Investor Protection Fund. And in the past, both stock exchanges have claimed their inability to utilise this money for investor-related activities because of SEBI restrictions on end-use.

So we asked SEBI about this new found use of the fund-five-star wining and dining. All we got from Mr J N Gupta, Executive Director in charge of secondary markets, was that the regulator had called for information on use of funds from both exchanges.

However, the moot question is, why isn't there already a transparent system of accounting for and reporting the use of such large sums of money? While the BSE has over Rs500 crore in the kitty, the NSE too has over Rs100 crore.

On further digging for information, one BSE director told us that under its former CEO, Mr Rajnikant Patel's leadership, there was a proposal to invest a massive Rs120 crore of investor protection fund money into a building to conduct investor protection programmes. Fortunately, this was rejected by the board.

Another director tells us that payments from the fund are supposed to be made to investors who suffer losses-for no fault of theirs-during defaults by brokers.

However, a group of investors, who should legitimately been paid out of the IPF, have been denied payment and made to run around even after winning arbitration proceedings on the issue.

Since India's investor population has been dwindling steadily, the question is, why isn't this money being correctly used for investor protection? And if stock exchanges are incapable of putting it to good use on behalf of investors, why isn't the money being transferred to government coffers, i.e., the Consolidated Fund of India?

After all, the Investor Education & Protection Fund (IEPF) set up under Sec (370) of the Companies Act is also forced to transfer funds to the Consolidated Fund of India and can only draw as much of the money as it hopes to spend in a given year on investor activities.

When this writer was a part of SEBI's Primary Market Advisory Committee (four years ago), many investor activists had pressed for IPO (Initial Public Offerings) gradings to be paid out of investor protection funds of bourses, in order to ensure that companies would not shop for gradings and the process would be fair, bold and neutral.

Given the size of funds available with both bourses (BSE has Rs510 crore and NSE would have well over Rs200 crore now, but we are unaware how even the interest on this money is utilised) it is clear that paying for IPO gradings would have been possible merely from the interest earned on this large corpus.

However, the SEBI board in its wisdom chose to ask companies to pay for the ratings. We strongly believe that this decision was influenced by companies and their  intermediaries, who have been against IPO gradings and continue to lobby against it.

Yet, a Moneylife online survey reveals that over 60% of investors do look at gradings before deciding to invest in IPOs.

Clearly, neither SEBI nor the bourses are capable of utilising this enormous corpus of investor protection money to strengthen protection for investors.

In this situation, it seems best that investors' money should at least help bridge the fiscal deficit. Maybe investors can collectively wangle some tax concessions from the government in lieu of this money. That will at least ensure that the benefit accrues to every secondary market investor.