NISM-Series-VIII: Equity Derivatives · Sales Practices and Investors Protection Services

Arbitration and Investor Protection Fund for NISM Equity Derivatives

Updated 11 October 2026 · Fact-checked

Arbitration is the exchange-run process for settling disputes between an investor and a trading member without going to court. The Investor Protection Fund (IPF) is a trust that pays admitted claims of investors when a member defaults or is expelled, up to a per-investor limit. To answer questions, match the situation to the right remedy.

Understand Arbitration and Investor Protection Fund

Start with the problem. You trade through a broker, who is a trading member of the exchange. Sometimes you disagree with the broker about a trade, or the broker fails and cannot return your money. The exchange has two tools for these cases.

Arbitration settles a dispute between you and a member. It is faster and cheaper than a civil suit. It is governed by the exchange's bye-laws, SEBI circulars and the Arbitration and Conciliation Act, 1996. You file a reference with the exchange within the time limit. The exchange appoints an arbitrator from its panel, who hears both sides and gives a binding award. The exchange also offers mediation or conciliation as a softer route before arbitration.

If you or the member is unhappy with the award, you can go to appellate arbitration. A larger panel of arbitrators reviews the case. Appeals have a short filing window. The time limits are favourite exam targets, so learn them from your workbook.

The Investor Protection Fund (IPF) is a different thing. It is a fund held in trust by each exchange. It is built from sources such as penalties collected from members and a share of certain exchange income. When a member is declared a defaulter or is expelled, genuine investor claims are examined. Admitted claims are paid from the IPF up to a per-investor ceiling set under SEBI norms. The fund pays only where the member cannot.

The Investor Services Fund (ISF) is also kept by the exchange. It is used for investor education, awareness and services, not for paying default claims. Remember: IPF pays compensation, ISF funds investor services.

Key formulas to remember

Arbitration route: Dispute with member → file reference with exchange within limitation → arbitrator from exchange panel → award → appeal to appellate panel if aggrieved; Applies to disputes between an investor and a trading member about trades on the exchange.
Limitation period for filing: Reference to be filed within 3 years from the date the dispute arose; This follows the general limitation principle. Late claims are generally not entertained. Check the current workbook for the exact wording.
IPF purpose: IPF pays admitted claims of clients of a defaulter or expelled member, up to a per-investor cap; The cap is set by SEBI and the exchange and can be revised. Learn the figure given in your workbook edition.
ISF purpose: ISF = investor education, awareness and services; It does not pay default compensation.
Exchange liability test: Claim must be against a member declared defaulter or expelled, and must be admitted by the exchange; Ordinary trading losses and market-risk losses are never compensated.

How to solve Arbitration and Investor Protection Fund questions

Use this method for any question on arbitration or investor funds.

1Read what the question describes: a dispute with a live broker, or a broker who has defaulted or been expelled.
2If it is a dispute about a trade or service, think arbitration. If the broker cannot pay, think IPF.
3Check any time limit mentioned. Match it to the 3-year filing limit or the appeal window in your workbook.
4Identify the stage: first-level arbitration, appellate arbitration, or court challenge after the award.
5If the option talks about education or awareness spending, choose ISF. If it talks about paying claims, choose IPF.
6Eliminate options that promise compensation for market losses, or compensation without the claim being admitted.
7For numbers, pick the exact figure from your workbook and reject near values.

Quickest way: Two-bucket shortcut

When to use it: Use when you have under a minute per question.

Bucket 1: dispute with a working member leads to arbitration, then appellate arbitration.
Bucket 2: member defaulted or expelled leads to IPF, capped per investor.
Anything about education and awareness leads to ISF.
If a number is asked, recall the workbook figure. If you cannot, eliminate options that break the logic and then choose.

Common mistakes in Arbitration and Investor Protection Fund

Saying IPF compensates any loss an investor suffers on trades.
The word 'protection' sounds broad.
Fix: IPF covers only admitted claims against a defaulter or expelled member. Market losses are never covered.
Mixing up IPF and ISF.
Both are exchange funds with similar names.
Fix: IPF = pays claims. ISF = investor education and services.
Thinking the IPF pays the full claim with no limit.
Students ignore the per-investor ceiling.
Fix: Compensation is capped per investor. Any amount above the cap is pursued from the defaulter's assets.
Confusing appellate arbitration with a court appeal.
The word 'appeal' suggests a court.
Fix: Appellate arbitration is still within the exchange's arbitration system, with a bigger panel. Courts come after that.
Ignoring the filing time limit.
Students focus on the process and skip the dates.
Fix: Remember the 3-year limitation and your workbook's appeal window. Late filing is a standard trap option.
Treating arbitration as only for investors.
The topic sits under investor protection.
Fix: Disputes between members, or between a member and a client, can both use the exchange's arbitration mechanism.

Worked examples

Example 1

A trading member is declared a defaulter. A client has an admitted claim for funds lying with the member. From which source can the exchange pay the client, and what limits the amount?

Show the solution

The member has defaulted, so the client cannot recover through the member.
The exchange's trust fund for this purpose is the Investor Protection Fund, not the Investor Services Fund.
The claim has been admitted, so it is eligible.
Payment is capped at the per-investor limit set for the IPF. Any balance remains a claim against the defaulter.

Answer: The Investor Protection Fund pays it, up to the per-investor ceiling.

Example 2

Which statement is correct? (A) ISF is used to pay clients of defaulting members. (B) Appellate arbitration is heard by a larger panel of arbitrators within the exchange system. (C) IPF compensates investors for losses from price falls. (D) Arbitration claims can be filed at any time without limit.

Show the solution

(A) is wrong: ISF funds investor education and services; IPF pays defaulter claims.
(C) is wrong: IPF does not cover market losses.
(D) is wrong: a limitation period applies, generally 3 years.
(B) is correct: appellate arbitration reviews the award with a larger panel inside the exchange mechanism.

Answer: (B)

Exam tips

Expect questions that test the difference between IPF and ISF. Learn one line for each.
Memorise the 3-year filing limit and the appeal window from your workbook. Wrong-number options are common.
Watch for trap options that promise compensation for market losses. These are always wrong.
Negative marking is 25% of the question's marks in this paper. If you cannot narrow the options, skip rather than guess blindly.
Check your workbook edition for the current IPF cap, as limits get revised.

Practice questions from Sales Practices and Investors Protection Services

Arbitration and Investor Protection Fund in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Arbitration and Investor Protection Fund: frequently asked questions

How do I file arbitration against a stock broker in India?

You file a reference with the stock exchange where the broker is a member, within the limitation period, with the prescribed form and fee. The exchange appoints an arbitrator from its panel. The arbitrator hears both sides and gives an award.

What does the Investor Protection Fund cover?

It pays admitted claims of investors when a trading member is declared a defaulter or expelled. Payment is limited by a per-investor cap. It does not cover market losses.

What is the difference between IPF and ISF?

The IPF compensates investors of defaulting members. The ISF is used for investor education, awareness and services. Questions often swap these roles in wrong options.

Can I appeal an arbitration award?

Yes. You can go to appellate arbitration within the stated time window, where a larger panel reviews the case. Further challenge is possible in court as allowed by law.