In order to make mutual fund houses and fund managers more accountable, the Securities and Exchange Board of India (Sebi) on Wednesday mandated that companies have to pay at least 20% of the compensation of fund managers and chief executive officers has to be paid in the form of units of the schemes.
The mutual fund regulator also added that the compensation paid as mutual fund units will be locked-in for a minimum period of three years or tenure of the scheme, whichever is less.
In the case of violation of code of conduct, fraud and gross negligence, the units will be clawed back, and the redeemed will be credited to the scheme.
Exchange-traded funds (ETFs), index funds, overnight funds and existing close-ended schemes have been excluded from the order.
“It solves dual purpose, firstly now key persons will have minimum 20% of their own salary in their own funds, which is like eating from your own restaurant plus obviously when compliance is aligned with money and penalty, it works even better,” said Anant Ladha, a mutual fund distributor based in Kota, Rajasthan
According to the Sebi circular issued on 28 April, the compensation includes salary, perks bonus, non-cash compensation net of income tax and any statutory contributions such as provident fund and National Pension Scheme (NPS).
The provisions will be applicable with effect from 1 July 2021.
In the circular, Sebi added that apart from CEOs and fund managers, chief investment officers, chief risk officers, chief information security officers, chief operation officers, fund managers, compliance officers, sales heads and dealers of the AMC will be paid a part of their compensation as mutual fund units. This set of key employees also includes fund management and research teams.
While the Sebi has barred redemptions of the units during the lock-in period, these key employees can borrow from the AMC in exigencies such as medical emergencies or on humanitarian grounds.
Moreover, key employees would not be able to redeem such units within the lock-in period in case of resignation or retirement before attaining the age of superannuation.
For dedicated fund managers managing only a single scheme or single category of schemes, 50% of the compensation can be as units of the same scheme or category and the remaining 50% of units of those schemes whose risk value is equivalent or higher than the scheme managed by the fund manager.
According to Kaustubh Belapurkar, director, manager research, Morningstar Advisor India, “Manager skin in the game is always a positive signal for investors. Currently only a few countries like the US, require disclosures around manager investments in their funds. The one point to ponder though is that the individual risk profile of some managers may be different from the risk profile of scheme(s) they manage.”
The Sebi’s move has come under some criticism by the mutual fund fraternity.
“It is intrusive. An individual’s personal portfolio should be entirely his or her own affair. And disincentivizing must be a matter of contract between employer and employee, not a regulatory action. The AMC as an institution must be held responsible for the investor’s money and not employees in their individual capacity,” said Vidya Bala, co-founder, Prime Investor. “The wordings are also ambiguous, and it puts managers of high-risk schemes in a particularly difficult position compared to say a CEO who can invest in different schemes with different risk levels. It’ll lead to a loss of talent from the industry to other products like insurance, portfolio management services, alternative investment funds etc,” she added.