SEBI's 'skin in the game' rule: What does it mean for you?

To safeguard the interest of investors, markets regulator Securities Exchange Board of India (SEBI) has notified that a minimum of 20% of the salary/perks of key employees of asset management companies (AMCs) will have to be paid in mutual fund units.

The new rules come on the back of a forensic report findings which alleged that some of the top officials of Franklin Templeton and their family members withdrew a portion of their investments from six stressed schemes of the fund house before they were shut for redemption in April 2020.

Skin in the game

“A minimum of 20% of the salary/perks/bonus/non-cash compensation (gross annual cost-to-company) net of income tax and any statutory contributions (provident fund and national pension scheme) of the key employees of the AMCs shall be paid in the form of units of MF schemes in which they have a role and oversight,” Sebi has said in a circular.

Key employees of the AMCs include — Chief Executive Officer (CEO), Chief Investment Officer (CIO), Chief Risk Officer (CRO), Chief Information Security Officer (CISO), Chief Operation Officer (COO), Fund Manager(s), Compliance Officer, Sales Head, Investor Relations Officer, heads of other departments and dealer of the asset management firm.

The compensation paid in the form of units needs to be proportionate to the asset under management (AUM) of the schemes.

SEBI said that such mutual fund units would be locked in for a minimum period of three years or tenure of the scheme, whichever is less.

It further said redemptions of such units will not be allowed during the lock-in period. However, the AMC may decide to have a provision of borrowing from it by key employees against such units in exigencies such as medical emergencies or on humanitarian grounds, as per the policy laid down by the fund house.

The regulator also said units allotted to the key employees will be subject to clawback in the event of a violation of code of conduct, fraud or gross negligence by them, as determined by SEBI.  Upon clawback, the units will be redeemed, and the amount will be credited to the scheme, it added.

The compliance of the provisions of this new framework will be ensured by the AMCs and monitored by the trustees.

Further, with a view to allowing the key employees to diversify their unit holdings, in case of dedicated fund managers managing only a single scheme or single category of schemes, Sebi said 50 per cent of such compensation will be by way of units of the scheme managed by the fund manager.

The remaining 50% could be by way of units of those schemes whose risk value as per the risk-o-meter is equivalent or higher than the scheme managed by the fund manager.

In case of retirement on attaining the superannuation age, such units will be released from the lock-in and the key employee will be free to redeem the units, except for the units in close-ended schemes where the units will remain locked in till the tenure of the scheme is over.

However, the provisions of this circular will not be applicable to key employees having oversight only over ETFs, index funds, overnight funds and existing close-ended schemes.

SEBI said modalities with respect to the contribution of the key employees in close-ended schemes and its applicability will be provided in due course.

The new framework will be applicable with effect from July 1, 2021.

Should investors worry?

From an investor point of view, the move is good as it will make fund houses more accountable. “Confidence on the governance of mutual fund industry will increase. There will hardly be any change in the performance parameter because most fund managers already invest in their own scheme. The new rule will only bring greater consistency and a certain degree of a room which will bring more governance not performance,” said Feroze Azeez, Deputy CEO of Anand Rathi Wealth.

The increased confidence in a more transparent and regulated platform – the courage to divert larger portion of the savings for retail investors in a platform which provides equity (an important asset class for next 10 years) will be more. India will, over a period of time, move from debt driven savings to a balanced equity and debt savings, added Azeez.