Market regulator SEBI wants mutual fund executives to have skin in the game. It issued a circular mandating alignintment of the interest of key employees of asset management companies (AMCs) with the unitholders of the mutual fund schemes. While industry players welcome the SEBI move, they raise questions on some provisions of it.
The circular says minimum 20 per cent of the salary/ perks/ bonus/ non-cash compensation (gross annual CTC) net of income tax and any statutory contributions (i.e. PF and NPS) of the key employees of the AMCs shall be paid in the form of units of mutual fund schemes in which they have a role or oversight. These units will be locked in for three years.
The Top executives of AMCs such as ICICI Prudential AMC and Edelweiss AMC inform that their senior employees have been investing in their own schemes voluntarily. The junior staff should have been kept out of it, emphasises Radhika Gupta, MD & CEO, Edelweiss AMC.
"This circular applies to not just senior employees but junior research staff, dealers, and support function heads. These people don't earn the kind of money CEOs and CIOs do. It is forcing them to lock 20 per cent of their income for 3 years. It mandates how much one saves. For an employee earning 15-20 lakh, imagine how difficult it is to put away Rs 3-4 lakh. We are constraining employee cash flows," says Gupta of Edelweiss AMC, adding that 70 per cent of her investments are in Edelweiss MF schemes.
"My CIOs, FMs, sales head, and product head also invest meaningfully in our funds. We needed no internal policy or regulation to do this. We love our products, trust our people. It's called soul in the game," she says.
ICICI Prudential AMC follows the same principle. "For more than a decade, the long-term incentives of our senior management and key employees are being invested in the schemes of the AMC with a certain lock-in period. Based on the provisions of the circular, the existing long-term incentive framework would need to be modified. The spirit of recent circular will further boost the confidence amongst the mutual fund unit holders," says spokesperson of ICICI Prudential AMC.
Let's analyse key issues in the circular -
Definition of key employees
The circular might be good in spirit; the definition of key employees needs a relook. "Ideally SEBI should restrict it to the fund manager of the scheme and key managerial personnel of the MF. The existing definition is too wide and frankly these employees may not even have much say or skin in the game. Only the top-level employees should be within the circular's ambit," says Vidisha Krishnan, Partner, MV Kini & Co, a law firm.
Who will invest where?
The dedicated fund managers managing only a single scheme/single category of schemes will have to invest in them 50 per cent of the mandated compensation, while they can diversify in other schemes with the remaining 50 per cent.
Kaustubh Belapurkar, Director - Manager Research, Morningstar India, says the regulation states the investment needs to be made wherever the key employee has a role or oversight on pro-rata basis depending upon the AUM of the schemes. "Typically fund managers' investments by that guideline would be in the funds which they manage. But for roles with oversight like CEO, CIO (Overall), CRO, etc, their investments would be made in all schemes of the AMC. Similarly an equity CIO, equity analyst will have their investments spread across equity & hybrid funds," says Belapurkar.
Krishnan points out the circular is silent on other key employees of such schemes diversifying in a similar manner.
Belapurkar further says that the individual risk profile of some managers may be different from the risk profile of scheme(s) they manage. "Perhaps some flexibility in terms of choosing other funds from the product stable in exceptional cases could be useful."
The circular says that units allotted to the key employees shall be subject to clawback in the event of violation of Code of Conduct, fraud and gross negligence by them. "Upon clawback, the units shall be redeemed and amount shall be credited to the scheme," the circular says.
"The gap in the circular is that it fails to state that the clawback will work only during the lock-in period. How will the clawback work after the lock-in ceases and key employees begin redeeming their scheme units?" Krishnan wonders.
What happens globally?
Currently only a few countries like the US and China require disclosures around manager investments in their funds. "But there is no precedence of a regulation requiring a certain portion of the salary being invested in fund units," says Belapurkar.
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