Ground-breaking or random? Understanding's SEBI's "Skin in the game" mandate

In the wake of the Franklin Templeton mutual fund fiasco, where top fund officials allegedly withdrew their investments from six of the stressed funds shortly before they shut down, the intention is well placed. But is that enough?

Random and complicated

Jimmy Patel, MD, and CEO, Quantum AMC, seems to think otherwise. “The SEBIs circular is arbitrary and illogical and looks like it was drafted hurriedly. The circular applies to junior staff and other members who are not at all connected with fund management. Also, not all AMCs pay high costs to their key personnel nor does everybody who falls under the definition of key personnel earn a high salary. In fact, it would become difficult for a small fund house to retain talent. In these tough times, it will be difficult to comply with the new framework. The cash flows of the employees will be adversely affected as well. While this may fall in favor of index funds and ETFs, this signals a potential death of active fund management.” But what could potentially be wrong in asking managers to increase their stakes in the funds they manage, a direct reflection of their skills and job performance?

Seen from an investor's perspective, it is confidence-inducing. Having the manager in the same boat as they are, in terms of returns generated by the mutual fund scheme can be reassuring for many. And most jobs around the world are incentivized by an employee’s performance, why should this be any different?

This is where the details come into play. The new rules mandate that key personnel related to the fund will have at least 20% of their compensation held in the form of scheme units, with a minimum lock-in period of 3 years. And in case of fraud, this money will be plowed back. 

“How is linking personnel like CIO (Chief Information Officer) to the fund performance justified?” asks Anil Upadhaya, a SEBI-registered practitioner and a consulting faculty at various business schools. Given that the middle and lower management is not as highly paid, it makes no sense to link their salaries in this manner. 

This will not miraculously improve the fund manager’s performance overnight, he adds. It’s like this- you entrust an architect with building your house, but believe that he/she won't deliver the best performance until they don’t physically live under the roof they built. Will the professionals suddenly start performing better once they realize they have a greater personal stake here? It can be demoralizing as well since it raises direct questions on the integrity of the said individual.

More symbolic than literal The move is more of a symbolic measure since it will be sometime before we can actually witness the impact on an investor's portfolio, if any, thinks Viral Bhatt, founder, MoneyMantra, a Mumbai-based personal finance advisory firm. While the move is positive and well-intentioned, it is hard to say if it will have any tangible impacts on the fund’s returns and consequently, on what investors get. Many experts too, agree that the notification needs to be fine-tuned before actual implementation for striking a balance that benefits both the investors and AMCs.