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SEBI's skin-in-the-game rules | Junior staff need to invest 10% of their salary in MF units for now

SEBI has allowed the implementation of skin-in-game rules in a phased manner for junior mutual fund employees. The market regulator has defined junior employees as those that are below 35 years of age, and are not head of any departments.

September 21, 2021 / 11:34 AM IST

The Securities and Exchange Board of India (SEBI) on September 20, 2021, said that its skin-in-the-game rules can be applied in a phased manner for the junior employees of the mutual fund.

For now, ten percent of the compensation of such employees will be invested in the mutual fund units of the fund house. From October 1, 2022, this will be increased to 15 percent and from October 1, 2023, it will be brought up to 20 percent.

The skin-in-the-game rules come into force from October 1, 2021

For these regulations, SEBI has defined junior employees as those that are below 35 years of age, and are not head of any departments. This relaxation is also not applicable for CEO of the fund house or the fund managers.

For such employees, 20 percent of their salaries will be invested in the mutual fund units right from the effective date of October 1, 2021, and be locked in for three years.

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Executives were hoping that the skin-in-the-game rules were limited to officials that are part of investment committee, who are responsible for taking investment decisions, rather than including executives of other departments. "As per a separate circular, which was issued earlier, mutual funds are effectively now required to put higher funds in their own schemes. So, the skin-in-the-games rules could have been limited to 10-15 percent of compensation of investment committee members, which along with scheme investment at fund house-level would have been enough," said chief executive officer (CEO) of a fund house.

Existing investments can be set-off

The ‘designated’ employees of the fund house will be also allowed to set-off their existing investments in their own fund house’s schemes, against these requirements.

So, employees that already have such investments, will not see their monthly take-homes getting impacted. However, these investments will get locked-in for another three years since October 1, 2021.

Limited flexibility on scheme allocation

One of the concerns raised by the mutual fund executives was that the skin-in-the-game rule will make it difficult for fund managers to make their personal investments as per their own financial goals.

Also read: Docking away 20% of fund manager salaries pose challenges, as mutual funds gear to cope

For example, a fund manager may not want to invest a large chunk of his salary in liquid funds, even though that is the biggest fund he is managing. “An employee for his personal financial goals may be more inclined to invest a larger part of his investments in high-risk high-return products like equity funds,” said a second CEO, requesting anonymity.

Industry executives had also raised concerns that holding liquid funds for as long as three years -- as opposed to a time period of up to a year, for which these schemes are actually meant for -- is unnecessary.

In the original circular, SEBI had allowed some flexibility to fund managers managing only single scheme or same category of schemes. For such fund managers, half of the required investments needed to be made in the schemes they managed, and the rest could be invested in other schemes, but these should either have the same or higher risk-profile than the schemes managed by the fund manager.

Confusion on ‘designated’ employees

In its April, 2021 circular, SEBI had defined the key employees, which would be required to follow these rules. These included the fund house’s chief executive officer (CEO), other senior officials like all fund managers, chief risk officer, chief information security officer (CISO), chief operation officer (COO), compliance officer, head of sales, investor relation officers, heads of other departments, dealers of the AMC and all those who directly report to the CEO, are covered under this rule. Aside from fund managers, the dealers and research analysts are also covered under this rule.

However, in the new circular, SEBI has said the term ‘Key Employees’ should be read as ‘Designated Employees’.

A chief executive officer of a third fund house wonders does this mean the original list of employees is being done away with, and the scope of these new rules will impact more employees.

A fourth CEO says that designated employees mean two levels below the CEO, which includes head of the department reporting to CEO, and the person employed below the department head.

However, another CEO Moneycontrol spoke to said that the rules would continue to be applicable to the same set of employees, which were defined as key employees in the original circular.

Redemption after 3-year lock-in, but with conditions

While liquid scheme investments will get automatically redeemed to employees’ accounts after the three-year lock-in, the new circular says employees can withdraw their investments from other open-ended mutual fund schemes only twice in a financial year.

For such redemptions, employees would need approval of the mutual fund’s compliance officer.

If the employee is privy to any information, which is not yet communicated to investors but can impact the scheme’s NAV, such employees are not allow to withdraw their investments.

Similarly, if the fund house is privy to such NAV-sensitive information, the compliance officer cannot grant redemption requests.

This is a developing story, please check back for more updates.
Jash Kriplani is a journalist with over ten years of experience. Based in Mumbai. Covering mutual funds, personal finance. His last stint was with Business Standard, where he covered mutual funds and other developments in the financial markets
first published: Sep 20, 2021 06:28 pm

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