With a view to align the interest of key employees of asset management companies (AMCs) with the unitholders of the mutual fund schemes, the capital market regulator Securities Exchange Board of India (Sebi) said a minimum of 20 percent of a fund manager’s salary shall be paid in the form of units of mutual fund schemes that they manage. Aside from fund managers, all other “key employees” of the fund house will also be covered, such as chief executive officer, chief investment officer, and other employees that the fund house identifies as key employees.
This announcement has come following news reports that some of the key employees of Franklin Templeton AMC are selling their investments held in the schemes that were closed ahead of closure.
A close reading of the circular indicates that the 20 percent payout that would come in the form of scheme units is as a percentage of the gross salary less of income tax deducted and other statutory contributions like Employees Provident Fund and National Pension Scheme.
The compensation paid in the form of the units shall be proportionate to the assets under management of the schemes in which the key employee of the fund house has a role. In case of a fund manager managing only one scheme, he has the option to receive half of the compensation in the units of the scheme he manages. The other half would come by way of other schemes whose risk profile (as defined by Sebi’s risk-meter guidelines) are the same or higher. In simple words, an equity fund manager would most likely get allotted only equity funds’ units. These units allotted to key employees must be locked in for three years, unless the scheme is wound up before that.
To maintain the guideline in letter and spirit, Sebi has mandated that index funds, exchange-traded funds, overnight funds and existing close-ended schemes will be excluded from unit allocation. If the employee retires at the age of superannuation, then the units (excluding units of closed-ended schemes) can be redeemed. The units cannot be sold if the employee resigns or retires before the age of superannuation.
Key employees are however allowed to borrow from the fund house in case of medical emergency against the units held in lock-in.
The regulator has made it clear that the units allotted as a part of the compensation package will be clawed back if such an employee is found violating the code of conduct or involved in fraud or in case of gross negligence. In case of clawback of such units, they will be redeemed and the proceeds will be credited to the scheme in question.
The circular prescribing allotment of units to the key employees as a part of compensation comes into effect from July 1, 2021. The regulator has also directed mutual fund houses to disclose the quantum of units issued to key employees in each scheme as part of compensation on the website of the company.
Though this is expected to increase the transparency and may boost the confidence of the investors as the key employees will have ‘skin in the game’ – aligned interest, the norm is expected to hit the fund house employees hard. The compulsory lock-in of units for three years makes matters worse, say fund house employees after an initial reading of the circular. An equity fund manager who is not allowed to speak to media says, “The 20 percent threshold will be cumbersome for some employees, especially where the salaries are low and existing commitments such as EMI are on the higher side.”
“It is a good idea that Sebi wants more skin in the game. But instead of getting into a rule-based approach, it would have been better if Sebi would have opted for spirit-based regulation,” says the chief executive officer of a mutual fund house, on the condition of anonymity.
Had Sebi made it mandatory for disclosures of key employees’ investments in various schemes, that information shared would have given investors clear guidance about skin in the game, he says.