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Moneycontrol Pro Panorama | Is Sebi’s move on MF pay a game changer?

In today’s edition Moneycontrol Pro Panorama: An IPO with a difference, Fed’s shot of hope, Maruti’s margin call, Moderna’s vaccine push and more

May 04, 2021 / 03:34 PM IST

Dear Reader,

The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of.

“Why do we work?” is a question that many of us have asked ourselves at different points in our careers. It is the subject of many research papers and also a topic of interest to employers striving to engage and motivate their employees. Sometimes, regulators feel the weird need to step in with their two bits as well.

Consider what Sebi has done. It has thrown the fund management industry into a tizzy by asking asset management companies to pay a fifth of the pay of key employees in the form of units of mutual funds they manage. This is after deduction of income tax and mandatory contributions, so the actual percentage (including variable pay and bonuses) will be lower.

The market regulator’s stated purpose is to align the interests of employees and unitholders. It intends to do this by making those directly involved in managing a scheme, such as a fund manager, invest a minimum of 50 percent in that scheme and the rest in other schemes. Other employees will invest based on their share of time given to that scheme. There will be a three-year lock-in for these units and in case the employee needs funds for any emergency, the AMC can lend money against these units.

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The equivalent of this move by Sebi can be seen in some of Mumbai’s Udupi restaurants, where a board will proudly proclaim, “The owner of this restaurant also eats here” or a variant of this message. The message subtly conveys that what’s good for the owner should certainly be good for you, in terms of taste and purity.

Sebi wants to ensure that employees of a mutual fund don’t have any existential doubts on why they work, at least for 20percent of their income. They need to grow this investment kitty, and if they benefit, then investors too will automatically gain. Therefore, fund managers will have a greater incentive and since all key employees are also invested, there’s collective responsibility as well.

But incentivizing is what salary is for, with additional components such as performance-linked bonuses as a reward for exceptional performance. Then there are ESOPs that reward you when the company’s valuation catapults. Why add one more component to it and why in every scheme?

The hope might be that if the restaurant owner eats there, the food quality will be good. But if you go ahead and say that not just the owner but everyone who works in the restaurant tastes every dish on the menu, does it take the trust further? (Sorry, I know that’s stretching the analogy but lunch time is approaching!)

In the revised mutual fund rules, some reading between the lines needs to be done. One of the clauses specifies that any fraud, negligence or misconduct by employees will entail a clawback of these units held in a lock-in. There have been instances where fund managers or other personnel have been found indulging in malpractices such as front-running. There have also been instances where investors have suffered because of losses suffered by debt fund investors. The Franklin Templeton case is one such major and recent episode. The conduct of key management personnel in withdrawing their investments in the affected debt funds also raised eyebrows.

Since an employee will have up to three years of income locked in these schemes, Sebi will have a ready means of imposing a financial penalty on the employee by asking the AMC to sell these units and credit the proceeds to the scheme. The collective investment by key employees means they will all be interested in a scheme’s success and if they notice any wrongdoings, they may blow the whistle as well.

Whether this leads to any improvement in returns earned by these mutual funds is a good question, and one that will likely be answered in an academic research paper, maybe a decade from now.

Investing insights from our independent research team:

Power Grid InvIT: Offering good and predictable yield

Hindustan Zinc: Are all positives captured in the price?

Visaka Industries – Interesting value proposition

Fed: The US economy has just got vaccinated

From the Opinion team, and more…

Power Grid InvIT IPO offers the best of both worlds — equity and debt

Maruti’s eroding profit margin requires deep repair in product line-up

Why there aren’t more Happiest Minds waiting in the wings

Chart of the Day | FMCG companies need a relook at what’s sitting on their shelves

Personal finance: Index fund for ETF? How to pick the better passive investment

Moderna increases vaccine supply target to 3 billion for next year (republished from the FT)

Technical picks: L&T Finance HoldingsMarutiShriram Transport Finance and Cholamandalam Finance (these are published every market day before trading opens and can be read on the app)

Join us for the latest episode of Moneycontrol Masterclass in which three of India's top doctors will debunk myths surrounding the second wave of Covid-19. Watch the live telecast at 6PM on Friday, April 30th and grab the chance to ask your questions by logging in to Moneycontrol's website, YouTube and Facebook channels. See you soon!

Ravi Ananthanarayanan

Moneycontrol Pro
Ravi Ananthanarayanan

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