One of the main grouses of MF investors always has been that the interests of fund houses are not properly aligned with investors. This has especially come to the fore after the Franklin Templeton MF episode. Funds get management fee even if the investor suffers losses, or don’t get money back. Mutual funds escape accountability by stating they merely are pass through investment vehicles. But, regulator SEBI seems to be keen on changing this unequal landscape. It has now re-imagined the word ‘mutual’ in mutual funds by proposing a set of bold skin-in-the-game norms. The rules will take effect from July 1, 2021. Here’s a quick look.
In order to align the interest of the key employees of the Asset Management Companies (AMCs) with the unitholders of the mutual fund schemes, SEBI has decided that a part of compensation of the key employees of the AMCs shall be paid as units of the scheme(s).
Defining key employees
SEBI has mentioned that Key Employees of the AMCs shall include:
i. Chief Executive Officer (CEO), Chief Investment Officer (CIO), Chief Risk Officer (CRO), Chief Information Security Officer (CISO), Chief Operation Officer (COO), Fund Manager(s), Compliance Officer, Sales Head, Investor Relation Officer(s) (IRO), heads of other departments, Dealer(s) of the AMC;
ii. Direct reportees to the CEO (excluding Personal Assistant/Secretary);
iii. Fund Management Team and Research team;
iv. Other employees as identified & included by AMCs and Trustees.
Part CTC to be paid in MF units
SEBI has said that a minimum of 20% 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 as units of Mutual Fund schemes in which they have a role/oversight.
The compensation paid as units shall be:
a. proportionate to the AUM of the schemes in which the Key Employee has a role/oversight.
However, for this purpose, Exchange-Traded Funds (ETFs), Index Funds, Overnight Funds and existing close ended schemes shall be excluded. Do note that SEBI has said modalities regarding contribution of the Key Employees in close ended schemes and its applicability shall be provided in due course.
b. paid proportionately over 12 months on the date of payment of such salary/ perks/ bonus/ non-cash compensation. In case of compensation paid in the form of employee stock options, the date of exercising such option shall be considered as the date of such payment.
c. locked-in for a minimum period of 3 years or tenure of the scheme whichever is less
Special conditions for dedicated managers
With a view to allow the Key Employees to diversify their unit holdings, in case of dedicated fund managers managing only a single scheme / single category of schemes, 50% of the aforementioned compensation shall be through units of the scheme/category managed by the fund manager, the SEBI has said.
The remaining 50% can, if they so desire, be through units of those schemes whose risk value as per the risk-o-meter is equivalent or higher than the scheme managed by the fund manager.
No redemptions during lock-in
SEBI has said that no redemptions of the said units shall be allowed during the lock-in period.
However, AMC may decide to have a provision of borrowing from the AMC by Key Employees against such units in exigencies such as medical emergencies or on humanitarian grounds, as per the policy laid down by the AMC.
Importantly, no redemption of such units shall be allowed within the lock-in period in case of resignation or retirement before attaining the age of superannuation as defined in the AMC service rules.
However, in case of retirement on attaining the superannuation age, such units shall be released from the lock-in and the Key Employee shall be free to redeem the units, except for the units in close ended schemes where the units shall remain locked in till the tenure of the scheme is over.
Clawback
Significantly, SEBI has said that units allotted to the Key Employees shall be subject to clawback in the event of a violation of Code of Conduct, fraud, gross negligence by them, as determined by SEBI.
Upon clawback, the units shall be redeemed and the amount shall be credited to the scheme.
Clawback means the act of retrieving compensation already paid out.
Applicability
The compliance of the provisions of the latest SEBI circular has to be ensured by the AMCs and monitored by the Trustees, the regulator has said.
Any non-compliance has to be reported in the quarterly CTR and half yearly trustee report.
Every scheme must disclose the ‘compensation, in aggregate, paid in the form of units to the Key Employees’, under the provisions of this Circular, on the website of the AMC.
What it means
This SEBI order will introduce more alignment of the interests of fund managers with the interest of the investors in the scheme. This is demanding more skin in the game on part of the AMC professionals. It’s a positive move for investors.
