Mutual Fund Industry Reacts To SEBI’s New Skin-In-The-Game Rule
Linking compensation to performance is hardly novel. Stock-based remuneration is also common in companies across the world. But mostly these are decisions between companies and their employees. A regulator mandating that top employees of asset management companies be compensated in mutual fund units is rare, if not unique to India.
Securities market regulator SEBI has directed that top management of AMCs will now be paid 20% of their compensation in units of schemes that they have a role in or oversight of. This will “align the interest” of key employees of AMCs with unitholders of their schemes, the regulator said in an April 28 circular.
Such unit-based compensation will be locked-in for a minimum period of three years or tenure of the scheme. It will also be subject to clawback in case of a code of conduct violation by the employee. The rule comes into effect on July 1.
“SEBI has pushed mutual funds to have a salary structure more linked to performance and with clawbacks. As fiduciaries, you would expect that mutual funds would set an example on their own. But it’s good that a beginning has been made - whatever may have driven it,” said Amit Tandon, founder and managing director of proxy advisory firm IiAS.
This new SEBI rule comes soon after the Franklin Templeton Mutual Fund fiasco — in which six debt schemes were wound down on account of investments gone bad. A subsequent audit investigation reportedly showed redemptions by fund insiders just before the announcement on schemes’ closure. It sparked a debate on insider trading in mutual funds. As also on ‘skin in the game’ — or direct financial exposure to performance outcomes.
This is not the first effort by the Securities and Exchange Board of India to force skin in the game. A few years back, the regulator made it mandatory that an AMC invest in all schemes it manages, A Balasubramanian, managing director and chief executive officer of Aditya Birla Sun Life AMC, pointed out. Now top employees will do so. “And since 20% applies to net of tax and statutory deductions it is actually more like 12-13 % ... this much of investment can be allocated to your own fund,” Balasubramanian said.
While the intent may be good, the new rule presents more than a few practical problems.
To begin with, it is effective July — whereas most compensation packages are determined at the start of the fiscal. They will now have to be amended four months in.
For some top employees, such as the CEO or CRO or chief information security officer, the 20% will go towards units of all the schemes, dozens even, depending on the fund house. Some top fund houses have over 30-40 schemes each. This fractionalisation will impact the personal assistant or secretary to the CEO as well.
For junior employees, unless the fund houses proportionately increase their salaries, a significant portion of their compensation will be locked in for three years.
The nature of schemes that the employee has a role in or oversight of will skew how her money is invested.
“Just because I run a mid-cap fund doesn’t mean this is my risk appetite! And a liquid fund manager has to park money in liquid (funds) for 3 years,” Radhika Gupta, managing director and CEO at Edelweiss Mutual Fund, said on social media.
To be clear, many funds already mandate or encourage, as internal policy, investments in their own schemes, at least by top employees. At PPFAS Mutual Fund insiders own over 4.8 crore units that were worth Rs 203 crore as on Apr. 28, as published on the fund’s website.
While this (skin-in-the-game) doesn’t guarantee performance, it is a fair principle that we invest our money where we ask our investors to invest and demonstrate conviction, said Kalpen Parekh, president at DSP Mutual Fund. Also, once confronted with the problem of fractionalisation, it may prompt consolidation of schemes, he added.
At the same time, there are practical nuances that need to be solved consultatively with inputs from industry participants. “Respecting the idea of skin in the game, rules should leave flexibility for each individual for his personal asset allocation using the schemes he is managing or other schemes of his own AMC,” Parekh said.