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SEBI tightens up MFs.

The Securities and Exchange Board of India has recently announced that a part of the compensation of the key employees of the asset management companies (AMCs) will be paid to them in form of schemes. However, this has been met with some opposition from key mutual fund industry voices.

What is the circular?

As per the circular, a minimum of 20 percent of the salary/perks/bonus/non-cash compensation net of income tax/statutory contributions of the key employees of any AMC should be paid to them in form of mutual fund units (in which they have a role).

The circular applies to senior as well as junior employees, including research staff, dealers, and support function heads.

The regulator expects the new rule to “align the interest” of the key employees of the AMCs with their unitholders.

The rule comes after Franklin Templeton Mutual Fund closed six of their debt schemes. An audit investigation had revealed that some fund insiders redeemed their money just before the closure announcement.

The opposition

While SEBI believes employees buying mutual fund units of AMC they work at will correspond to them having “skin in the game”, its implementation is going to be tricky, Radhika Gupta, MD and CEO of Edelweiss MF said on a Twitter thread.

The main opposition is that junior employees will be hit by this as they don’t earn the kind of money. Gupta says, “On top of it, the regulator is forcing them to lock in 20 percent of their salary for three years.” She adds that she has “no problem with skin in the game for me or my senior FMs!”

“We are constraining employee cash flows,” Gupta said. “For a guy earning 15-20 lakhs, imagine how difficult it is to put away 3-4 lakhs.”

Chairman and CEO, PPFAS Mutual Fund, Neil Parikh, has expressed similar concerns.

“A debt dealer (not a very high-paying job) should not be forced to lock in a big portion of his/her salary in liquid funds for 3 years! A lot of the ‘key employees’ mentioned in the circular should not be forced.. surely not in these tough times.” Parikh wrote on Twitter.

During the lock-in period, employees cannot redeem the said units. However, an AMC may allow its employees to borrow from AMC against the units in cases of medical emergencies or humanitarian grounds.

If the employee chooses to retire or resign before reaching the age of superannuation, then the units shall not be redeemed, the circular adds.

Another argument is that while managers investing in their own funds is a good signaling factor for investors, it could very well be the fact that the fund does not suit the employees’ needs.

Further, the circular suggests that managers invest in all schemes basis weighted AUM. “If I run an 80-20 debt-equity business, that is my forced asset allocation. For a midcap manager, he has to invest in his schemes or a higher risk grade. Just because I run a mid-cap fund doesn’t mean this is my risk appetite,” Gupta said.

Talking about the implications of the scheme, Gupta said, either we will be forced to pay everyone 20 percent more than what we do, which will hit our business and cost structure. Or a lot of people will not prefer working for an AMC. This will hit the marketing head or CTOs of the AMC and they don’t even make investment decisions, she said.

It is noteworthy that other industries like banks, insurance companies and other financial institutions don’t have such rules.

The circular, Gupta said, is also hard to implement because employee compensation is based on the year and bonus outlook, a manager cannot make such decisions at the beginning of the year

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