Minimum 20% key AMC employee compensation to be in mutual fund units: Sebi

Allotment to be done every month; units allotted subject to 3-year lock in, says market regulator

The Securities and Exchange Board of India (Sebi), in a far-reaching decision on Wednesday, told the Rs 32-trillion mutual fund (MF) industry that a fifth of the salary of top executives is be paid in the form of units of mutual fund schemes they oversee.

The market regulator has said this has been done to “align the interests of the key employees of the asset management companies (AMCs) with the unitholders of the schemes”.

“A minimum of 20 per cent of the salary/perks/bonus/non-cash compensation (gross annual cost-to-company) net of income tax and any statutory contributions (provident fund and national pension scheme) of the key employees of the AMCs shall be paid in the form of units of MF schemes in which they have a role and oversight,” Sebi has said in a circular.

Market players said the move would ensure that fund managers and the top management have “skin in the game” and this would lead to a better selection of securities and performance.

In the recent past, the performance of several schemes, both on the debt as well as the equity side, was hit due to exposure to poor-quality assets.

A Balasubramanian, managing director and chief executive officer of Aditya Birla Sun Life AMC, said: “There are individuals who are investing in their own schemes, but this move will ensure a higher commitment towards their own funds. Even from the investors’ point of view, this will improve their conviction to continue investing in mutual funds.”

Market participants said in several markets abroad there was a similar practice of key executives investing in their schemes, but it was done voluntarily and not through orders.

The move will give Sebi and asset management companies (AMCs) a better grip on their employees as the regulator has also introduced a “clawback” clause.

 

“Units allotted to key employees shall be subject to clawback in the event of violation of code of conduct, fraud, gross negligence by them, as determined by Sebi. Upon clawback, the units shall be redeemed and amount shall be credited to the scheme,” Sebi has said in a circular.

The regulator has said the units obtained as compensation will be subject to a lock-in period of three years.

Sebi has said compensation in the form of MF units will be paid over 12 months. If a fund manager manages a single scheme, Sebi has said 50 per cent of the units can be of other schemes with a similar risk profile.

While officials of AMCs will have to observe a three-year lock-in, Sebi has allowed borrowing against units in the case of an emergency.

Sebi has mandated every scheme will disclose the “compensation, in aggregate, paid in the form of units to the key employees”, on the website of the AMC. The circular will be effective on July 1 this year.

Key employees of an AMC include chief executive officer, chief investment officer, chief risk officer, fund managers, and members of the fund management and research team.

The regulator has excluded passively managed schemes from this diktat and has said rules for close-ended schemes will be announced in due course.