Sebi's new skin-in-the-game framework for MFs likely to stretch AMCs

The Rs 33-trillion domestic mutual fund (MF) industry will be required to make thousands of crores of investments in its own schemes to meet the Securities and Exchange Board of India's (Sebi’s) new skin-in-the-game framework approved by its board last month.

Sebi’s expert group had proposed an investment between 0.03 per cent and 0.25 per cent. However, this would have entailed an investment of around Rs 3,953 crore - 5x the total existing investment.

According to a disclosure by Sebi, AMCs will have to invest 0.03 per cent in schemes with ‘low’ risk profile and 0.13 per cent in schemes with ‘very high’ risk profile, which are typically equity schemes.

To ensure smooth implementation, the markets regulator has decided to have a lower threshold to begin with. For a scheme with Rs 1-trillion assets under management, the fund house will have to invest Rs 130 crore — far higher than Rs 50 lakh being invested now.

Currently, fund houses are required to invest a maximum of Rs 50 lakh per scheme. To ensure the interests of asset management companies (AMCs) are more aligned with those of unitholders, Sebi’s board approved scrapping the Rs 50-lakh cap. Instead fund houses will have to invest, based on the risk profile of the schemes. The risk profile will be in accordance with the existing labels under the risk-o-meter framework.

 “The minimum contribution by AMCs in MF schemes should be meaningful, and in principle, be linked to the risk value assigned to the schemes. However, there is a need to review the quantum of contribution of 5x to consider the possible financial impact on AMCs,” Sebi said in the board meeting agenda paper.

Currently, an AMC has to maintain a networth of Rs 50 crore. Sebi’s panel has proposed that fund houses be allowed to make investments in their own schemes from their networth.

The move to invest more in their own schemes will indirectly entail an increase of networth, say industry players. Further, the fund houses will be required to cough up more money in case of mark-to-market (MTM) losses.

Sebi’s MF advisory committee has suggested that AMCs be asked to bring in funds to make up for the shortfall in the networth only in case of sustained MTM loss for a considerable period of time. The move is to protect smaller AMCs which may otherwise face challenges in raising fresh equity at short notice.

Many see the new norms favouring the bigger players, which are mostly backed by banks or large financial institutions with deep pockets.

The new framework will become effective once Sebi amends the MF regulations. Fund houses could get up to a year to meet the norms. Certain MF schemes, such as exchange-traded funds, index funds, overnight funds, and fund of funds, are exempt from the skin-in-the-game requirement.

The move is part of a series of steps taken by Sebi to ensure transparency and responsibility at AMCs.

In April, the regulator had said 20 per cent of the salary of senior MF executives will have to be paid in the form of units of schemes they oversee. These norms were to become applicable from July 1. Following industry feedback, Sebi has extended the implementation date to October 1.