Sebi deepens fund managers’ skin in the game

The regulator said the move is aimed to align the interest of the key employees with the unit holders of the mutual fund schemes. Key officials include a fund house’s chief executive officer, chief investment officer, fund manager, research analysts, chief operation officer among others.

“Having skin in the game is looked at positively by all investors, and the basic intent seems good,” said Kaustubh Belapurkar, Director (Fund Research), Morningstar India.

The new rule comes in the wake of a forensic report commissioned by Sebi which alleged that some of the top officials of Franklin Templeton and their family members withdrew a portion of their investments from some of six stressed schemes of the fund house just before they were shut for redemptions on April 23,2020.

The Sebi circular on Wednesday said units allotted to key employees would be clawed back in the event of “fraud, gross negligence or violation of code of conduct.” The rules become effective on July 1.

The regulator has excluded exchange traded funds, index funds, overnight funds and existing close ended schemes from the new rule.

Sebi said the compensation paid in the form of units should also be proportionate to the assets under management of the schemes in which the key employee has an oversight.

In case of compensation paid in the form of employee stock options, the date of exercising such option should be considered as the date of such payment, Sebi said. The compensation should be locked- in for a minimum period of three years or tenure of the scheme whichever is less.

Mutual fund industry officials are miffed with the new regulations. While some said the move could result in a flight of talent to independent fund management, others said it was unfair on the chief executive officers of mutual funds.

“The CEO will end up putting 20% of his post tax money across a large number of schemes irrespective of his needs, and that too locked in for three years,” said the CEO at a domestic fund house.

The regulator said fund houses should not allow any redemptions of the said units during the lock- in period. Besides, redemptions of such units should also not be allowed within the lock-in period in case of resignation or retirement before attaining the age of superannuation.

“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.”

In the case of fund managers managing only a single scheme, 50% of the compensation can be by way of units of the scheme managed by the fund manager and the remaining can could be by way of units of those schemes whose risk value is equivalent or higher than the scheme managed by the fund manager, the circular said.