Allotment to be done every month; units allotted subject to 3-year lock in, says market regulator
Chirag Madia | Mumbai
Last Updated at April 28, 2021 20:32 IST
In a radical move, the Securities and Exchange Board of India (Sebi) on Wednesday directed the Rs 32-trillion mutual fund (MF) industry that a fifth of the salary of top executives be paid in form of units of mutual fund schemes they oversee.
The market regulator has said this is being done to “align the interest 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 said in a circular.
Market players said the move will ensure fund managers and the top management have “skin in the game” and will lead to better selection of securities and performance.
In the recent past, performance of several schemes both on the debt as well as equity side has been hit due to exposure to poor quality assets.
A Balasubramanian, MD and CEO of the Aditya Birla Sun Life AMC said: “There are several of the individuals who are currently investing in their own schemes, but this move will ensure higher commitment towards own funds. Even from the investors point of view, this move will improve their conviction to continue investing in mutual funds.”
Market participants also say that, in several of the global markets there is the similar practice of key personal investing in their own schemes, but it is done on a voluntary basis and not by the regulations.
Besides performance, the move will give Sebi and AMCs a better grip on their employees as the regulator has also introduced a ‘clawback’ clause.
“Units allotted to the 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 said in a circular.
The regulator said the units obtained as compensation will be subject to a lock-in period of minimum three years. Sebi has also said that the compensation in the form of MF units will be paid over 12 months. If a fund manager manages just a single scheme, Sebi has said 50 per cent of the units can be of other schemes with similar risk profile.
While AMC officials will have to observe three-year lockin, Sebi has allowed borrowing against the units in case of emergency.
“AMC may decide to have a provision of borrowing from the AMC by key employees against such units in exigencies such as medical emergencies or on humanitarian grounds, as per the policy laid down by the AMC,” the circular said.
Sebi has also mandated that every scheme shall disclose the ‘compensation, in aggregate, paid in the form of units to the key employees’, on the website of the AMC. The provisions of this circular shall be applicable with effect from July 01, 2021.
Key employees of an AMC include, chief executive officer (CEO), chief investment officer (CIO), chief risk officer (CRO), fund managers, fund management and research team among others. The regulator has excluded passively managed schemes (ETFs) from this diktat and has said rules for close-ended schemes will be announced in due course.
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First Published: Wed, April 28 2021. 20:23 IST