- On April 28, SEBI released a circular asking mutual fund companies to provide 20% of salary in MF units to key employees.
- The move came after the Franklin Templeton fiasco to align the interest of the key employees with that of investors.
- The heads of several mutual fund companies are disappointed as the new rule by SEBI translates 20% of their salary into mutual fund units.
On April 28, 2021, SEBI informed the asset management companies (AMC) to provide a minimum of 20% salary/perks/bonus/non-cash compensation of key employees in the form of a mutual fund unit. The idea was to align the interest of the key employees with that of investors.
A mutual fund unit is a portion of one’s investment from the pool of funds set by the mutual fund company.
The move came after the Franklin Templeton fiasco wherein the fund house one day suddenly closed six debt mutual fund schemes overnight citing poor liquidity condition in debt markets due to the pandemic-induced crisis. This led to panic among investors who were unable to access their investment thereon.
The new mandate by the market’s regulator is applicable for key employees including chief executive officer (CEO), chief investment officer (CIO), chief risk officer (CRO), chief information security officer (CISO), chief operation officer (COO), fund manager, compliance officer, sales head, investor relation officer (IRO), heads of other departments and dealers of the AMC.
Direct reportees to the CEO (excluding personal assistant/secretary), fund management team and research team are also included in this list.
“After the Franklin Templeton incident, there is no enthuthiasm among newcomers to join the industry. Basically, it is no more an attractive career opportunity with so many regulations in place. These professionals would prefer working in a private equity, PMS (portfolio management services), AIF (alternative investment funds), fintech company which has less regulatory complications. With this, top talents will have one more reason to not choose the mutual fund industry as a career option,” said the chief executive of one of the top mutual fund companies on condition of anonymity.
There is complete misalignment of mandatory investment for employees with varied risk appetite and investment time horizon, he added.
“The circular on skin in the game, while a good idea in spirit, is going to be extremely problematic in implementation. This circular applies to not just senior employees but junior research staff, dealers, and support function heads. These people don’t earn the kind of money CEOs and CIOs do,” said Radhika Gupta, managing director and CEO of Edelweiss Mutual Fund in a tweet on April 28, the day SEBI released this circular.
“It is forcing them to lock 20% of their income for 3 years. It mandates how much one saves. For a guy earning ₹15-20 lakh [in a year], imagine how difficult it is to put away ₹3-4 lakh [per annum]. We are constraining employee cash flows. Just because I run a mid-cap fund doesn’t mean this is my risk appetite. And a liquid fund manager has to park money in liquid funds for 3 years,” she added.
In simpler terms, why would a 30-year-old fixed income fund manager invest a significant portion of his salary in a debt scheme. The objective of a debt fund is to grow wealth in a stable manner with typically lower returns and low risk compared to equity funds.
Further, the fund houses have addressed these concerns to SEBI through Association of Mutual Funds in India (AMFI). It expects some sort of relief from the regulator in terms of reducing the percentage of salary to be given in MF units and cutting some junior level employees from the initiative.
Considering this, SEBI has deferred the implementation of the new compensation norms by three months to October 1, 2021. The new rules were supposed to come into effect from July 1, 2021.
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