With little over a month left for the new skin-in-the-game rules to come into effect, executives in the mutual fund (MF) industry are worried that a portion of their salaries would be compulsorily locked in mutual fund (MF) schemes.
As per the rules laid down by the capital market regulator, Securities and Exchange Board of India (SEBI), 20 percent of all senior executives of mutual fund houses’ salaries would be kept aside for this. And this money will be locked in for three years. If the fund managers or such executives are caught violating any rules, their units would be sold off and the money would be clawed back into the scheme.
Aside from the fund house’s chief executive officer (CEO), other senior officials like all fund managers, chief risk officer, chief information security officer (CISO), chief operation officer (COO), compliance officer, head of sales, investor relation officers, heads of other departments, dealers of the AMC and all those who directly report to the CEO, are covered under this rule. Aside from fund managers, the dealers and research analysts are also covered under this rule.
No flexibility in choice of schemes
As things stand, employees don’t have any flexibility on the schemes they wish to invest in.
Industry executives also wonder will the new rules mean that if a liquid fund is the largest fund managed by the fund house, the employees involved in that scheme will see majority of their 20 percent quota deployed into liquid fund.
Liquid funds are usually low risk-low return products and used by investors to park their surplus cash for short-term. Large investment in liquid funds for three years may not be something that would suit every employees’ financial goals.
Holding liquid funds for three years
It’s not just about investing in schemes that the fund managers don’t really need. Industry officials say that holding liquid funds for as long as three years- as opposed to a time period of up to a year, for which these schemes are actually meant for- is unnecessary.
“Right now it seems, employees won’t have much say in what schemes they can invest in. What would have helped is giving flexibility to employees to invest in schemes that meet their own financial planning needs, while making fund houses disclose percentage of employee investment in each scheme in monthly factsheets,” said CEO of a fund house, requesting anonymity.
“This way SEBI can ensure transparency, and if employee investment is very low in some schemes, the fund house’s trustees can question the fund house officials. This would nudge fund houses to increase employee participation, but at the same time give them more freedom,” he added.
Will fund houses be able attract talent?
MF officials also think that the percentage of salary that needs to be locked-in can be reduced for employees drawing lower salaries.
“Some of the younger employees may not be drawing as much, but at the same time would have home loan EMIs and other obligations to take care of. So, for such employees the percentage of units can be reduced to ten percent,” said the CEO, quote above.
CEOs of smaller-sized fund houses are worried that the new rules may make it difficult for them to retain or attract talent. “An analyst or even top officials at a small fund house don’t necessarily draw high salaries. In any case, analysts join small-sized fund houses for a couple years to get trained and move to larger fund houses for higher salaries. The new rules may make it difficult for smaller MFs to get talent, as they would prefer larger MFs or other industries that can offer higher monthly take-home,” said CEO of a small-sized fund house.
He also pointed out that since the skin-in-the-game rules don’t apply to passively-managed schemes, the new fund houses that are getting launched could keep their focus limited to passive schemes. “If that happens and more fund houses shift focus to passively-managed schemes, it would impact investors’ choice,” he added.
“Star fund managers could demand higher salaries so that their take-home is not impacted. Also, we need to ask whether 20 percent of an individual’s salary can serve as a good deterrent as a fraud is likely to be several times the size of this,” said R Balakrishnan, former mutual fund CEO and financial industry veteran.
Amit Tandon, managing director of corporate governance and proxy advisory firm Institutional Investor Advisory Services, said, “Both SEBI and fund houses have a valid point of view. Fund managers must have skin in the game and the asset managers must not be coerced into a pay-structure that can impact to what they believe is their ideal long-term saving plan. This is a real issue that needs to be sorted out and will happen only through extensive dialogue between fund houses and the regulator.”
How are fund houses preparing right now?
Meanwhile, fund houses have started to tweak their internal systems to comply with the skin-in-the-game rules.
“Our compliance and HR team have created a grid of employees and mapped it against various schemes. The salaries for October will get deployed from November and we will follow this grid if there are no relaxations from SEBI,” said the first CEO, quoted above.
Another CEO said, “Our human resources division has worked with external consultants to implement these new rules, but it might have to be revisited if there are any updates.”
Some fund houses are also working with the registrar and transfer agents (RTAs) to directly get the units credited to employees’ accounts. “We are thinking of directly crediting the relevant part of employees’ salaries at CAMS and getting the units purchased in employees’ accounts,” said a fourth CEO we spoke with for the story.