Guidelines On Compensation of Mutual Fund Employees: SEBI

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    Recently, the Securities and Exchange Board of India (SEBI) has said that a minimum 20% of the compensation of mutual fund managers in an asset management company (AMC) should be in the form of units of the mutual fund schemes they manage.

    • An asset management company (AMC) is a firm that invests pooled funds from clients, putting the capital to work through different investments including stocks, bonds, real estate, master limited partnerships, and more. 

    Changes proposed by SEBI

    • A minimum of 20 percent 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.
    • Units allotted to 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 the amount shall be credited to the scheme.
      • A clawback is a contractual provision whereby money already paid to an employee must be returned to an employer or benefactor, sometimes with a penalty.
    • The units obtained as compensation will be subject to a lock-in period of three years.

     

    Image Courtesy: BS

    Reasons for changes announced by SEBI

    • The primary objective of the new rule is to align the interest of the key employees of the AMCs with the unit holders of the mutual fund schemes.
    • The SEBI wants fund managers to demonstrate to investors that they have confidence in the schemes they manage.

    Implication of new SEBI rule on investors

    • The move by SEBI will boost the transparency of fund manager compensation and also helps build accountability.
    • It ensures that fund houses actually link the pay of fund managers to performance and go beyond lip service.
    • It could encourage whistleblowing if wrongdoing is happening.
    • It will give a lot of psychological comfort to investors that their fund manager has skin in the game.

    Arguments from Mutual Fund industry against new SEBI rule

    • The common refrain from mutual fund CEOs has been that SEBI’s intention is good but the rules are too clunky to follow.
    • The rule by SEBI, which in effect specifies percentages of investments in different schemes, could conflict with the personal finance goals of the fund managers.
    • It could even lead to a flight of talent from the industry.

    Securities and Exchange Board of India (SEBI)

    • It was established on April 12, 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992.
    • It is a statutory body which is constituted as the regulator of capital markets in India under a resolution of the Government of India.
    • Aim: To protect the interests of investors in securities and to promote the development of, and to regulate the securities market.
      • It is the regulator of the securities and commodity market in India owned by the Government of India

    Source: BS