Sebi: Too much skin in the game? Sebi open to an easier regime, reviews MF rule

The capital markets regulator’s proposed easing of rules follows feedback from the industry on the growing challenges in the implementation of the rules. Potential hurdles include higher costs, hardships for the employees affected, and likely flight of talent away from the asset management industry.

“Sebi is looking to review the skin in the game rules after the mutual fund industry brought to its notice the operational issues in their implementing some of them,” said the person cited above.

An email query to Sebi remained unanswered until the publication of this report.

To align the interests of key employees at mutual funds with those of the unitholders, Sebi mandated two years ago the industry pay at least 20% of the salary and perks of these executives in the form of units of mutual fund schemes with a lock-in of three years. The policy came under criticism from asset managers as the rules were considered sweeping because they included a wider section of the employees and those with lower pay packages were hurt the most.

The norms extended to CXO-level executives, including the chief executive officer, chief investment officer, fund manager, research analysts and chief operations officer, besides the heads of technology, human resources and other functions.

The mutual fund industry has made representations to Sebi that the rules, especially the one that mandates lock-in of 20% take-home salary every month, should be eased for executives other than the CEO, the CIO and senior fund managers. The norms have affected employees with lower pay packets such as junior investment managers, analysts and function heads.‘Wide Definitional Scope’
“The definition of designated employees is pretty broad and covers a wide range of employees including several juniors with relatively lesser payouts,” said Tejesh Chitlangi, senior partner at IC Universal Legal. “Whilst one can argue the reasonability of a regulatory provision mandating at least 20% of one’s compensation to be mandatorily invested in the schemes where they may have some role or oversight that too with a three-year lock-in, there are several additional issues which should be given a rethought.”

According to the chief executive of a large fund house who did not wish to be identified, the personal finance of a junior employee with a home loan in Mumbai will be in distress if the individual must set aside 20% straight away at the start of the month.

Mutual fund officials said they are finding it tough to hire from outside the industry as prospective employees are asking the fund house to shoulder the burden of the skin-in-the-game requirement.

The regulator, according to sources, has acknowledged the industry’s concerns over the rules, which took shape in the wake of allegations that some of the top officials of Franklin Templeton and their family members withdrew a portion of their investments from some of the six stressed schemes of the fund house just before they were shut for redemptions on April 23, 2020.

“While the principle of the skin-in-the-game for asset managers is sound and desirable, the operational and second-order effects have resulted in problems both for the employees and asset management companies,” said Sandeep Parekh, managing partner, Finsec Law Advisors.

Mutual funds are also seeking relaxation in the rules that mandate them to align their investments in their own schemes to the money they are managing and the total assets of the fund house. Officials said this norm does not take into account the personal risk appetite of the executives while investing.

“The one-size-fits-all formula may not work since the packages across seniority levels,” said Chitlangi. “Various AMCs significantly differ with risk appetite and investment preferences differing across individuals. The market, as well as scheme performance, may materially fluctuate during the long lock-in tenure without any redemption recourse for such employees whereby they cannot reasonably time their entry or exit which any other mutual fund unitholders flexibly can.”