Recently, the market regulator SEBI (Securities and Exchange Board of India) came up with new guidelines on the compensation of key mutual fund employees such as fund managers and other key personnel in an Asset Management Company (AMC).
Although the SEBI’s intention behind the rule amendment was good, the mutual fund industry seems quite unhappy with the change. Now, the question arises- why?
Well, that’s what we are here for. In this blog, we will discuss the new rule set by SEBI, understand why SEBI did this, how retail investors can benefit from this, and why the MF industry is unhappy with the decision.
Therefore, without any further ado, let’s discover the new guidelines introduced by SEBI.
Also, read about the SEBI’s new margin trading rule!
As per the SEBI’s new norms, a minimum of 20% of the compensation of key mutual fund employees, including fund managers and other key personnel in an AMC should be in the form of the units of mutual fund schemes they manage.
Here, mutual fund key employees refer to the likes of chief investment officer, research head, chief executive officer, and their direct reportees.
The new rule is aimed at aligning the interest of the key personnel of the Asset Management Company. Moreover, the newly amended rule is supposed to come into effect from June 1, 2021.
According to SEBI, compensation paid in the form of units must be proportionate to the AMC of the schemes. For instance, a CEO with an overall oversight will get 20% of his/her compensation spread across all the MF schemes. On the contrary, a fund manager managing only one fund will get at least 50% of such compensation in the scheme he/she handles and the remaining in other schemes of the riskier’s mutual fund. The regulator has also confirmed that these units given by way of compensation are locked in for three years.
Furthermore, ETFs (Exchange Traded Funds), index funds, close-ended funds, and overnight funds have been exempted from the new rule.
As the circular said, the change in compensation guidelines was to align the interest of the key personnel of the AMCs with the unitholders of the MF schemes. In other terms, SEBI wants fund managers to have skin in the game, or explain to investors that they are very confident of the schemes they are managing.
However, this may prove to be a fallout of the events at Franklin Templeton. In March 2020, Franklin shuttered six debt funds and according to a forensic audit, some employees of the mutual fund redeemed their holdings just before those six schemes were closed. Even earlier, the mutual fund employees have alleged them of front running.
Head (RankMF) at Samco Securities, Omkeshwar Singh expressing his opinion about the new compensation guidelines said that the move tends to bring accountability of the schemes’ performance that are relied upon the key employees of the AMC.
He also added that the new rule will aid in sharing the risk at par with the schemes’ unitholders, not just with code of conducts unlike earlier. In fact, it will also help with the personal financial accountability with a part of remuneration getting invested in such schemes.
Adding further, he said that this will enhance the trust of mutual fund investors in mutual funds.
This new move by SEBI is supposed to increase the transparency of fund manager compensation. Along with creating accountability, it will also ensure that fund houses link the fund managers’ pay to performance and move beyond lip services.
Looking at the brighter side, you will find that, since the mutual fund’s performance is linked to a whole lot of employees’ compensation, it could motivate whistleblowing if any kind of wrongdoing is taking place.
On the other hand, investors will have a lot of psychological comfort about their fund manager having a stake in the result. We will have to wait and watch whether this move will lead to higher returns or not.
In case you are a minor or a person below 18 years of age and want to know how to invest in mutual funds, then read our blog on how minors can invest in mutual funds online.
The common holdback from mutual fund CEOs has been that SEBI’s motive is good but the rules are too old-fashioned to follow. For example, a money market fund manager (not having annual returns of more than 6-7%) might suffer a huge risk appetite and route all his/her investments in equity funds.
If this rule by SEBI comes into effect, it will specify percentages of investments in various schemes. As a result, it will create a conflict with the personal financial objectives of the fund managers. Fund house CEOs warned that this may also lead to an escape of talent from the industry.
Jimmy Patel, the CEO of Quantum Mutual Fund said that SEBI’s circular appears arbitrary and illogical and that it has been drafted hurriedly as the circular implements to junior staff and other members who aren’t at all concerned with fund management.
Further, he added that not all AMCs pay high compensation to key personnel nor everybody, as defined under key personnel, earns a high salary. In fact, a small fund house will have to suffer at retaining talent. Plus, in such a difficult time, complying with the new framework would be quite challenging.