Real skin in the game for MF managers, now officially!

There are very few fund houses such as Kotak Mutual Fund and Quantum Mutual Fund that do have a culture of investing their own funds. Having skin in the game helps us to understand the pain of investors. Therefore, we believe that it is a good thing to practice, which may prove helpful for the fund houses to build trust among investors. 

However, now the Securities & Exchange Board of India (SEBI) has come up with a new rule wherein, a minimum of 20 per cent of the fund managers' salary shall be in the form of units of mutual fund schemes that they manage. Apart from fund managers, it applies to even other key employees such as Chief Executive Officer (CEO), Chief Investment Officer (CIO), and any other employees that the fund house considers as key employees. 

The circular also reveals that the 20 per cent payout coming in the form of scheme units would be as a percentage of the gross salary less of income tax deducted and other statutory contributions such as Employees Provident Fund (EPF) and National Pension System (NPS). 

Furthermore, this 20 per cent part of the salary would be calculated proportionately based on the assets under management (AUM) of the schemes in which, the key employee of the fund house contributes. However, in case the fund manager is managing only one scheme, then he has an option to receive half of the compensation in the form of units from the scheme he manages while the remaining would come from other schemes where risk profiles are the same or higher. This risk profile here would be considered as per SEBI’s risk-meter guidelines. 

Simply put, for an equity fund manager, units would most likely be allotted only from equity funds. Moreover, these allocated units would be locked in for three years. As directed by SEBI, the index funds, exchange-traded funds (ETF), overnight funds and existing close-ended funds will be excluded from unit allocation. However, if an employee retires at the age of superannuation, then he can redeem the allocated units. Having said that, units of closed-ended funds are excluded from the same. And if the employee resigns or voluntarily retires early, then in such cases, the allocated units cannot be sold. However, if there is a medical emergency, the key employees are allowed to borrow from the fund house against the units forming the part of the lock-in period. 

The circular about the allotment of units to the key employees would come into effect from July 1, 2021. Furthermore, SEBI has also directed asset management companies (AMC) to disclose the quantum of units allocated to the key employees in each scheme on the company website. 

Though, with this now, the key employees will have skin in the game, which will help increase transparency and confidence among investors but might certainly hit the key employees hard. However, the more daunting thing is the three-year lock-in period.