Covid-19 impact: Sebi may tweak pay structure of top MF executives

Caps on variable pay, staggered bonus payouts among likely steps to rein in risky moves by fund managers

The Securities and Exchange Board of India (Sebi) may look at the way mutual fund (MF) executives are compensated as the industry faces a severe crisis amid the coronavirus lockdown. 
 

Caps on variable pay and staggered bonus payouts are some of the steps that the markets regulator could consider, said people in the know. There could also be clauses on clawing back bonuses doled out in the past in the case of fraud, negligence or exceptional circumstances.
 

Sebi may also nudge fund managers to put more skin in the game. Managers of credit-risk funds have little or no money invested in the schemes they manage, with 11 of the 20 such schemes having nil investments from their fund managers, data based on past disclosures for different periods till March 31, 2019 shows.
 

At present, a large part of the overall compensation to senior MF executives is paid by way of variable pay, which is linked to assets managed, alpha generated in a given year, and outperformance over industry peers. This can often reinforce the focus on short-term performance, making fund managers take undue risks for additional returns, said experts.

It is not unusual for fund managers to get bonuses that equal their annual salaries in a reasonably good year. The industry also routinely gives one-time payments and stock options that could amount to a sizeable amount in a particular year.
 

Last year, the insurance sector regulator had fixed an upper limit for bonuses and said the variable pay of senior insurance officials must be based on their performance vis-à-vis the industry. The Reserve Bank of India (RBI), on the other hand, had streamlined clawback rules for whole-time directors and material risk takers to dissuade them from excessive risk-taking. It also told private banks to raise the variable portion of remuneration to at least half of the total for CEOs and whole-time directors to ensure ‘pay for performance’ principles.
 

“Sebi may move in the direction of IRDAI and the RBI in terms of prescribing a few rules for senior management compensation for MF officials,” said a senior industry official. “The way senior fund officials are currently compensated are skewed towards rewarding returns rather than keeping risks in check. This can be detrimental to investor interest.”

A few years ago, the regulator had mandated disclosure of remuneration given to senior fund officials, which had initially led to a fair bit of pushback from the industry. However, the regulator refrained from putting out caps or ceilings in the way they could be compensated.    
 

The compensation for senior MF executives routinely runs into crores. For instance, HDFC MF Managing Director Milind Barve and Chief Investment Officer Prashant Jain's annual remuneration for FY19 stood at Rs 7.2 crore each. ICICI Prudential MFs MD and CEO Nimesh Shah took home Rs 6.25 crore.

Motilal Oswal Asset Management MD and CEO Aashish Somaiyaa's total remuneration for FY19 was Rs 39.6 crore, which included a one-time payment owing to cumulative vesting of equity shares earned over the previous six and a half years, which materialised in FY19.

"The regulator may want to take steps to discourage excessive risk-taking. One way of doing that would be to ask MFs to put a cap on bonuses or introduce clawback clauses, which get triggered in certain situations," said Dhaval Kapadia, director portfolio specialist, Morningstar Investment Advisors India.

"Having said that, it may not be easy to define the parameters based on which these clauses are triggered, especially if fund managers have not gone against any regulatory diktat."

Some believe that interfering with compensation of senior management may lead to unintended consequences. Capping bonuses, for instance, may make it difficult for funds to attract and retain talent, said an industry CEO, requesting anonymity.

Employee remuneration makes up 50-60 per cent of the overall costs of most asset managers. Bonuses for FY20 are likely to be dismal, ranging from 0-10 per cent, as fund houses look to conserve cash in the backdrop of the Covid-19 pandemic. It was a dismal year for both equity and debt fund managers, with the polarization in equities and the spate of downgrades impacting returns.

Total industry assets slid to Rs 22.26 trillion as of March 31, 2020, a 6 per cent drop over the same period last year. Equity assets totalled Rs 5.78 trillion, down 31 per cent over the corresponding period the previous year. Inflows through monthly systematic investment plans (SIPs) in equity schemes have remained steady at over Rs 8,000 crore during the year even though lump sum investments have come under pressure of late.