After mutual funds voice concerns, Sebi may ease compensation norms

The Securities and Exchange Board of India (Sebi) is considering making changes to the mutual fund (MF) compensation circular issued last month. It was aimed at ensuring that key executives of the Rs 32-trillion industry had enough "skin in the game".

People in the know said the regulator could water down the circular following challenges highlighted by the industry with regards to its implementation.

On April 28, Sebi directed the MF industry to pay a fifth of the salary of key employees in the form of units of the schemes they oversee. This is being done to “align the interest of key employees of asset management companies (AMCs) with the unitholders of schemes,” the regulator said.

Among the likely changes being considered are reducing the threshold from 20 per cent to 10 per cent, and pruning the list of eligible employees to whom the circular will be applicable, according to industry participants privy to the discussions with the regulator.

An email sent to Sebi didn’t elicit a reply immediately.

“There have been some reservations among small fund houses regarding the applicability of this circular. Sebi has mandated that 20 per cent of the salary should be paid in units of MF schemes. We expect that to come down to 10 per cent,” said the CEO of a mid-sized fund house.

Sebi in a circular said: “A minimum of 20 per cent 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.”

Key employees of an AMC, according to the regulator, include chief executive officer (CEO), chief investment officer (CIO), chief risk officer (CRO), fund managers, fund management and research team, compliance officer, sales head, and direct reportees to the CEO (excluding personal assistant/secretary).

The MF industry executives have been voicing their concerns that the circular will make it harder to retain and attract talent. Also, that the circular is "unfair" as it also applies to staffers who don’t have anything to do with fund management or performance.

“We don’t mind this circular being applicable to fund managers, research team or CEOs. But the current definition is quite widespread and almost covers the entire staff of an AMC. There is a possibility that the regulator may narrow down the list of key employees” said the MD from a leading fund house.

There is consensus that the circular will help improve transparency and preformance, and aid better selection of securities. But the industry is of the view that the regulator should tweak the circular as it results in some unintended consequences.

Several fund houses have approached the regulator in individual capacities over these issues. Industry sources also said the possible tweaks have also been discussed at the industry level.

The regulator also said the units obtained as compensation would be subject to a lock-in period of a minimum of three years. Sebi also said that the compensation in the form of MF units would be paid over 12 months. If a fund manager manages just a single scheme, Sebi said, 50 per cent of the units can be of other schemes with a similar risk profile.

“Investing 20 per cent of gross annual CTC is quite unfair to some of the employees of a fund house. If Sebi alters this announcement to ‘variable pay’ rather than gross CTC, there will be a relief for smaller fund houses,” said a broad member of the Association of Mutual Funds in India (Amfi).

The provisions of the circular shall be applicable with effect from July 1, 2021. Some of the fund houses said the regulator may extend the deadline by a few more months if there is no consensus on the changes that are being discussed.