Sebi may dilute certain clauses in controversial MF compensation circular

Regulator, industry gets into huddle ahead of October 1 deadline

The Securities and Exchange Board of India (Sebi) could dilute certain clauses in the controversial compensation circular introduced for the mutual fund (MF) industry that required fund houses to invest a fifth of fund managers’ and other senior officials’ salaries in their own schemes.
 
Sources said Sebi and industry representatives have got into a huddle to ensure smooth implementation of the new norms ahead of the October 1 deadline. The industry has requested Sebi to make some changes, citing implementation challenges, and expect the regulator to issue a revised circular in the coming weeks, said people in the know.
 
Sebi has said the new norms, introduced in April, aim to “align the interest of the key employees of the asset management companies (AMCs) with the unitholders of the schemes.” The circular was to be initially implemented from July 1. However, on June 25, Sebi extended the implementation to October 1.
 
While Sebi has given the industry more than five months to warm up to the new norms, officials say several concerns remain. They key one being the ambit of the circular.
 
At present, the employees covered under the circular include chief executive officer, chief investment officer, chief risk officer, fund managers, fund management and research team, among others.
 
Several fund houses have asked Sebi to narrow the list of employees who will be covered under the rule, as they fear an exodus of employees.
 
“We want this circular to cover only the staffers directly responsible for investment decisions and fund performance. I don’t know why the circular includes people like chief information security officer and chief operation officer. Sebi is likely to include key employees like CEOs, fund managers and research team in the revised circular,” said another top industry official.

Sebi’s current definition is quite extensive and almost covers the entire staff of AMCs, including those who have nothing to do with fund management or investment decisions.
 
Another concern highlighted by the industry is around fund managers handling riskier scheme categories.
 
“There are fund managers who handle high-risk schemes such as mid-caps or sectoral funds. While they have expertise in handling such schemes, they may not have the risk appetite. We have asked Sebi to allow more leeway when it comes to allotment of units in such cases,” said a third industry official.
 
Sources said senior executives of fund houses and their human resources (HR) departments have had several discussions with their employees to understand their concerns, which too have been represented to Sebi.
 
Meanwhile, Sebi has asked various fund houses about the strategy they will adopt once the mandatory three-year lock-in ends. The April circular says units obtained as compensation will be subject to a lock-in period of three years.
 
“The regulator wants to know what we would do post the lock-in period of investments. Whether we will go for compulsory redemptions, partial redemption or continue with the investments. Before it is implemented from October, we might see more changes in the circular,” said the CEO of a top fund house.