In any industry, the rights of the buyer must be protected. In case of the financial services industry, especially for businesses that deal with retail money, investor protection becomes paramount. Inarguably, having your ‘skin in the game’ or ‘putting your money where your mouth is’ has proved to be an effective tool in increasing accountability and ensuring that the intent of investment professionals is well-aligned with those of investors. To that extent, the recent Sebi circular is on point - in spirit and intent.
However, there are several layers to this circular which could have widespread ramifications. Many of these do not serve the intent and can be detrimental to the industry and the professionals who work in it.
The main point of contention is the large number of employees who unfairly fall under the ambit of the circular. As per the circular, junior analysts, dealing staff, and heads of departments will all have to comply with the mandates set forth in the circular. However, it is unfair to hold so many people accountable as their role in investment decision making is limited. Instead, it would be better to limit this to only key personnel like the chief executive officer (CEO), senior fund managers / CIOs, and risk and compliance heads.
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Another point to note is that 20 per cent of an individual’s total compensation (net of tax) must be in their own scheme. This can pose several challenges.
The first is simply the fact that there is a large gap between CXO compensation and the compensation of other investment team members and HODs. This rule will have a significant impact on the saving and even well-being of individuals who earn in the Rs 15 lakh to Rs 30 lakh range. Imagine if you earn Rs 20 lakh per annum, of which Rs 4 lakh is locked-in for three years. Not only will this impact your savings, it can also impact your ability to pay rent / EMI and meet other expenses and liabilities.
Further accentuating the problem is that the circular also mandates where this money can be invested. Unfortunately, it pays no heed to the personal circumstances of employees, their risk profile, their prevailing asset allocation strategies, and even their long-term financial requirements. If you are a mid-cap fund manager who has multiple liabilities and expenses and are forced to invest 50 per cent of your money in your mid-cap fund, would that be an optimal thing to do? Most certainly not.
Another fall out of this could be that talent will either become very expensive, thereby impacting the cost structure of aset management companies (AMCs), or it will become scarce. None of these eventualities will be particularly beneficial for end investors.
Undoubtedly, more needs to be done to protect investor interest and ensure that a few bad actors do not have an inordinately large impact on investor wealth and the industry as a whole. This can easily be achieved by holding the decision makers accountable. Sebi can mandate that employees earning above a certain threshold (maybe Rs 50 lakh) need invest a certain percentage (30-50 per cent) of their total investments in schemes of their own AMC, as per their asset allocation choices.
Rules need not be draconian for them to have an impact. We must not forget that the mutual fund industry comprises people who can and do have their skin in the game. Even before the circular, fund managers and senior management in most AMCs have invested a significant chunk of their financial savings in their own schemes. I have 70 per cent of my money in my own funds and most of the senior management mirrors this approach. Regulation is always welcome. However, it should be equitable and not benefit some at the cost of others.
Disclaimer: Radhika Gupta is the MD & CEO of Edelweiss Asset Management Limited (EAML) and the views expressed above are her own.