In an attempt to protect the interests of investors, SEBI has provided for the alignment of interest of key employees of the Asset Management Companies (“AMCs”) with the unit holders of the mutual fund schemes by mandating a unique scheme of compensation for the key employees.
Vide circular dated April 28, 2021, SEBI has mandated that a minimum of 20% of the salary, perks, bonuses, non-cash compensation (gross annual CTC) net of income tax and other statutory contributions of the key employees of the AMCs shall be paid in the form of units of the mutual fund schemes in which they have an oversight or a role or is managed by them. The units given is supposed to be proportional to the AUM of the schemes managed by key employees, paid proportionately over 12 months on the date of payment, and will be locked in for 3 years or the tenure of the scheme (whichever is lesser). No redemption of such units shall be permitted to key employees during the lock-in period, except in cases of exigencies as clarified in the policies of the respective AMCs or on retirement on attaining the superannuation age. The circular defines ‘key employees’ as:
- CEO, Chief Investment Officer, Chief Risk Officer, Chief Information Security Officer, Chief Operation Officer, Fund Managers, Compliance Officer, Sales Head, Investor Relation Officer(s), heads of other departments, Dealers of the AMC
- Direct reportees to the CEO, excluding Personal Assistant;
- Fund Management Team and Research team;
- Other employees as identified & included by AMCs and Trustees.
Key employees having an oversight only over ETFs, Index Funds, Overnight Funds and close ended schemes are excluded from the purview of this circular. Furthermore, for dedicated fund managers, managing only a single scheme or single category of schemes, there is an option of getting compensated from the units of those schemes whose risk value is equivalent to or higher than the scheme managed by the fund manager. But this shall only be 50% of the decided compensation under this circular as the remaining 50% will still be from the units of the scheme or category managed by them. The aggregate compensation paid in units to key employees from each scheme shall be disclosed on the website of the AMC.
The circular, scheduled to take effect from July 01, 2021, comes after the Franklin Templeton Mutual Fund controversy. The circular strengthens the commitment of key employees of AMCs towards investors by providing for clawback provisions in cases of violation of code of conduct, fraud, or gross negligence, and by ensuring that the key employees have some personal stake in the performance of the mutual fund managed by them.
While the circular may have been issued in the interest of investors, the scope of the circular is excessive. The definition of key employees not only includes the fund manager(s), but also a host of other employees who may not even be involved in the investment decision making concerning the scheme(s). Further, by not creating a threshold salary limit over which the circular will be applicable, SEBI is forcing low-income AMC employees to mandatorily save 20% of their income in specific mutual fund schemes. It is also likely that certain key employees have a role in mutual fund schemes that have a risk profile unsuitable for them. Quite bizarrely, if the key employees do not want to invest in such unsuitable schemes, then the AMC should ensure that only those people whose risk profile matches the scheme should be staffed as key employees.
