New Sebi norms on compensation: Mutual fund houses fear losing talent

Topics Mutual Funds | SEBI | MF schemes

A section of the mutual fund industry apprehends that the Securities and Exchange Board of India's (Sebi’s) diktat to pay a fifth of the salary of top executives in the form of units of MF schemes may make it harder to retain or attract talent. Many players are now planning to approach the markets regulator through their industry body Association of Mutual Funds in India (Amfi), seeking amendments to the compensation circular issued on Wednesday.


“For a CEO or sales head, I have to invest in every scheme of my AMC? Every single scheme? That’s going to be very difficult. This rule doesn’t apply to employees of banks, insurance companies, and other financial institutions. Why these rules for one industry?” tweeted Radhika Gupta, MD & CEO, Edelweiss AMC.


According to her, either the industry will be forced to pay everyone 20 per cent more, hitting the business and cost structure, or a lot of people won’t work for an MF.


“Scouting for fresh talent may become a challenge in the future. A person outside the industry will think twice before joining the MF industry,” the CEO of another AMC said.


Call for amendments


Among the most important tweaks, the industry will seek is reducing the ambit of “key employees”.


Sebi’s current definition is widespread and covers almost the entire staff of an AMC, incl­uding those who have nothing to do with fund management or investment decisions. “The circular also covers employees like the head of human resour­ce and dealing staff, among ot­hers. These people have nothing to do with the investment performance,” said Gupta.


Other top industry officials said they will request Sebi to restrict the circular to staffers directly responsible for investment decisions and fund performance. They said asking employees other than the fund management team to mandatorily invest a fifth of their salary goes against the principle of natural justice.


A senior executive of a fund house said: "No new person will join the industry unless his pay is aligned. And if that happens, even the existing people will want pay hikes to get their salaries aligned, which may not be feasible in the long run."


Sebi has said that 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 key employees of AMCs shall be paid in the form of units of MF schemes in which they have a role and oversight.


Another change sought by the industry is to allow some discretion to fund managers who manage high-risk schemes, such as small-cap, mid-cap or thematic schemes.


The circular suggests that key MF employees, such as CEO, need to invest in all the schemes basis weighted assets under management (AUM). This can result in a forced asset allocation. So if a fund runs an 80-20 debt-equity business that becomes the asset allocation for the CEO. A mid-cap fund manager, on the other hand, will have to invest in his schemes or in a scheme with a higher risk grade.


While seeking amendments to the circular, some fund houses through Amfi are likely to ask for clarity if the “diversification” clause will enable equity fund managers to invest in the debt category and vice versa. “I think the intent is good but perhaps some of the modalities could be fine-tuned. There could be some flexibility of investing not necessarily in your own scheme but choosing other schemes of the fund house. It is not always the case that fund you are managing which matches your investment profile,” said Kaustubh Belapurkar, director-manager research, Morningstar India.


In the circular, Sebi has said “in case of dedicated fund managers managing only a single scheme or category, 50 per cent of the compensation shall be by way of units of the scheme/category managed by the fund manager and the remaining 50 per cent can, if they so desire, be by way of units of those schemes whose risk value as per the risk-o-meter is equivalent or higher than the scheme managed by the fund manager.”


Support for circular


Some in the industry favoured the new diktat. Samir Arora, founder and fund manager at Helios Capital, tweeted: “An equity fund manager better be excited with the funds he/she manages. This is not just a job that you are doing without believing in the thesis. If his risk appetite is lower or higher, he is not the right person to manage the fund.”


Kalpen Parekh, president, DSP MF, said: “When we meet any global investor, a very important question each one of them asks us is: Do you invest your own money in your fund that you are recommending to us?”


Protecting low-earners


Industry players also plan to take up the issue of employees whose salary is below the median levels and who could be adversely impacted if they have to park a fifth of their salary in MF schemes.


Conceding that having skin in the game is a good idea, Gupta of Edelweiss AMC said implementing the circular may pose a challenge as it applies to not just senior employees but junior research staff, dealers, and support function heads, as well. “These people don’t earn the kind of money CEOs and CIOs do. It is forcing them to lock 20 per cent of their income for three years. It mandates how much one saves. For a guy earning Rs 15-20 lakh, imagine how difficult it is to put away Rs 3-4 lakh. We are constraining employee cash flows.”


Another industry official said: “Many have several loans and other outgoes. It will be difficult for them to set aside 20 per cent of their salary every month. We will ask Sebi to provide more time in such cases so that they get time to realign.”


Sebi has said the new rules on compensation will come into effect from July 1.

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