Sebi's new rule to create arbitrage
As per Sebi, compensation paid in the form of units need to be proportionate to the asset under management (AUM) of the schemes
image for illustrative purpose
New Delhi A section of mutual fund houses feared that markets regulator Sebi's new framework on compensation will adversely affect their key employee cash flow and make it difficult to retain talent. In addition, the new rule will create regulatory arbitrage in favour of index funds and exchange-traded funds (ETFs) and will result in potential death of active fund management, fund houses said.
On Wednesday, Sebi asked asset management companies (AMCs) to pay at least 20 per cent of gross salary of key employees in the form of the units of the scheme managed by them. The new rule covers all key employees who have been defined as heads of various functions and all employees who are involved in the fund management process fund managers, research teams, and dealers, among others. The rule, aimed at aligning the interest of the key employees of AMCs with the unitholders of the mutual fund schemes, will come into effect from June 1.
As per Sebi, compensation paid in the form of units need to be proportionate to the asset under management (AUM) of the schemes.
Index funds, ETFs, overnight funds and close-ended funds have been exempted from the new rule. Quantum Mutual Fund CEO Jimmy Patel said, "Sebi's circular is arbitrary and illogical, looks like drafted hurriedly as the circular applies to junior staff and other members who are not at all connected with fund management." He further said that not all AMCs pay high cost to key personnel nor everybody as defined under key personnel earns high salary. In fact, it would become difficult for a small fund house to retain talent. In this tough time, it will be difficult to comply with the new framework.
According to him, cash flows of the employees will be adversely affected tremendously due to prior commitments of equated-monthly instalments (EMIs). "This will also create regulatory arbitrage in favour of index funds and exchange-traded funds (ETFs) and will result in potential death of active fund management," Patel added. Edelweiss AMC CEO Radhika Gupta said the circular on skin in the game, while a good idea in spirit, is going to be problematic in implementation. "This circular applies to not just senior employees but junior research staff, dealers, and support function heads. These people don't earn the kind of money CEOs and CIOs (chief investment officers) do," she said.
"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 flow," she added.
