The recent SEBI circular pertaining to the skin in the game rule has triggered heated debates in mutual fund circles.

The markets regulator, with effect from July 1, has directed fund houses to pay 20 per cent of salary for some key personnel (includes perks, bonus, non-cash compensation net of income tax and statutory contributions like Employees Provident Fund) in units of mutual fund schemes in which the key employee has a role/oversight. "The compensation in units will be proportionate to the AUM of schemes in which the key employee has role/oversight," SEBI said while excluding ETFs, overnight funds, index funds and existing close-ended schemes from the rule.

Lock-in for 3 years

The units will be locked-in for a minimum period of three years or tenure of the scheme whichever is less. “Units cannot be redeemed during the lock-in period. But the AMC may provide facility to employee to borrow against the units in case of exigencies. Redemption of units within lock-in period will not be allowed on resignation or retirement before attaining superannuation age as defined in the AMC rules,” the SEBI circular said.

To aid diversification of unit holdings, fund managers managing only a single scheme/category of schemes can receive 50 per cent of compensation in units of the scheme/category he or she manages. If they choose, the remaining 50 per cent can be paid in units of schemes with comparable or higher risk as per the risk-o-meter, the circular said.

Noble notion

Though the intention of the circular is laudable, many fund houses, some openly and others privately, flagged difficulties in its implementation. Their grievance is not completely invalid either.

According to SEBI, key employees of an AMC include: Chief Executive Officer, Chief Investment Officer, Chief Risk Officer, Chief Information Security Officer, Chief Operation Officer , Fund Manager(s), Compliance Officer, Sales Head, Investor Relation Officer(s), heads of other departments, dealer(s) of the AMC; Direct reportees to the CEO; Fund Management Team and Research team; and Other employees as identified and included by AMCs and Trustees.

As the circular includes not only senior employees but even junior research staff, dealers and support function heads, the impact on the take-home pay could be a matter of concern.

A staff earning a salary of ₹10 lakh, will be in the bracket of 15 per cent income tax. Also, about 10-12 per cent will be directed towards provident fund contribution.

To cause heavy burden

If this rule takes effect, the concern is that this will further impact the salary by 20 per cent, reducing the take-home pay by almost 50 per cent. This would put a huge burden on a person having commitments such as a housing loan, education loan and medical insurance.

Instead of one hard-and-fast rule for all employees, SEBI could restrict the norm either to the top honchos of the fund houses or to those who earn an annual income of at least ₹50 lakh. For staff who are at the lower levels, SEBI can prescribe that on any investment, 50- 75 per cent of the corpus should be in the scheme they are involved in.

The rule, however, may have some positive outcomes. In some fund houses, schemes run by star managers get preferential treatment in trade execution or inter-scheme transfers. By involving everyone with a role in one or more schemes, this preferential treatment may slow down.

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