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SEBI aligns key employees’ pay with interests of mutual fund unit holders

Suresh P Iyengar Mumbai | Updated on April 28, 2021

Regulator directs MFs to pay 20 per cent of overall compensation through units of schemes in which they have an oversight role

In an interesting twist, the Securities and Exchange Board of India (SEBI) has directed mutual funds to pay 20 per cent of the overall compensation paid to key employees through units of mutual fund schemes in which they have an oversight role.

However, Exchange Traded Funds, Index Funds, Overnight Funds and existing close-ended schemes shall be excluded from the new regulations.

Units allotted to the key employees can be claw-backed in the event of a violation of Code of Conduct, fraud, and gross negligence by key employees. Upon clawback, the units shall be redeemed and amount shall be credited to the scheme, said SEBI. Every scheme has to disclose the compensation, in aggregate, paid in the form of units to the Key Employees, it added.

The new norms will come into effect from July 1.

‘Key employees’

In a circular issued on Wednesday, SEBI said that in order to align the interest of the key employees of the AMCs with that of unit-holders of the mutual fund schemes, a minimum of 20 per cent of overall compensation (net of income tax, PF and NPS) of the key employees of the AMCs shall be paid in the form of units of schemes in which they play oversight role.

The compensation paid in the form of units will be proportionate to the AUM of the schemes in which they have a role. Key Employees of the AMCs include CEO, CIO, Chief Risk Officer, Chief Information Security Officer, Chief Operation Officer, fund managers, Compliance Officer, Sales Head, Investor Relation Officers, heads of other departments, and dealers of the AMC.

This apart, key employees reporting directly to the CEO, fund management team and research team and other employees as identified by AMCs and Trustees will also be considered as key employees.

If the compensation paid is in the form of employee stock options, the date of exercising such option shall be considered as the date of such payment, it said. The stock option will be locked-in for 3 years or the tenure of the scheme, whichever is less.

Redemptions

In order to provide diversification for dedicated fund managers managing only a single scheme or similar category of schemes, SEBI said half of the overall compensation can be paid in the form of units of other schemes which has the same or higher risk profile. No redemptions of the said units shall be allowed during the lock-in period, it said.

In times of medical exigencies, key employees can pledge the units alloted and borrow from AMCs. In case a key employee resigns during the lock-in period, redemption of the units will not be allowed in that period. However, in case of retirement on attaining the superannuation age, such units will be released from lock-in and redeemed, except for units in closed-ended schemes.

Published on April 28, 2021

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