Not fair game

Recent instances of mutual funds inking sweet deals with company promoters and taking on outsized credit risks in debt funds, have led investors to question if highly-paid money managers are indeed serious about their fiduciary duties. The Securities Exchange Board of India’s (SEBI) latest circular requiring asset management companies (AMCs) to pay their senior staff a part of their compensation in mutual fund units, is an attempt to align their interests with that of investors by ensuring that they eat what they cook. The new rules mandate that senior staff of every AMC receive 20 per cent of their annual compensation in mutual fund units with a three-year lock-in period, with the details disclosed on the AMC website. No doubt, requiring money managers to share in the risks and rewards of investors in their schemes is a more effective way to ensure prudent risk-taking than writing voluminous regulations on where and how they must invest. But SEBI’s circular perhaps goes too far in micro-managing the regulation.

There are a couple of specifics to the new rules that may prove problematic in implementation. One, while it may be logical to insist that AMC personnel at the highest levels such as the CEO, Chief Marketing Officer, Chief Investment Officer, Chief Risk Officer and designated fund managers carve out 20 per cent of their pay towards skin in the game, insisting on identical contributions from junior staff such as research analysts or CEO reportees appears unduly harsh. Top AMC personnel with sizeable net worth may scarcely feel the pinch from parking some of their incremental income in the mandated schemes. But such forced investments can take a heavy toll and impair the personal finances of staff at the lower echelons. To mitigate this, SEBI must consider setting an income threshold for its rules. It would also be fair to restrict the rule only to senior staff who can directly influence fund assets and performance. Two, while top personnel and fund managers investing in their own fund house acts as a vote of confidence, it appears unfair for the regulator to interfere in their personal asset allocation decisions by dictating in which schemes and in what proportions they must invest. It would hardly be ideal for a young manager of a liquid scheme or the elderly manager of a small-cap fund to make high allocations in their own schemes.

Should the rules be applied in their current form, AMCs may end up hiking the pay packages of their senior staff, jacking up their expense ratios and ultimately hurting investor returns. Investors also need to be cautious about over-interpreting these disclosures, as skin-in-the-game mandated by law is unlikely to be as effective as voluntary investments, in signalling confidence.

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