SEBI Defers Implementation of Skin in the Game

Do you seek a professionally managed investment? Are you looking for a suitable option to achieve your short term and long-term financial goals? You may consider putting money in mutual funds where a fund manager takes care of your investment. The Securities and Exchange Board of India (SEBI) regulates India’s capital market and protects investors’ interests in mutual funds.

According to SEBI rules, fund managers and critical AMC personnel are paid a minimum of 20% of their annual compensation through units of mutual fund schemes where they have a role. You have SEBI postponing the implementation of this rule from the July deadline to 01 October 2021. 

Why does SEBI want part of fund managers’ compensation to be paid through mutual fund units?

SEBI wants fund managers to make investment decisions based on the interest of the unitholders in their mutual fund schemes. You have SEBI sending a circular where fund managers and key AMC personnel would get a minimum of 20% of their annual compensation through units of mutual fund schemes where they have oversight. Mutual fund managers and critical AMC personnel have skin in the game after the new SEBI rule, as part of their compensation is invested in mutual fund schemes where they have a role or oversight. 

You have some fund managers of mutual fund schemes chasing returns by taking excessive risk, even against the investment mandate. It could impact the unitholders of mutual fund schemes. However, if mutual fund managers and key AMC personnel get part of their compensation through the units of mutual fund schemes where they have a role, it could lead to better investment decisions. 

You also have a three year lock-in period for these mutual fund units according to SEBI rules. However, fund managers and key AMC personnel may borrow against these mutual fund units for medical emergencies. 

You have the capital market regulator SEBI, postponing the implementation of this rule from the earlier deadline of 01 July 2021 to the new deadline of 01 October 2021. 

How do mutual fund investors benefit if fund managers invest in their schemes?

You have fund managers receiving a part of their compensation through mutual fund units where they have a role. It could lead to the alignment of unitholders’ interest with that of the fund manager. 

For instance, you have cases where debt fund managers have invested unitholders’ money in lower credit quality securities to chase higher yields. It could lead to a stop in such practices, which negatively impact mutual fund investors. 

You have SEBI adding a clause in the circular which penalises fund managers and key AMC personnel for gross negligence and fraud. It prevents mutual fund managers from acting against the interests of unitholders. 

The new SEBI rule could infuse confidence among mutual fund investors as the fund manager also invests in these schemes. It may encourage new investors to invest in mutual funds, increasing mutual fund penetration in India.

Why has SEBI deferred the implementation of skin in the game?

You have SEBI extending the deadline on fund managers’ compensation and key AMC personnel to 01 October 2021. You have the mutual fund industry asking for more time to implement this rule as it involves rejigging the pay structure of fund managers and critical AMC personnel. Moreover, the mutual fund industry faces challenges due to the pandemic, which may have resulted in deferring the implementation of skin in the game. 

Skin in the game may ensure the alignment of unitholders’ interests with that of the fund manager of the mutual fund scheme. Moreover, you also have a clawback clause where units allotted to fund managers and key AMC personnel are clawed back and credited to the mutual fund scheme on gross negligence, violation of the code of conduct and fraud. In a nutshell, after the SEBI rule, mutual fund managers have to act in the best interests of the unitholders of their schemes. 

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in