Market regulator Securities and Exchange Board of India (SEBI) has mandated that all designated employees of asset management companies (AMC) be paid up to 20% of their monthly compensation in units of the schemes in which they have a role or oversight. According to SEBI, this move would make AMCs accountable towards the interests of unitholders of mutual fund (MF) schemes.
Junior employees below 35 years must invest 10% of their monthly compensation from 1 October 2021 to 30 September 2022, and 15% from 1 October 2022 to 30 September 2023, in the MF schemes they have a role or oversight. This cap will be increased to 20% from 1 October 2023 onwards. This arrangement will cease to apply from the date such junior employees attain the age of 35 years, SEBI says.
A designated employee of the AMC below the age of 35 years, excluding chief executive officer (CEO), head of any department and fund managers, is deemed ‘junior employee’. Other designated employees are mandatorily required to invest 20% of the compensation paid to them from 1 October 2021.
This is part of the SEBI’s skin-in-the-game rules issued earlier in April this year. Under the fresh set of norms for junior employees, the provision would be implemented in a phased manner. The new set of rules will come into effect from 1 October 2021.
In April 2021, SEBI stipulated
that key employees of AMCs should have exposure to schemes they manage. This was to be done by paying a part of their salary in the form of units of the scheme in which they have a role or oversight. The regulator’s move came in the aftermath of the Franklin Templeton fiasco
(where six debt schemes were wound down) and sought to bring in additional accountability.
After representations from the MF industry and mutual funds advisory committee (MFAC), SEBI has clarified specific provisions and apply these ‘skin-in-the-game’ rules for key MF employees ahead of the 1st October deadline.
According to SEBI’s clarifications, the term key employees in the circular associated with the compensation rules refers to designated employees. The phrase ‘paid in the form of units’ shall be read as ‘mandatorily invested in units’. It means a portion of designated employees’ remuneration will have to be mandatorily in the form of units of the scheme they manage.
Designated employees may set off their existing investments in the prescribed schemes as on 28 April 2021, the day new SEBI rules on salaries came into effect, against the required fresh investments. They may set off their units for which the required lock-in period of three years has expired. In such cases, AMC shall ensure that such units are locked in for the further period of three years or tenure of the scheme, whichever is less.
Investment in units of the scheme shall be made on the day of payment of salary, SEBI said, adding that the previous month’s closing AUM shall be taken for apportioning the investment across eligible schemes.
“All non-cash benefits and perks shall be accounted for in cost to the company (CTC) at the perquisite value as per form 16 under Income Tax (I-T) Act, 1961. However, superannuation benefits and gratuity paid at the time of death or retirement shall not be included in the CTC,” SEBI says.
Terms Tweaked By SEBI
SEBI in its new circular changed ‘key employees’ as ‘designated employees’ and rephrased ‘paid in the form of units’ as ‘mandatorily invested in units’.
‘Set Off’ Clause
“Designated employees may set off their existing investments as on 28 April 2021, if any, against the fresh investments as required in the same schemes,” SEBI said.
They “may set off their units, for which the required lock-in period of 3 years is expired, against the fresh investments required to be made in the same schemes as per provisions of the April circular. In such cases, AMC should ensure that such units are locked in for the further period of three years or tenure of the scheme, whichever is less,” the market regulator added.
After the mandatory lock-in period expiry, designated employees can redeem their units in open-ended schemes twice in a financial year, with the prior approval of the compliance officer, it further stated.
Units allotted to the ‘designated employees’ will be subject to clawback in the event of gross violation of code of conduct or fraud or gross negligence by them, as determined by SEBI.
Every scheme would disclose the ‘compensation, in aggregate, paid in the form of units to the ‘designated employees’ on the website of the AMC, the market regulator added.