SEBI Asks MFs To Pay 20% of Key Mutual Fund Employees’ Salary by Way of Scheme Units

Market regulator Securities and Exchange Board of India (SEBI) issued a circular stipulating that minimum of 20% of the salary of the key employees of asset management companies (AMCs) must be paid in the form of scheme units in which they have a role, in an obvious attempt to make them more accountable for their investment decisions and it shows the confidence towards investors. The provisions of this circular shall be applicable with effect from 1 July 2021.
This announcement has come following news reports that some of the key employees of Franklin Templeton AMC are selling their investments held in the schemes that were closed ahead of closure.
The circular indicates that the 20 percent payout that would come in the form of scheme units is as a percentage of the gross salary less of income tax deducted and other statutory contributions like Employees Provident Fund and National Pension Scheme.
To maintain the guideline, SEBI has mandated that index funds, exchange-traded funds, overnight funds and existing close-ended schemes will be excluded from unit allocation. If the employee retires at the age of 60, then the units (excluding units of closed-ended schemes) can be redeemed. The units cannot be sold if the employee resigns or retires before the age of 60 years.
This circular applies to not just senior employees but junior research staff, dealers, and support function heads. These people don’t earn the kind of money CEOs and CIOs do. It is forcing them to lock 20 per cent of their income for 3 years. It mandates how much one saves. For an employee earning 15-20 lakh, imagine how difficult it is to put away Rs 3-4 lakh. They are blocking their cash flows.
The circular says that units allotted to the key employees shall be subject to clawback in the event of violation of Code of Conduct, fraud and gross negligence by them. “Upon clawback, the units shall be redeemed and amount shall be credited to the scheme,” the circular says.
The gap in the circular is that it fails to state that the clawback will work only during the lock-in period. How will the clawback work after the lock-in ceases and key employees begin redeeming their scheme units? This is yet to be cleared.