Sebi Proposes Adjustments to 'Skin in the Game' Rule for Mutual Fund Employees Amid Compliance Concerns

The Securities and Exchange Board of India (Sebi) has proposed changes to the "skin in the game" rule for mutual fund employees. The aim is to ease compliance, especially for those with lower salaries and operational roles. Currently, key employees like CEOs and fund managers must invest 20% of their annual salary in the funds they manage, with a three-year lock-in period.

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Sebi's consultation paper suggests adjusting the mandatory investment percentage based on salary brackets. Employees earning less than Rs 25 lakh would have no mandatory investment. Those earning between Rs 25-50 lakh would invest 10%, Rs 50 lakh-1 crore would invest 14%, and those earning over Rs 1 crore would invest 18%.

Proposed Changes for Non-Investment Staff

The regulator also proposes reducing mandatory investments for non-investment staff like COOs and sales heads. This change would allow flexibility based on each employee's role within the Asset Management Company (AMC). Currently, all designated employees must adhere to the same investment percentage.

To address issues like delayed compensation and high debt burdens from stock options, Sebi suggests excluding non-cash components like Employee Stock Ownership Plans (ESOPs) from the minimum investment calculation. An industry analysis shows that AMCs pay about 7% of total compensation as non-cash benefits, with only six out of 47 AMCs paying more than 20% in non-cash compensation over the past three years.

Early Release of Units and Stress Testing

Sebi also proposes allowing early release of units when employees resign, subject to certain restrictions. Currently, units remain locked if employees leave before retirement age, except for close-ended schemes. Upon retirement, lock-ins are lifted except for these schemes.

Additionally, Sebi suggests making stress testing results public for all mutual fund schemes, excluding closed-ended ones. To minimise impact on asset allocation, it recommends that 75% of the minimum investment should be in schemes managed by the AMC with equivalent or higher risk compared to liquid schemes.

Sebi is seeking public comments on these proposals until November 21. These changes aim to make compliance easier while maintaining necessary safeguards for mutual fund operations.