Mutual fund houses irked as 'skin in the game' rules set to kick in

Mutual funds might struggle to retain or hire top talent at the middle and lower levels as they implement the capital markets regulator Sebi's circular, which requires key executives to invest in their own schemes beginning October 1.

While the move is aimed at ensuring that key employees of mutual funds have a stake in the funds, popularly known as 'Skin in the Game', industry officials said the implementation of the rule could hit the profitability of asset managers and impact individual financial decisions.

Sebi on Monday relaxed the rules for junior employees. It said executives below 35 years would have to invest only 10% of their compensation in MF units of the fund house in the first year, and 15% in the second year (from October 1, 2022), as against 20% for the other employees. The industry was expecting the regulator to exempt junior employees from these rules and dilute some of the earlier regulations for senior executives.

Heads of mutual funds, who spoke to ET on condition of anonymity, said there could be a flight of talent to other financial services firms unless pay packages are increased. "At middle management levels, many individuals aim to buy a house or have other goals to invest for. Making a compulsory investment reduces their cash flows. Such individuals are bound to seek higher compensation and I already have some feelers," said the CEO at a fund house.

Industry officials said analysts and junior fund managers could consider insurance companies, hedge funds, portfolio managers and foreign broking houses, which do not follow the 'skin-in-the-game' rules.

India is the only country, which mandates fund managers to invest in their own schemes, said Kaustubh Belapurkar, director-fund research, Morningstar India. "India is now also the only country requiring funds to disclose managers' actual compensation amounts."

Legal experts said requirements of skin-in-the-game are usually placed by specific fund houses in global markets.

"This is a classic case of over-regulation by Sebi, especially when the AMCs themselves are required to invest a portion of their funds in their schemes. Further, there are no similar rules for other financial intermediaries such as banks, insurance companies, PMS, AIFs etc which also invest its clients' money in the securities markets," said Anil Choudhary, partner, Finsec Law Advisors. "Singling out employees of AMCs and prescribing a legal mandate to invest is not only too intrusive of freedom of choice to such employees but may impede AMCs to attract and retain talent."

Mutual fund CEOs and sales officials, who spoke to ET on the issue said the requirement to invest in a number of schemes in line with the total assets of the fund house could impact their personal finances. If the fund house has 80% of its assets in debt and 20% in equity, the CEO and functional heads barring the fund management team has to invest, in the same ratio.

"Why should I be forced to invest in liquid funds, when my personal asset allocation does not warrant so? It will give me only 3-4% return," said the sales head of a domestic fund house.