Sebi Mandate On Key AMC Salary Not A Day Too Soon: Skin In The Game Necessary To Rein In Callousness

The Securities and Exchanges Board of India’s (Sebi) mandate to Asset Management Companies (AMC) to start paying at least 20 per cent of the salary of their key personnel, including the fund manager actively managing a scheme, in the form of units of the schemes they are managing, hasn’t come a day too soon.

And the thaw in favour of such personnel managing but a single scheme that they can be paid 10 per cent of their salary in the form of units they are managing provided the remaining 10 per cent should be of units of the same fund house with similar risk profile is also fair and reasonable.

In the US, stock options for employees, especially those in the higher echelons of management are the norm to ensure they have sufficient skin in the game---alignment of their financial interests with those of shareholders whose funds they are managing.

Franklin Templeton’s unit holders in India are still licking their wounds. Its fund managers were guilty of misspelling, passing off tier I bonds of banks as the equivalent of safe and secure fixed deposits.

And a few years before Franklin Templeton, almost all mutual funds in India were guilty of blithely investing in bonds of Infrastructure Leasing & Financial Services (ILFC) and its myriad subsidiaries and Special Purpose Vehicles (SPV) numbering around 397 whose project costs were alleged to be highly inflated to facilitate skimming off of funds by promoters.

Mutual funds theoretically endowed with research powers should have dug deep and found out the wavered ways of the ILFS promoters.

The market regulator Sebi must be commended for doing what no other country has done.

In other countries, AMC staff invests voluntarily to boost the confidence of the unit holders but in India voluntary measures hardly work barring honorable exceptions like Mukesh Ambani routinely buying Reliance Industries shares from the market to send a reassuring message to the shareholders whereas other promoters lap up with alacrity the preferential allotment route with its implications of concession. Be that as it may.

The Sebi blazed the trail a few years ago by doing the unthinkable----mandating rating for IPOs. Hitherto only debt instruments and schemes were rated in India but the Sebi broke the mould by mandating rating for public issue of equity shares.

It is not as if raters have covered themselves with glory be they in rating of credit instruments or equity but it was the least the Sebi could do in a milieu where investors in IPOs are left to stew in their own juice with caveat emptor being the depressing guiding principle for lay investors.

The tribe of fund managers has risen as a phalanx against the recent Sebi initiative saying 20 per cent non-cash compensation in the form of units will leave very little for other investments including payment of EMI for home loan and household expenses especially given the lock-in period of three years before they can sell the units thus allotted in lieu of salary.

And they apprehend in a manner of self-fulfilling prophesy that there could be a flight of talent from the mutual fund industry if the Sebi does not reverse its diktat.

Stock options came into being as an employee retention technique---key managerial personnel will eschew short term profit boosting measures by having a longer horizon in mind while taking decisions to align with the lock in period of the shares allotted to them.

The idea was to wean them away from the here and now of short term expedients to boost profits inevitable in commission based remuneration regimes. Stock options goad them into thinking about the long term impact of their decisions and also compel them to stay with the employer at least till the vesting period of the shares allotted to them but locked up.

Ironically this argument is being turned on its head by the AMC employees in India when it comes to mandatory 20 per cent compensation in the form of units. This is a self-serving argument, the one Sebi should not pay heed to.

What perhaps it can do is to reduce 20 per cent to 15 per cent to soften the impact of illiquidity inevitable in shares and units especially when they involve minimum lock in period. But it should stand its ground and not rollback what is admittedly a measure that should have been mandated long ago.

The human tendency is to show greater commitment, involvement and empathy when one’s own fortunes especially financial are at stake. When the fund managers are in the same boots of the unit holders their gung-ho decisions are bound to be tempered by caution. Hopefully in its wake there won’t be an encore of Franklin or ILFS fiascos that singed mutual fund investors in India.