The Optics, Intent and Impact of ‘Skin in the game’ 

After a brief lull, markets regulator Securities Exchange Board of India (SEBI) has fired a fresh salvo at Asset Management Companies (AMCs) or Mutual Fund houses as they are more commonly referred to. Seemingly, with the objective of aligning the interest of key employees of AMCs with the unit-holders of their mutual fund schemes, SEBI has ordained that a minimum of 20 percent of a fund manager’s salary shall be paid in the form of units of mutual fund schemes that they manage. 

Well, not just the fund managers, but also all other key  employees of the AMC such as chief executive officer, chief investment officer, and others identified as key employees are covered under this new rule. And yes, analysts too. These units allotted to them must be locked in for three years, unless the scheme is wound up before that. 

The market regulator has also clarified that the units allotted as a part of the compensation package will be clawed back if such an employee is found violating the code of conduct or involved in fraud or gross negligence. Now, those are the rules. Let us proceed to look at them through the Prism of three key parameters Optics, Intent and Impact.

The Optics of the ‘Skin in the Game’ rules are positive, at least for SEBI. It clearly enforces an image of a regulator on the ball, wanting fund managers to put their Salaries on the line to protect investors interests. The Intent of the ‘Skin in the Game’ rules too seem fine in principle as the ostensible raison d’ etre of this Circular is to protect investor interests. Furthermore, there has been a growing perception in certain circles (not necessarily accurate) that the Fund Managers paychecks are not related to their performances.

It is when one reaches the point of evaluation of the Impact of the ‘Skin in the Game’ rules, that the picture turns hazy. For starters, is it fair to assume that unless a Fund Manager puts down money in the funds they manage, they won’t readily fulfill their professional duties ? 

I, for one, have not met too many AMCs that keep backing or rewarding non-performers. In fact, many of them do invest a fair bit in their own AMC’s schemes voluntarily, but based on their risk rather than job profile and that is a key difference. Furthermore, is there any empirical data based on which the regulator has decided that such a rule will improve the performance of fund managers and simultaneously reduce risk for the investor ? 

And then, there are many in the industry who believe this circular is a muscular response to the flak in the media that the regulator faced for its perceived passive role in the Franklin Templeton debt schemes fiasco.  To conclude, the jury is still out on this one and a lot of iterations appear inevitable before the dust settles on this circular on July 1, 2021 when it is proposed to be made operational.

Ashok Kumar
Head of LKW-India. He can be reached at ceolotus@hotmail.com