SEBI Relaxes Skin-in-the-Game Rules for Mutual Funds. Know the Details Here

As per the rules, the key employees of AMCs are required to invest a minimum of 20% of the salary/ perks/ bonus/ non-cash compensation (gross annual CTC) net of income tax and any statutory contributions i.e. PF and NPS, in the units of Mutual Fund schemes in which they have a role/ oversight.

These investments are made over a period of 12 months on the day of the payment of the salary. Moreover, the investments are locked in for a minimum period of 3 years, or tenure of the scheme, whichever is less. Additionally, the units are subject to clawback (i.e. they are redeemed and credited back to the scheme) in the event of gross violation of code of conduct / fraud / gross negligence by the key employee/s.

SEBI has now relaxed certain requirements based on the recommendation of the mutual fund industry.

Why SEBI relaxed rules for 'skin-in-the-game'

Fund houses had raised concerns that the rule may force employees to invest in an asset allocation plan that may not align with their risk appetite.

For instance, a fund manager of a Liquid Fund will have to invest a substantial portion in the scheme even if his/her investment objective is more suited to an aggressive profile. In addition, the units will be locked in for a period of 3 years, even though the category is meant for short-term investments.

In addition, mandatorily investing a fifth of the compensation in the schemes of the AMC may not be a feasible option for many employees because it will constrain their cashflows. This, coupled with the compulsory lock-in period of three years could make it challenging for such employees to fulfil their financial obligations.

In view of this, SEBI has relaxed the norms for designated employees of AMC, particularly those with lower salaries and those not directly involved in investment function. Read on to know about them:

1) New slab wise investment rules

SEBI's latest circular states that designated employees having gross annual CTC of up to Rs 25 lakh will be exempted from mandatorily investing in schemes of the AMC.

For employees having a CTC of more than Rs 25 lakh, SEBI has introduced multiple slabs depending on the annual income. Additionally, SEBI has offered AMCs the option to include or exclude Employee Stock Ownership Plans (ESOPs) from these calculations.

Accordingly, employees with CTC of over Rs 25 lakh to Rs 50 lakh will have to invest 10% of their net income, employees earning over Rs 50 lakh to Rs 1 crore will be required to invest 14%, while those with CTC of over 1 lakh will have to invest 18%.

In cases where AMC employees do not have ESOPs as part of their CTC, those with CTC of over Rs 25 lakh to Rs 50 lakh will have to invest 12.5% of their net income, employees earning over Rs 50 lakh to Rs 1 crore will be required to invest 17.5%, while those with CTC of over 1 lakh will have to invest 22.5%.

Here is the breakdown of slabs based on gross annual CTC:

2) Relaxation for Category B employees

SEBI has further stated that Category A employees will have to invest in schemes as per the applicable slabs based on their CTC. Category A employees include the CEO, CIO, Fund Managers, Investment research team, Dealers, Chief Risk Officers (CROs), Compliance Officer, and members of the investment committee.

It has however relaxed investment rules for Category B employees as their investment will now be limited to Slab 0 or 1 irrespective of their CTC and will be decided by the AMC based on whether the employee is directly or indirectly related to investment function. Category B employees include Direct reportees to the CEO (excluding Personal Assistant / Secretary and Category A employees), Chief Information Security Officer (CISO), Chief Operation Officer (COO), Sales Head, Investor Relation Officer (IRO), Heads of departments other than investment and risk functions.

3) Employees associated with Liquid Funds

The market regulator also changed the rules for employees associated with Liquid Funds. Such employees will invest as per Slab 1, even if the employee falls under Slab 2 or 3 based on the CTC. They can also invest up to 75% of the amount required to be invested in Liquid Fund in other schemes of the AMC with a higher risk compared to Liquid Fund.

4) Employees reaching retirement age

In case an employee reaches the retirement or superannuation age based on AMC rules, the units will be realised from lock-in and will be available for redemption. However, if the employee resigns or retires before the superannuation age as defined by the AMC, the lock-in period will be reduced to 1 year from the end of employment or the completion of the 3-year lock-in period, whichever is earlier.

5) Disclosure requirement

SEBI has also relaxed the disclosure requirement by the AMCs for the aggregate investment made by their employees in their own schemes on websites of stock exchanges by making it a quarterly requirement instead of current practice of monthly disclosure.

This circular will come into effect from April 1, 2025.

What should investors do?

SEBI's relaxation of certain skin-in-the-game requirements can help address challenges faced by AMCs in complying with the norms. The proposed changes will still hold AMCs in ensuring compliance with the skin-in-the-game requirements but with a more practical approach.

That said, it is important to note that hefty investments by fund houses and/or their employees in its schemes does not guarantee improved performance of the scheme, neither does it make schemes less risky.

Remember that the final responsibility of choosing suitable schemes lies with you, the investor. Know the various risks involved before taking any investment decision. Avoid riskier categories such as small-cap fund, sector/thematic fund, and/or credit risk fund (in case of debt investment), if you are uncomfortable taking very high risk. Do note that even within sub-categories there will be schemes that follow a more aggressive approach compared to its peers, making them unsuitable for certain investors.

Thus, choose schemes carefully after ensuring its suitability to your investment objectives and make informed investment decision.

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DIVYA GROVER is the co-editor for FundSelect, the flagship research service of PersonalFN. She is also the co-editor of DebtSelect. Divya is an avid reader which helps her in analysing industry trends and producing insightful articles for PersonalFN’s popular newsletter – Daily Wealth letter, read by over 1.5 lakh subscribers.
Divya joined PersonalFN in 2019 and has since then used stringent quantitative and qualitative parameters to analyse funds to provide honest and unbiased research to investors. She endeavours to enable investors to make an informed investment decision and thereby safeguard their wealth.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.