Is SEBI Trying To Achieve Level Playing Field By Making The Key Management Personnel To Share Risk And Reward At Par With Unit Holders?


In one of the recent Circular, SEBI has made this statement true by laying down the framework for paying part of the compensation of certain “Key Employees’ (as defined in the circular) of the Asset Management Company (AMC). Such staff would now be paid 20 percentage of the salary in the form of units of the scheme.

SEBI vide its Circular dated April 28, 2021 has tried to link the earnings of Key Employees of the AMC to the performance of the Scheme. They would now receive  20 percentage of their remuneration as units of the scheme in which they have a role /oversight . The Circular is to come into effect from July 01, 2021.

The rationale behind these rules seems to make the Key Employees of the mutual fund more accountable to look after the performance of the schemes. Also, the investors / unit holders will now have more confidence and trust in the Mutual Fund House. The Key Employees who essentially are in charge and responsible for taking investment decisions and run the scheme would be more cautious as their personal fixed income is also linked with the returns which the units (received in the form of compensation) will earn.

However, there are certain major concerns which the Mutual Fund Industry Houses may face in implementing the Circular. Few of such points are summarized below:

1. Definition of Key Employees : The definition as per the Circular is exhaustive to bring almost all staff of the AMC. Ideally the coverage should be restricted to few Senior person such as CEO, CIO and Fund Manager who make investment decisions and are directly connect with the fund management or investment decisions. People like the head of other department like HR, dealing staff, who have no role in making decisions and also people involved at junior level and report to seniors may be carved out. Making 20 per cent of their financial earnings compulsorily as non-cash item seems to create financial burden on such junior level employees.

2. Diversification Clause : As per the Diversification Clause, in case of dedicated fund managers managing only a single scheme or single category of schemes, 50 per cent of such compensation will be by way of units of the scheme managed by the fund manager and the remaining 50 per cent could be by way of units of those schemes whose risk value as per the risk-o-meter is equivalent or higher than the scheme managed by the fund manager. Clarification should be given whether the equity fund managers can invest in the debt category and vice versa.

While the intent of the SEBI by making the Key Employees at par with the unit holders to bear the risk and reward of the scheme seems to be on the principles of accountability; the same needs to be restricted to few ‘KEY’ employees who are really ‘KEY’ in true sense. Also the employee receiving not big pay packages will be forced to park their income as investments and have to replan their expenditure for monthly financial liabilities such as EMI on loan etc. Hence, a 20 per cent salary in the form of units will adversely impact such employees financial stability and create liquidity issues in their hands.

I am hopeful SEBI will surely adopt a practical approach and logically relook at the Rules made in the Circular and thereby try to realign few of the aforesaid issues on the principle of prudence and natural justice.


Author: CA. Ritesh Podar, Mumbai, Maharashtra.  He can be reached at [email protected] or 9833014637.

(The views expressed are personal.)


Author Bio

More Under SEBI

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

May 2021