Clarifications with respect to Circular dated April 28, 2021 on ‘Alignment of interest of Key Employees (‘Designated Employees’) of Asset Management Companies (AMCs) with the Unitholders of the Mutual Fund Schemes’

Based on the representations received from the Mutual Fund Industry and recommendations of Mutual Funds Advisory Committee (‘MFAC’), it has been decided to provide clarity on certain provisions and on the applicability of the aforementioned circular.

MUTUAL FUNDS word on Chalkboard with Coffee Cup, view from above

SEBI, vide Circular no. SEBI/HO/IMD/IMD-I/DOF5/P/CIR/2021/553 dated April 28, 2021, has provided that a part of the compensation of Key Employees of the AMCs shall be paid in the form of units of the scheme(s) in which they have a role or oversight.

The term “Key Employees” shall be read as “Designated Employees”.

SEBI clarified that the said circular shall be implemented in a phased manner for junior employees, i.e. 10% in the 1st year and 15% in the 2nd year of implementation of the Circular. It means the Junior Employees shall be required to invest 10% during October 01, 2021 to September 30, 2022 and 15% during October 01, 2022 to September 30, 2023.

Then, all the junior employees shall be required to invest 20% mandatorily from October 01, 2023. However, for this purpose, a designated employee of the AMC who is below the age of 35 years (excluding CEO, head of any department and Fund Managers) shall be deemed as “junior employee”. Thus, the phased implementations shall be ceased to apply from the date such employee attains the age of 35 years.

SEBI further clarified the following:

  • Investment in units of the scheme, shall be made on the day of payment of salary.
  • The previous month’s closing AUM shall be taken for apportioning the investment across eligible schemes.
  • All the non-cash benefits and perks shall be accounted for in CTC at the perquisite value as per Form-16, however, superannuation and gratuity shall not be included in the CTC.
  • If the Designated Employee has availed loan from AMC then such perquisite value of interest shall not be included in the CTC.
  • The Designated Employees can also set off their existing investment against the fresh investments required as per the Alignment Circular in the same schemes. Such investments shall be locked-in for the period of 3 years even if the lock-in period is expired.
  • Redemption of Units – Scheme-wise:

Liquid Schemes: Units of Designated Employee would get automatically redeemed after the expiry of lock-in period.

Open Ended Schemes: After the expiry of mandatory 3 years lock-in period, designated employee shall make an application to Compliance Officer for redemption of the said units. Such applications can be made only twice in a financial year. The Compliance Officer shall decide on the said application within 5 days from the date of receipt of such application.

If approved, then such approval is valid for 10 trading days. And the unexecuted portion, if any, shall not be rolled over on the expiry of the period mentioned of approval. However, a second application can be made within the year as stated in above paragraph.

The Compliance Officer shall maintain all Regulatory checks and take all the required confirmations from the Designated Employees. If the Designated Employee/the AMC is in the possession of any material information which is not yet communicated to investors then such designated employee shall not make any application for redemption to Compliance Officer or the Compliance Officer would not approve such application.

In case of request of redemption to be made by Compliance Officer then it shall be approved by “Chief Executive Officer”.

  • The investment of all the Designated Employees shall be made in the “Growth Option” of the Schemes. In case, the scheme does not have Growth Option then the investment shall be made in the “Reinvestment of Income Distribution cum Capital Withdrawal Option”. Further, if the scheme does not have both the options then the investment shall be made in the “Payout of Income Distribution cum Capital Withdrawal Option”.
  • In Funds of Funds schemes, only Fund Managers of such schemes shall be required to invest.
  • For this purpose, in addition of ETFs, Index Funds, Overnight Funds and existing close ended scheme, SEBI added Funds of Funds investing only in single ETF shall also be covered in the exclusions.
  • In all cases of deferred compensation including Employee Stock Options, the AMC shall decide whether the deduction of 20% of such deferred compensation (perquisite value less taxes), should be on the date of grant or exercise. However, the policy should be same for all Designated Employees of the AMC, in a given financial year.
  • Any unconditional compensation in any form which was granted before the issuance of the Alignment Circular but it is unpaid as on date of the Alignment Circular i.e. April 28, 2021 shall not be included in the CTC.
  • As per the Alignment Circular dated April 28, 2021, in addition to diversification of the unit holdings to dedicated fund managers managing only a single scheme/single category of schemes, shall also be applicable to dedicated fund managers of overseas funds.
  • In case of death of Designated Employee, the units shall be released from the mandatory 3 years lock-in period.
  • AMC hall ensure that necessary audit trail is maintained to verify compliance with the provisions of the Alignment Circular.
  • Units allotted to Designated Employees shall be subject to clawback in the event of gross violation of Code of Conduct/fraud/gross negligence by them, as determined by SEBI.
  • Disclosure is mandatory on the AMC website at monthly aggregate level showing gross investment across all relevant employees in that specific scheme.
  • The modalities with respect to contribution in the close ended schemes by the Designated Employees shall in such a way that the required investment in close ended scheme shall be made in the units of any open ended schemes having risk value equivalent to or higher than the mandated close ended schemes.

It is further clarified that the aforesaid modality shall be adopted also in case of contribution in the interval schemes, schemes having restrictions on individual investments or lump-sum investments or having temporary suspension on subscription or solution oriented schemes (retirement fund, children’s fund, etc).

Moreover, the risk value based on the risk-o-meter of the immediate preceding month shall be considered. And the AMCs and Trustees shall have a policy in place to ensure that such open ended schemes are similar to the mandated close ended schemes in terms of nature of the portfolio.

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Company: Drishti Jyotin & Associates
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I am a qualified Company Secretary and having 7+ years of experience in Company Law, Mutual Fund, Stock Broker, Investment Advisor, PMS and other SEBI Compliances, IPR and Corporate Law. I have worked as Compliance Officer of reputed Stock Broking Company and a reputed Mutual Fund. Now I have starte View Full Profile

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