Securities and Exchange Board of India (SEBI) has proposed amendments to the Mutual Funds Regulations, 1996, aimed at easing compliance requirements for Asset Management Companies (AMCs) under the “skin in the game” framework, which aligns employees’ interests with unitholders. These amendments include reduced lock-in periods for investments made by employees who resign, quarterly disclosure of mandatory investments instead of monthly, and relaxed auto-redemption requirements. Employees associated with liquid fund schemes can now allocate up to 75% of their investments in higher-risk schemes within the same AMC. Additionally, the amendments propose empowering AMC committees to recommend actions in cases of misconduct. Restrictions on redemption post-lock-in periods will also align with updated insider trading regulations. Furthermore, the frequency of stress-testing disclosures for mutual fund schemes will be enhanced to improve transparency. The changes seek to balance compliance obligations while ensuring accountability and investor protection. Public feedback on these proposals has been supportive, and the amendments will be finalized following SEBI’s due process.
Securities and Exchange Board of India
Sub: Amendment to the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 for facilitating ease of doing business for employees of Asset Management Companies (AMCs) with respect to the framework related to “Alignment of interest of the designated employees of the Asset Management Company (AMC) with the interest of the unitholders”
1. Objective
This memorandum seeks approval of the Board for carrying out amendments to the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 (hereinafter referred to as ‘MF Regulations’) for:
- relaxing the regulatory framework related to ‘Alignment of interest of the designated employees of the AMCs with the interest of the unitholders’ (hereinafter referred to as ‘skin in the game requirements’), to facilitate ease of doing business for Mutual Funds.
- mandating disclosure of results of stress testing of mutual fund schemes.
2. Background
2.1. Mutual Funds are regulated through MF Regulations and the circulars issued thereunder including the Master Circular dated June 27, 2024 (‘MF Master Circular’).
2.2. The regulatory framework related to ‘skin in the game requirement’ was prescribed vide erstwhile SEBI circular dated April 28, 2021(presently Clause 6.10 of the MF Master Circular).
2.3. In the Board meeting held on June 29, 2021 (Annexure A), the Board was inter alia apprised of the above regulatory framework and the proposed changes that were required to be carried out in the above framework to provide a glide path for certain employees. Pursuant to the approval of the Board, the changes were notified vide erstwhile SEBI circular dated September 20, 2021.
2.4. Post prescribing abovementioned requirements related to the skin in the game, SEBI prescribed various additional risk management measures for mutual fund schemes including institutional mechanism by AMCs for identification and deterrence of potential market abuse including front-running and fraudulent transactions in securities, inclusion of units of mutual funds under the ambit of SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’), disclosure of stress testing results periodically for certain schemes etc. Such measures are meant to provide suitable disclosures to the investors, prevent any potential market abuse and ensure accountability on part of the AMCs.
2.5. As part of the continuous process of reviewing various regulatory frameworks, SEBI constituted several working groups to recommend measures to simplify and ease compliances under various SEBI Regulations. A working group (‘EODB working group’) was also formed to review the present regulatory framework under the MF Regulations and recommend measures to promote the ease of doing business for Mutual Funds.
2.6. The EODB working group after considering the inputs from the mutual fund industry, provided its recommendations for review of the framework for ‘skin in the game requirements’.
2.7. Based on the feedback received from the industry and internal discussions, a consultation paper dated November 06, 2024 (copy of the consultation paper is placed as Annexure-B) was issued seeking comments from the public. The consultation paper received responses from 19 entities including Department of Economic Affairs (DEA), AMCs and Stock Brokers during the consultation period (public comments are placed at Annexure C). The proposals of the consultation paper were also deliberated by the Mutual Funds Advisory Committee (‘MFAC’) in its meeting held on November 21, 2024.
2.8. The feedback received to the consultation paper is broadly in agreement with the proposals made therein. Further, MFAC was also in agreement with the said proposals.
3. Regulatory changes pursuant to the consultation paper
3.1. Taking into consideration the additional measures prescribed for mutual fund schemes as mentioned at para 2.4 above, feedback received on the consultation paper, recommendations of the MFAC and internal deliberations, certain relaxations are proposed to the present regulatory requirements under ‘skin in the game’. The detailed analysis and the proposals, are placed at Annexure D. The summary of the proposed changes is provided as under:
3.1.1. Slab wise minimum investment amount: The minimum mandatory investment amount under the skin in the game requirement may be reduced from 20 percent and made slab-wise, based on the value of the Cost to Company (CTC) of the employees. Accordingly, two options for applicability of slabs, are proposed as under:
| Slabs based on annual CTC | Minimum percentage required to be invested with inclusion of Employee Stock Ownership Plan (ESOP) component, if any
|
Minimum percentage required to be invested with exclusion of ESOP component
|
| Option | Option A | Option B |
| Slab 0 (Gross CTC below INR 25 lakhs) | Nil | Nil
|
| Slab 1
(Gross CTC above INR 25 lakhs but below INR 50 lakhs) |
10% of gross annual CTC net of income tax and any statutory contributions.
|
12.5% of gross annual CTC net of ESOP component, income tax and any statutory contributions. |
| Slab 2
Gross CTC above INR 50 lakhs but less than INR 1 crore |
14% of gross annual CTC net of income tax and any statutory contributions. | 17.5% of gross annual CTC net of ESOP component, income tax and any statutory contributions. |
| Slabs based on annual CTC | Minimum percentage required to be invested with inclusion of Employee Stock Ownership Plan (ESOP) component, if any | Minimum percentage required to be invested with exclusion of ESOP component |
| Slab 3 (Gross CTC above INR 1 crore) | 18% gross annual CTC net of income tax and any statutory contributions | 22.5% gross annual CTC net of ESOP component, income tax and any statutory contributions. |
In this regard, AMCs may be allowed the discretion to opt for either of the abovementioned options i.e, A or B. Designated employees with no ESOP component as part of their CTC may be covered by AMCs under Option A.
3.1.2. Lower slab rates for non-investment function employees: Employees who are not part of investment management function, may be subject to lower slabs. The proposed slabs based on the designation/role of the designated employees are as under:
| Category | Employees | Proposed Slab |
| Category
A |
CEO, CIO, Fund Managers, Investment Research team, Dealers, Chief Risk Officer (CRO), Compliance Officer, Members of the Investment Committee of AMC | Slab applicable based on the CTC of the employee, as proposed at para 3.1.1 above. |
| Category
B
|
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(s) (IRO), Heads of other departments | Slab 0 or Slab 1, irrespective of the CTC, as decided by AMC based on the activity being performed by the employee.
|
3.1.3. Investments by employees associated with liquid schemes: For designated employees associated with liquid schemes, it is proposed as under:
a. For dedicated designated employees associated with liquid fund schemes only, Slab 1 as proposed at para 3.1.1 above may be considered even if the designated employee falls in either Slab 2 or Slab 3 based on the CTC, for compliance with skin in the game requirements.
b. For designated employees associated with other schemes in addition to liquid fund scheme, Slabs based on the CTC of the employee as proposed at para 3.1.1 above may be considered.
c. To reduce the impact on asset allocation, up to 75 percent of the minimum investment amount required to be invested in liquid fund schemes may be allowed to be invested in schemes, with equivalent or higher risk as compared to liquid schemes, of the same Mutual Fund. This shall be applicable for designated employees associated with only liquid fund scheme as well as for designated employees associated with other schemes in addition to liquid fund scheme, and shall be with respect to only the quantum required to be invested in liquid fund schemes.
d. Post expiry of lock-in period of investments in liquid schemes, the requirements of auto redemption may be relaxed and aligned with the requirements applicable for other schemes i.e., employee shall have the discretion of setting off against new investments or continuing with/ redeeming his investments.
3.1.4. Lower lock in period for employees who have resigned: Once an employee resigns or retires from any AMC before attaining the age of superannuation as defined in the AMC service rules, the requirement of lock in period for the investment, may be reduced from 3 years to 1 year from the end of the employment or completion date of 3 year lock in period, whichever is earlier.
3.1.5. Frequency of disclosures: The frequency of disclosure of the compensation mandatorily invested under skin in the game requirements by designated employees, in aggregate, may be reduced from end of every month to end of every quarter on the platform of Stock Exchanges, instead of on AMC’s website, within 15 days from the end of each quarter.
3.1.6. Claw back of units: In case of any violation of the code of conduct under the MF Regulations, fraud, gross negligence by designated employee the Nomination and Remuneration Committee of an AMC may be empowered to do the preliminary examination and provide recommendations to SEBI for consideration, after seeking approval from Trustees. For AMCs where Nomination and Remuneration Committee is not formed, an equivalent body under the Board of AMC may be empowered to do the preliminary examination and provide recommendations to SEBI for consideration after seeking approval from Trustees.
3.1.7. Requirements regarding redemption of investments after the lock in period of 3 years: The current restrictions on redemption of investments made under the skin in the game requirements, post expiry of the lock in period of 3 years, may be aligned with the requirements under the amended PIT Regulations (the amendment includes Mutual Fund units under the PIT Regulations). Accordingly, the following changes are proposed:
i. The current restriction on number of redemption requests in a financial year and prior approval of compliance officer for skin in the game investments, may be relaxed for redemption transactions after the expiry of the lock in period. However, the restrictions applicable under PIT Regulations i.e., restriction on trade in closure period and requirement of pre-clearance from compliance officer when closure period is not applicable, may be applicable for such transactions. Accordingly, the designated employee shall be free to redeem the units at any time and any number of times, subject to the requirements as applicable under PIT Regulations.
ii. For mandatory subscription/investment in the units of mutual funds under skin in the game requirements, relaxation may be provided from the requirements of pre-clearance under Clause 6 of Schedule B1 of PIT Regulations.
3.2. Presently, as mentioned at para 2.2 above, the regulatory framework related to ‘skin in the game’ is prescribed under Clause 6.10 of the MF Master Circular. In order to prescribe the relaxed framework related to ‘skin in the game requirement’, it is proposed to incorporate a specific enabling provision in the MF Regulations. As regards the changes proposed at Annexure D, the same may be implemented by way of issuance of a circular.
3.3. The enabling provision proposed to be incorporated into the MF Regulations, for regulatory framework related to ‘Alignment of interest of the designated employees of AMC with the interest of the unitholders’ is provided below:
Excised. Amendment to SEBI (Mutual Funds) Regulations, 1996, shall be notified after following the due process.
3.4. Apart from the above, the consultation paper also included a proposal for disclosure of results of stress testing for all schemes of mutual funds. Presently, while all mutual fund schemes (excluding close ended and interval schemes) are required to conduct stress testing at least on a monthly basis, the requirement of disclosure of stress testing results is mandatory only for small cap and mid cap fund schemes. In view of the relaxations from the requirements of ‘skin in the game’ as proposed above, it may be prudent that the investors are aware of the risks associated with all mutual fund schemes. The comments received on the proposal are mixed in nature with majority being in agreement with the proposal and some not in favour of mandatory disclosure of stress test results. MFAC also broadly agreed with the proposal and suggested that SEBI may consider mandating separate disclosure frequencies for equity and debt schemes.
3.5. Considering the above, it is proposed that the disclosure of stress testing results may be mandated for mutual fund schemes in addition to small cap funds and mid cap funds. The manner, frequency and formats for disclosures may be specified, in consultation with AMFI.
3.6. Presently, the regulatory requirement of conducting stress test for mutual fund schemes is prescribed under Clause 2.3.2.1 (iii) of Annexure 1 of the MF Master Circular. In order to prescribe additional requirements including disclosures related to stress testing of mutual funds schemes, it is proposed to incorporate a specific enabling provision in the MF Regulations. The detailed framework in this regard may be prescribed, in consultation with AMFI, by way of a circular.
3.7. The enabling provision proposed to be incorporated into the MF Regulations related to stress testing is provided below:
Excised. Amendment to SEBI (Mutual Funds) Regulations, 1996, shall be notified after following the due process.
4. Proposal for consideration and approval of the Board
4.1. The Board may consider and approve the proposal outlined in paragraph 3.2, 3.3, 3.5, 3.6 and 3.7 above. Draft amendment to the SEBI (Mutual Funds) Regulations, 1996, and the draft notification for the proposed amendment are placed at Annexure D1 and Annexure D2 respectively.
4.2. The changes to the regulatory framework related to ‘skin in the game requirement’ as proposed at Annexure D, may be implemented by way of issuance of a circular.
4.3. The applicability of requirements related to stress testing for mutual funds scheme and the manner including frequency and formats of disclosures may be specified after further deliberations with the industry by way of a circular.
4.4. A reasonable time may be provided for implementation of the proposals.
4.5. The Board may authorize the Chairperson to carry out suitable amendments to the regulations and to take any other consequential or incidental steps for implementation of the decisions of the Board.
Annexure A
This has been excised for reasons of confidentiality.
Annexure B
Consultation paper is available on SEBI website www.sebi.gov.in at Reports & Statistics» Reports» Reports for Public Comments
Annexure C
This has been excised for reasons of confidentiality.
Annexure D
Proposed changes to the regulatory framework of skin in the game
1.1. Minimum investment amount
1.1.1. Current requirements
AMCs are required to invest a minimum of 20% of the salary/ perks/ bonus/ non-cash compensation (gross annual cost to company (CTC)) net of income tax and any statutory contributions (i.e. PF and NPS) of the designated employees of the AMCs in units of mutual fund schemes in which they have a role/oversight. CTC includes all noncash benefits and perks at the perquisite value as per the Form 16 under Income Tax Act, 1961. However, superannuation benefits and Gratuity paid at the time of death/retirement are not included in the CTC.
1.1.2. Proposals in consultation paper
i) The minimum mandatory investment amount may be reduced from existing requirement of 20 percent and made applicable slab-wise, based on the CTC of the employees. The proposed slabs are as under:
| abs based on annual CTC | Minimum percentage required to be invested with inclusion of Employee Stock Ownership Plan (ESOP) component, if any
|
Minimum percentage required to be invested with exclusion of ESOP component
|
| Option | Option A | Option B |
| Slab 0 (Gross CTC below INR 25 lakhs) | Nil | Nil
|
| Slab 1
(Gross CTC above INR 25 lakhs but below INR 50 lakhs) |
10% of gross annual CTC net of income tax and any statutory contributions.
|
12.5% of gross annual CTC net of ESOP component, income tax and any statutory contributions. |
| Slab 2
Gross CTC above INR 50 lakhs but less than INR 1 crore |
14% of gross annual CTC net of income tax and any statutory contributions. | 17.5% of gross annual CTC net of ESOP component, income tax and any statutory contributions. |
| Slabs based on annual CTC | Minimum percentage required to be invested with inclusion of Employee Stock Ownership Plan (ESOP) component, if any | Minimum percentage required to be invested with exclusion of ESOP component |
| Slab 3 (Gross CTC above INR 1 crore) | 18% gross annual CTC net of income tax and any statutory contributions | 22.5% gross annual CTC net of ESOP component, income tax and any statutory contributions. |
ii) For designated employees, AMC may be given an option to choose Option A or Option B. For designated employees with more than 20 percent non-cash component of the CTC, the non-cash component shall be included in the calculation of minimum investment amount and the respective slabs under Option A shall be applicable based on CTC.
1.1.3. Public Comments
i) While the comments received are majorly in favour of the proposal, there are some modifications suggested. The summary of the comments is as under:
a) The slabs may be simplified to ensure ease of compliance (i.e., lesser slabs, lesser deduction percentage per slab etc.). It is further suggested that the non-cash component especially Employee Stock Ownership Plan (ESOPs), may be removed from the calculation of minimum investment amount. It is stated that the CTC of the employee changes due to the variation in value of non-cash component especially ESOPs and any change in slabs would mean rework even for past allocations etc. which will make the entire process cumbersome and prone to errors.
b) Some entities suggested revoking the skin-in-the-game investments altogether or considering a flat rate of 10 percent for all designated employees. In such a scenario, in the event of violation of code of conduct, fraud, gross negligence by Designated Employees, they may be suitably penalised.
c) It has been suggested by one entity that the first 20% of the non-cash components of the CTC could be exempted, and a flat rate of 12.5% could be applied on the value exceeding 20% of the CTC at the time of exercise.
1.1.4. Consideration of issues
i) The proposal was also deliberated by MFAC wherein the view was that proposed slabs can be considered to be further simplified and non-cash components other than ESOPs, should be considered for calculation of minimum investment amount and ESOPs may be altogether removed from the calculation of minimum investment amount.
ii) In line with MFAC recommendation, to ensure ease of compliance and simplify the calculation of minimum investment amount under skin in the game, it is proposed that non-cash component other than ESOPs, may be considered similar to cash component for the calculation of minimum investment amount under skin in the game requirement.
iii) There may be a merit in the argument that the valuation of ESOPs may vary over the financial year which can lead to change in applicable slab of the employee and pose operational challenges in deciding the investment amount under skin in the game. Therefore, it may be desirable for the AMCs to have an option to exclude ESOPs from the calculation of minimum investment amount under skin in the game requirements.
iv) Accordingly, ESOPs may be allowed to be excluded from the calculation of minimum investment amount without any upper limit (proposed as 20 percent in consultation paper). Accordingly, slabs as proposed under Option B may be made applicable based on the annual CTC net of income tax, statutory contributions and ESOPs.
v) This proposal would reduce the minimum investment amount for employees who have ESOPs component, more than 20 percent, as percentage of the annual CTC. For employees with ESOPs component, less than 20 percent of the annual CTC, higher slab percentage under Option B already compensate for the reduced investment due to exclusion of ESOPs from the computation.
vi) As regards the suggestions related to mandating lower percentage for investments under each slab or a common slab of lesser percentage, the review of the skin in the game framework had been primarily undertaken to address concerns regarding the impact on the designated employees with lower in-hand salary. As may be seen at para 1.1.2 above, the proposed slabs would reduce the minimum investment requirement for designated employees with gross CTC below INR 25 lakhs (Slab 0), from present 20 percent to 0 percent, for designated employees with gross CTC above INR 25 lakhs but below INR 50 lakhs (Slab 1), from present 20 percent to 10 percent and for mid-level employees, with gross CTC between INR 50 lakhs and INR 1 crores (Slab-2), from present 20 percent to 14 percent. Considering the above, any further dilution of minimum investment amount may not sufficiently align the interest of the designated employee with the interest of the unitholders.
1.1.5. Proposal:
In view of the above, the following is proposed:
i) The minimum mandatory investment amount may be reduced from 20 percent and made applicable slab-wise, based on the CTC of the employees. The following slabs may be made applicable based on the gross annual CTC of the employees:
| Slabs based on annual CTC | Minimum percentage required to be invested with inclusion of ESOPs, if any | Minimum percentage required to be invested with exclusion of ESOPs |
| Option | Option A | Option B |
| Slab 0 (Gross CTC below 25 lakhs) |
Nil | Nil |
| Slab 1 (Gross CTC above 25 lakhs but below 50 lakhs) |
10% of gross annual CTC net of income tax and any statutory contributions. | 12.5% of gross annual CTC net of income tax, any statutory contributions and ESOPs. |
| Slab 2
Gross CTC above 50 lakhs but less than 1 crore |
14% of gross annual CTC net of income tax and any statutory contributions. | 17.5% of gross annual CTC net of income tax, any statutory contributions and ESOPs. |
| Slab 3 (Gross CTC above 1 crore) | 18% gross annual CTC net of income tax and any statutory contributions | 22.5% of gross annual CTC net of income tax, any statutory contributions and ESOPs. |
Note: Designated employee with no ESOP component as part of their CTC to be covered by AMCs under Option A.
ii) For designated employees, AMC may be given an option to choose Option A or Option B.
1.2. Applicability on Designated Employees
1.2.1. Current requirements
i) All Designated Employees are required to invest same percentage of compensation in mutual funds schemes where they have role/oversight.
ii) Designated Employees of the AMC include Chief Executive Officer (CEO), Chief Investment Officer (CIO), Chief Risk Officer (CRO), Chief Information Security Officer (CISO), Chief Operation Officer (COO), Fund Manager(s), Compliance Officer, Sales Head, Investor Relation Officer(s) (IRO), heads of other departments, Dealer(s) of the Asset Management Companies (‘AMCs‘), direct reportees to the CEO (excluding Personal Assistant/Secretary), Fund Management Team and Research teams, other employees as identified & included by AMC and Trustees.
1.2.2. Proposals in consultation paper
i) Instead of having the same percentage of contribution for all designated employees at the same level, such employee who are not part of investment management function and are included in the designated employee definition, may be subjected to a lower percentage of mandatory investments.
ii) The following slabs may be made applicable:
| Employees
|
Proposed Slab |
|
• CEO • CIO • Fund Managers • Investment Research team • Dealers • Chief Risk Officer (CRO) • Compliance Officer • Members of the Investment Committee
|
Slab applicable based on the CTC of the employee as proposed at para 1.1.2.(i) above. |
|
• Direct reportees to the CEO (excluding Personal Assistant / Secretary |
Slab 1 i.e., 12.5%/10%, irrespective of the CTC |
|
• Chief Information Security Officer (CISO) • Chief Operation Officer (COO) • Sales Head • Investor Relation Officer(s) (IRO) • Heads of other departments
|
Slab 0 or Slab 1, irrespective of the CTC, as decided by AMC based on the activity being performed by the employee. |
1.2.3. Public Comments
i) While the comments received are majorly in favour of the proposal, there are some modifications suggested. The summary of the comments received is as under:
a) Considering the critical role played by the CRO and Compliance Officer in managing risk and ensuring legal compliance for the schemes, the proposal of slabs based on CTC for CRO and CO are found to be appropriate. However, it is also suggested by some that CEO, CRO and CO should be placed in Slab 2 as they are not involved in investment function.
b) It has been stated in one of the comments that when a department head resigns, the second-level person is often temporarily marked as a direct reportee to the CEO. In such cases, the AMC should have the flexibility to determine the appropriate slab for the employee based on the critical role they are performing during the interim period. Hence, the direct reportees to the CEO should be placed under either Slab 0 or Slab 1, as decided by the AMC based on the specific activities and criticality of the role performed by the employee. On the other hand, it is suggested in some comments that no discretion should be given to the AMC and a uniform structure should be prescribed (whether nil or otherwise) to ensure uniform implementation across the industry.
1.2.4. Consideration of issues
i. The proposal was also deliberated by MFAC, and it was in agreement with the proposal.
ii. Considering the critical role played by the CEO, CRO and Compliance Officer in managing overall operations, risk and ensuring legal compliance for the schemes, the slabs based on CTC may be made applicable for CEO, CRO and CO.
With respect to the proposal of AMCs to have discretion regarding the decision of applicable slabs based on the role of the employee in the company, the same is with an intent to aid in dealing with the structural differences that may exist amongst various AMCs due to the difference in their size, governance structure, etc. However, it may be emphasised that AMCs, while using the discretion regarding application of suitable slabs, need to ensure that the employee who is directly or indirectly related to the decision of investments, is considered under Slab 1.
iii. Further, there is merit in the suggestion that AMCs may be given discretion to choose the applicable slabs of direct reportees to the AMC’s CEO based on the role of the designated employee in the AMC. Accordingly, in order to simplify applicable slabs, it is proposed that AMCs may have the discretion to choose the applicable slabs of direct reportees to the AMC’s CEO based on the role of the designated employee in the AMC.
1.2.5. Proposal:
i) It is proposed that the slabs applicable for designated employees should be decided based on the role of the employee in the AMC. The proposed slabs are as under:
| Employees
|
Proposed Slab |
|
• CEO • CIO • Fund Managers • Investment Research team • Dealers • Chief Risk Officer (CRO) • Compliance Officer • Members of the Investment Committee
|
Slab applicable based on the CTC of the employee as
proposed at para 1.1.2.(i) above. |
|
• Direct reportees to the CEO (excluding Personal Assistant / Secretary |
Slab 1 i.e., 12.5%/10%,
irrespective of the CTC |
|
• Chief Information Security Officer (CISO) • Chief Operation Officer (COO) • Sales Head • Investor Relation Officer(s) (IRO) • Heads of other departments
|
Slab 0 or Slab 1, irrespective of the CTC, as decided by AMC based on the activity being performed by the employee. |
1.3. Liquid fund schemes
1.3.1. Current requirements
i) Currently, while overnight fund schemes investing in overnight securities having maturity of one day, have been exempted from compliance with requirements under skin in the game, liquid fund schemes, investing in debt and money market securities with maturity of up to 91 days, are covered under its ambit.
ii) Further, in case of dedicated fund managers managing only a single scheme / single category of schemes, 50% of the minimum investment amount of the compensation shall be by way of units of the scheme/category managed by the fund manager and the remaining 50% can, if they so desire, be by way of units of schemes whose (a) risk value as per the risk-o-meter is equivalent or higher than and (b) whose underlying portfolio is of similar nature as, the scheme managed by the concerned fund manager.
1.3.2. Proposals in consultation paper
i) For designated employees associated with liquid fund schemes, Slab 1 as proposed para 1.1.2.(i) above may be considered irrespective of the CTC of the employee, for compliance with skin in the game requirements.
ii) Further, to reduce the impact on asset allocation, 75 percent of the minimum investment amount may be allowed to be invested in schemes, managed by the AMC, with higher risk as compared to liquid fund schemes.
Apart from the above, comments were sought on whether the above two relaxations should be granted even though liquid fund schemes carry credit risk.
1.3.3. Public Comments
i) While the comments received are broadly in favour of the proposal, there are some modifications suggested. The summary of the comments received is as under:
a. As the liquid fund schemes are meant for short-term investments, the proposed relaxations will allow for personal asset allocation of related designated employees from getting adversely affected and thus, should be granted, even though liquid funds schemes carry credit risk.
b. It was suggested in one of the comments that investments required to be invested in liquid schemes, overnight schemes or money market schemes, may be allowed to be switched to other higher risk category funds during the 3 year lock in period. It was further suggested by one entity that proposed relaxation may be extended to designated employees who are part of debt investment team and not managing liquid funds directly.
c) Some entities suggested that the requirement of auto redemption of investments in liquid funds after the expiry of lock-in period may be removed as auto redemption of investments leads to tax implications. Thus, as applicable for investments made in schemes other than liquid funds, the designated employees may be allowed to set off the additional investment requirements with the existing investments in liquid funds or to continue/redeem such investments, as per the requirements of the employee.
1.3.4. Consideration of issues
i) The relaxation is proposed to be provided for designated employees managing or associated with the liquid fund schemes. Designated employees who are associated with other schemes in addition to the liquid scheme, may invest up to 75 percent of the proportionate amount required to be invested in liquid funds, based on AUM managed by such designated employee, in other schemes with equivalent or higher risk.
ii) Further, the relaxations are proposed to be provided only for liquid schemes as such schemes are meant for short term parking of money. As regards the suggestion to switch to other schemes during lock in period, the same will not serve the purpose of alignment of the interest of the designated employee with the unitholders of liquid schemes.
iii) As regard the requirement of auto redemption of investment in liquid funds under skin in the game after the expiry of the lock-in period, the same was introduced on the request of the industry to provide instant liquidity and to facilitate redemption of investments in such schemes without the requirement of obtaining pre clearance from the compliance officer. However, due to changes in the applicable tax laws, the designated employee may prefer to continue with investments made in liquid funds or set off the requirement of fresh investment in liquid funds with the existing investments. Since investment in schemes other than liquid funds are already allowed to be set off against the requirement of fresh investment, it is proposed that after the expiry of lockin period, the requirement of auto redemption of investments in liquid scheme may be relaxed. Thus, the requirements may be aligned with the requirement applicable for investment made in scheme other than liquid funds under the skin in the game requirements.
1.3.5. Proposal:
In view of the above, the following is proposed:
i) For dedicated designated employees associated with liquid fund schemes, Slab 1 as proposed at para 1.1.5.(i) above may be considered even if the designated employee falls in either Slab 2 or Slab 3 based on the CTC, for compliance with skin in the game requirements. This relaxation shall not be applicable for designated employees associated with other schemes in addition to liquid fund scheme.
ii) For designated employees associated with other schemes in addition to liquid fund scheme, Slabs based on the CTC of the employee as proposed at para 1.1.5 (i) above may be considered.
iii)Further, to reduce the impact on asset allocation, up to 75 percent of the minimum investment amount required to be invested in liquid fund schemes may be allowed to be invested in schemes, managed by the AMC, with higher risk as compared to liquid fund schemes. This shall be applicable for designated employees associated with only liquid fund scheme and also for designated employees associated with other schemes in addition to liquid fund scheme, only with respect to the quantum required to be invested in liquid fund schemes.
iv) As regards the post expiry lock-in period of investments in liquid schemes, the requirements of auto redemption may be relaxed and aligned with the requirements applicable for other schemes i.e., employee to have the discretion of setting off against new investments or continuing / redeeming his investments made under skin in the game requirements.
1.4. Lock-in after resignation or retirement of the employee
1.4.1. Current requirements
Currently, redemption of units is not permitted during the lock-in period of 3 years in case of resignation or retirement of an employee before attaining the age of superannuation. However, in case of retirement on attaining the superannuation age, such units can be released from the lock-in and the designated employee is free to redeem the units, except for the units in close ended schemes where the units shall remain locked in till the tenure of the scheme is over.
1.4.2. Proposals in consultation paper
i) Once the employee has resigned or retired from the AMC before attaining the age of superannuation as defined in the AMC service rules, the requirement of lock-in period, for the investments made in compliance with the applicable requirements, may be reduced to 1 year from the end of the employment or completion date of 3 year lock-in period, whichever is earlier.
ii) Apart from the above, comments were sought on whether the lock-in period of 3 years should be retained for schemes with higher risk such as equity schemes, credit risk debt fund etc.
1.4.3. Public Comments
i) The comments received were broadly in agreement with the proposal of reduced lockin period after the employee has resigned or retired from the AMC before attaining the age of superannuation as defined in the AMC service rules.
ii) Most of the entities were not in favour of retaining 3 years lock-in period for schemes with higher risk such as equity schemes, credit risk debt fund etc. and suggested that requirements should be made applicable uniformly for all schemes and as one year is sufficient time period for any risk event to be occur.
It was however suggested in one of the comments to retain the 3 years lock-in period for higher risk schemes such as equity schemes, credit risk debt fund etc., and consider allowing staggered withdrawals from the mutual fund schemes over 3 years may be explored.
1.4.4. Consideration of issues
In view of the feedback received and to facilitate ease of doing business for AMCs and designated employees, as lock-in period of 1 year after the resignation of the employee may be sufficient for the purpose of aligning the interest of the employee with the unitholder for a reasonable period and thus,, the existing lock-in period of 3 years may be considered to be relaxed for all mutual funds scheme. Accordingly, the requirement of lock-in period may be reduced from 3 years to 1 year for employees who resign or retire from an AMC before attaining the age of superannuation as defined in the AMC service rules.
1.4.5. Proposal
In view of the above, it is proposed that once an employee has resigned or retired from the AMC before attaining the age of superannuation as defined in the AMC service rules, the requirement of lock-in period, for the investments made in compliance with the applicable requirements, may be reduced to 1 year from the end of the employment or completion date of 3 year lock-in period, whichever is earlier.
1.5. Disclosure of aggregate amount
1.5.1. Current requirements
As per the present regulatory framework, every scheme is required to disclose the ‘compensation, in aggregate, mandatorily invested in units for the Designated Employees’, on the website of their AMC. Such disclosure is required to be made on monthly basis at aggregate level showing the total investment across all relevant employees in that specific scheme.
1.5.2. Proposals in consultation paper
i) The frequency of disclosure of the investments, made under skin in the game requirements, may be reduced from end of every month to end of every quarter.
ii) The above disclosure may be made within 15 days from the end of each quarter.
iii) Since the disclosures would be required to be made quarterly, the same may be aligned with the quarterly disclosures required to be made under SEBI (Prohibition of Insider
Trading) Regulations, 2015 (‘PIT Regulations’) and the AMC may be required to disclose the investments, under the requirement of skin in the game, on the platform of Stock Exchanges instead of on AMCs’ websites, within a time period as may be specified for disclosure of holdings of Designated Persons under the PIT Regulations.
1.5.3. Public Comments
While the comments are broadly in agreement with the proposal, it is suggested in one of the comments that the required disclosure for skin-in-the-game investments may be continued to be made on the AMCs’ websites and not on the platform of stock exchanges.
1.5.4. Consideration of issues
i) MFAC was of the view that in addition to the disclosure on stock exchanges’ websites, AMCs may continue to voluntarily disclose the same on its website.
ii) The disclosures are proposed to be made on the websites of stock exchanges so as to align with the disclosure requirements specified under the PIT Regulations. However, the AMCs shall have the discretion to continue to disclose the same on their websites.
1.5.5. Proposal:
In view of the above, the following is proposed:
i) The frequency of disclosure of the investments made under skin in the game requirements, may be reduced from end of every month to end of every quarter.
ii) The above disclosure may be made within 15 days from the end of each quarter on the platform of Stock Exchanges.
1.6. Clawback:
1.6.1. Current requirements
Units allotted to the Designated Employees under skin in the game requirement are subject to clawback in the event of any violation of Code of Conduct under the MF Regulations, fraud, gross negligence by them, as determined by SEBI. Upon clawback, the units are required to be redeemed and amount is required to be credited to the scheme.
1.6.2. Proposals in consultation paper
For the requirement of claw back for violation of the provisions of the code of conduct for mutual funds, Nomination and Remuneration Committee of AMC may be empowered to do the preliminary examination and provide recommendations to SEBI for consideration. For AMCs where Nomination and Remuneration Committee is not formed, an equivalent body under the Board of AMC may be empowered to do the preliminary examination and provide recommendations to SEBI for consideration.
1.6.3. Public Comments
While the majority were in agreement with the proposal, some changes were also suggested. The summary of the comments is as under:
a) Many were of the view that as NRCs of AMCs can have different views, the decision regarding clawback should be left to SEBI for consistency across industry.
b) On the other hand, there were others who feel that decision regarding clawback of the minimum investment amount should be delegated to the NRC of the AMC and the same may be reported to SEBI only for information. It is suggested that by empowering the NRC to make the clawback decisions, the process can be handled more effectively, with the appropriate oversight and decision-making authority within the AMC. The reporting to SEBI will also provide the necessary regulatory oversight and transparency.
c) Similarly, there are some comments wherein it is stated that management of the AMC should be empowered to take decision of clawback based on the facts of the case, and details of such clawback may be intimated to the Board of AMC and Trustees and to SEBI through the regular reporting channels. Additionally, SEBI may take action (including further clawback) in case of any non-compliance as stated above
1.6.4. Consideration of issues
i) The proposal was also deliberated by MFAC and the committee was of the view that decision of clawback should rest with the Board of AMC and Trustees.
ii) In this regard, in case of violation of code of conduct which is part of MF Regulations, complete delegation to the Nomination and Remuneration Committee of AMC or the Board of AMC/ Trustees, may not be desirable. Hence, it is proposed that for the requirement of claw back in case of violation of the provisions of the code of conduct, fraud, gross negligence by designated employee, NRC of the AMCs may be empowered to do the preliminary examination and provide recommendations to SEBI for consideration, after seeking approval from Trustees.
1.6.5. Proposal:
In view of the above, the following is proposed:
For the requirement of claw back for violation of the provisions of the code of conduct for mutual funds, fraud, gross negligence by designated employee, Nomination and Remuneration Committee of AMC may be empowered to do the preliminary examination and provide recommendations to SEBI for consideration, after seeking approval from Trustees. For AMCs where Nomination and Remuneration Committee is not formed, an equivalent body under the Board of AMC may be empowered to do the preliminary examination and provide recommendations to SEBI for consideration after seeking approval from Trustees.
1.7. Restriction on redemption of lock-in units after the expiry of lock-in period
1.7.1. Current requirements
i) In terms of Clause 6.10.2 of the MF Master Circular, after the expiry of the mandatory lock-in period of 3 years, Designated Employees can redeem their units in open ended schemes twice in a financial year, with the prior approval of the Compliance Officer of AMC.
ii) No redemptions of the units are allowed during the lock-in period. However, AMCs may decide to have a provision of borrowing from the AMCs by Designated Employees against such units, in exigencies such as medical emergencies or on humanitarian grounds, as per the policy laid down by the AMCs.
iii) Where the concerned Designated Employee is in possession of any material information, which is not yet communicated to investors and which could materially impact the NAV / interest of unitholders, such Designated Employee is not allowed to make application for redemption or submit redemption request during such period. Further, where the AMC is in possession of any material information, which is not yet communicated to investors and which could materially impact the NAV / interest of unitholders, Compliance Officer is required to not grant an approval for such application.
iv) Clause 6 of Schedule B1 of PIT Regulations specifies the requirement of pre clearance when closure period is not applicable for trading in mutual funds units by Designated Persons and their immediate relatives including at the time of initiation of systematic transactions. With respect to the applicability of the said requirement on transactions in units by the Designated Persons pursuant to the mandatory requirement under skin in the game requirements, it is mentioned that it shall be specified by the Board.
1.7.2. Proposals in consultation paper
i) The requirement of restriction on number of redemption requests in a financial year and approval from compliance officer may be relaxed for redemption transactions after the expiry of the lock-in period. However, the restrictions applicable under PIT Regulations (i.e., restriction on trade in closure period and the requirement of preclearance from compliance officer when closure period is not applicable) may be made applicable for such transactions.
ii) For mandatory subscription/investment in the units of mutual funds under skin in the game requirements, relaxation may be provided from the requirements specified under Clause 6 of Schedule B1 of PIT Regulations.
1.7.3. Public Comments
The comments received are in agreement with the proposal.
1.7.4. Consideration of issues and Proposal
In view of the above, it is proposed that the proposals at para 1.7.2 above may be approved.
Annexure D1
Amendment to SEBI (Mutual Funds) Regulations, 1996, shall be notified after following the due process.
Annexure D2
Amendment to SEBI (Mutual Funds) Regulations, 1996, shall be notified after following the due process.
Source: SEBI Board Meeting Dated: Wednesday 18th December 2024
