Compensation of Key Employees of Asset Management Companies in the form of Mutual Fund Units – SEBI’s latest move to increase ‘skin in the game’

With the underlying objective to promote transparency in remuneration policies in mutual funds (“MF”) such that remuneration of key employees are aligned with the interest of investors, the Securities and Exchange Board of India (“SEBI”) has from time to time provided directions for enhanced disclosure requirements for key employees of MFs. In March 2016, SEBI had required asset management companies (“AMCs”) to make certain disclosures on their websites pertaining to remuneration of the chief executive officer (“CEO”), chief investment officer (“CIO”) and chief operations officer (“COO”) of the AMC. In addition to these disclosures, the AMCs were also required to disclose details of (i) all other employees of the AMC whose annual remuneration was equal to or above INR 6,000,000 for that year; (ii) monthly remuneration in the aggregate is not less than INR 500,000 per month, if the employee is employed for a part of the financial year; (iii) the ratio of CEO’s remuneration to median remuneration of MF/ AMC employees; (iv) MF’s total average assets under management (“AUM”), debt average AUM and equity average AUM and rate of growth over last three years. Thereafter in April 2017, SEBI directed AMCs to disclose remuneration received by top ten employees of the AMCs on their website. In addition to this, SEBI also increased the threshold for making disclosures only if the annual remuneration of employee (other than CEO, CIO and COO) was equal to or above INR 10,200,000, and whose monthly remuneration in the aggregate was not less than INR 850,000 per month, if the employee was employed for a part of that financial year.

To further align the interest of key employees of the AMC with unitholders of the MF schemes, SEBI has now, by way of a circular dated April 28, 2021 (“Circular”), notified that a part of the compensation of key employees of the AMC will be paid in the form of units of the schemes of the MFs. The key requirements to be met by MFs/ AMCs under the Circular are:

1. Compensation: AMCs will now be required to pay a minimum of 20 % of the salary/ perks/ bonus/ non-cash compensation (gross annual CTC) net of income tax and any statutory contributions of the key employees in the form of units of Mutual Fund schemes in which they have a role/oversight, proportionate to the AUM of such schemes. This requirement will not be applicable for exchange traded funds, index funds, overnight funds and existing close ended schemes. Such payments are required to be paid proportionately over 12 months on the date of payment of salary/ perks/ bonus/ non-cash compensation to the key employees. In case compensation is paid to key employees in form of employee stock options, the date of exercising such option is required to be considered as the date of such payments. In case of dedicated fund managers managing only a single scheme / single category of schemes, 50% of the compensation should be paid by way of units of the scheme/category managed by the fund manager and the remaining 50% can, if so desired by such fund managers, can be paid 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.

2. Key employees: The Circular provides that key employees of the AMCs will include:

i) CEO, CIO, Chief Risk Officer (CRO), Chief Information Security Officer (CISO), COO, Fund  Manager(s),  Compliance  Officer, Sales Head, Investor Relation Officer(s) (IRO), heads of other departments, Dealer(s) of the AMC;

ii) Direct reportees to the CEO (excluding Personal Assistant/ Secretary);

iii) Fund Management Team and Research team;

iv) Other employees as identified & included by AMCs and Trustees.

3. Lock-in period: Such units will be locked-in for a minimum period of 3 (three) years or tenure of the scheme, whichever is less, and redemption of units within the lock in period shall not be allowed on resignation or retirement  before attaining superannuation age as defined in the AMC service rules. In case the key employee retires on attaining the superannuation age, such units can be released from the lock-in and the key employee would be free to redeem the units (except units in close ended schemes till the tenure of the closed ended scheme is over). AMCs are permitted to provide for the key employees to borrow from the AMC against such units in exigencies such as medical emergencies or on humanitarian grounds, as per the policy laid down by the AMC.

4. Clawback: In the event there is any violation of the code of conduct, fraud, gross negligence by the key employees, they will be subject to a ‘clawback’ clause as well. Upon clawback, the units shall be redeemed and amount shall be credited to the scheme.

5. Applicability: The Circular will be applicable with effect from July 1, 2021. The rules for close-ended scheme and its applicability will be provided by SEBI in due course.

While SEBI has continually been moving towards the idea for fund managers to have skin in the game to improve the performance of the funds, the impact of the Circular on the performance of funds is yet to be seen. In the Circular, SEBI has included direct reportees to the CEO, and the fund management/ research team as key employees, which are quite wide terms and may create practical difficulties in implementation, for both employees and employers. In addition to this, SEBI may need to provide further clarity on whether the clawback clause provided in the Circular would apply to the units provided as compensation after the lock-in period, once key employees begin redeeming their scheme units. Lastly, the Circular creates an obligation on the key employees to invest in schemes which may not align with their risk appetite. SEBI might further fine-tune certain aspects of the Circular to provide further flexibility and clarifications to MFs/ AMCs.


Rushabh Maniar, Partner
Sonali Ladha, Associate
Vartika Sharma, Associate

Date: June 10, 2021