Skin in the Game (SITG) Investments, mandated by the Securities and Exchange Board of India (SEBI) for Designated Employees (DEs) – C-category executives of Asset Management Companies (AMCs), Fund Managers, Compliance Officers, etc. – Completed Its first year in September 2022. The move forced these employees to compulsorily invest 20% of their take home pay in units of Mutual Fund (MF) schemes that are under their direct authority or management. These entities have been struck off for a period of three years in case of violation of the Model Code of Conduct prescribed by the AMC and AMFI (Association of Mutual Funds in India).
This policy making was, perhaps, the result of an infamous debacle in a mutual fund house, in which fund managers resorted to liquidating mutual fund schemes before the public announcement about their closure. This was the second level strictness set by the regulator; The investment mandate for the first AMC to invest in mutual fund schemes (as a percentage of assets under management, or AUM, based on the risk value of each scheme as reflected through its Risk-O-Meter).
SITG Investments aims to strengthen the fiduciary duty of AMCs managing assets of value 40 trillion, to curb ‘risk taking’ of fund managers at the expense of investors and promote alignment of fund manager’s interest with investors.
Initially, there was some opposition to this policy reform. The SITG was considered an intrusive decree of the regulator as employees had to compromise to comply with their personal obligations such as loans and family expenses. This policy limited the investment options of the developers as 20% of their take home salary had to be compulsorily invested in their own MF house schemes, that too with a lock-in period of 3 years. This was considered an element of over-regulation.
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Globally, the ‘SITG’ approach is followed by hedge funds and investment management companies. Even the US SEC mandates similar disclosures by companies based on which investors can make informed decisions.
To put this in perspective in the Indian context, we analyzed the SITG investments made by DE of 15 MF houses. Our analysis reveals that the salary earned by DE is not comparable in AMC and the AUM (open-ended scheme) size is not commensurate with the salary earned by DE. For example, top 3 AMC with AUM 4 trillion in individual SITG investments by DE (see table).
Despite having the same AUM size, a huge difference can be seen in the SITG investments made by DEs of the above mentioned AMCs. This is due to disparity in remuneration of DEs in different AMCs. Hence, there is a need to relook at the SITG investment rule – it should be based on the income earned by the DE rather than a ‘one approach fits all’ policy.
From an investor’s point of view, SITG is a ‘must have’ data for making informed investment decisions. We suggest to keep it as an additional metric along with the AUM of the schemes. Further, to strike a balance between the interests of investors and DEs, perhaps the regulator may prescribe a slab-based approach (5%, 10% or 20%) for SITG investment, depending on the income level of the DE. The lock-in requirement of 3 years can also be waived in case of an emergency. Even the insurance regulator IRDAI may recommend SITG investments for those managing ULIPs.
Kuldeep Thareja, Mitu Bharadwaj and Rasmeet Kohli work with the National Institute of Securities Markets. Thoughts are personal.
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