Skin in the Game
"Don’t tell me what you think: just tell me what’s in your portfolio.” The line is picked from the book written by Nassim Nicholoas Taleb, ‘Skin in the Game’. Market regulator SEBI in its latest circular has tried to do the same with the fund managers. The regulator wants to align the interest of the key employees of the AMCs with the unit-holders of the mutual fund schemes. For this it has specified that minimum 20 per cent of the gross annual CTC net of Income Tax and any statutory contributions of the key employees of the AMCs shall be paid in the form of units of mutual fund schemes in which they have a role or oversight. These units will be locked in for three years.
The regulator may have come out with such a circular to prevent the repetition of what happened at Franklin Templeton India. The fund house last year shut down six of its debt funds and a forensic audit alleged that some employees of the mutual fund redeemed their holdings just before the closure of the six schemes. The intention of the regulator looks perfect; however, I believe it has gone too far. Globally there is no such precedence. Even the most developed market such as the US only asks fund managers to disclose their holdings and does not force them to buy. Besides, there other issues that will make its implementation a bit complicated.
For example, it does not talk about the risk appetite of a fund manager. It may be possible that an equity fund manager may not have the appetite to invest in equity; however, now he has to forcefully invest. Against this a debt fund manager may have a higher risk appetite and would want to invest more into equity but now has to invest in debt. If he tries to match his investment in equity as per his asset allocation, it may pose a cash flow problem for him. Such a restriction may even force him to quit the job, posing a problem of talent management for AMCs. Hence, I believe some modification need to be done in the circular so that it becomes a win-win situation for both unit-holders and fund managers.
SHASHIKANT