Sebi's new compensation rule to create arbitrage in favour of index funds, ETFs

New Delhi: A section of mutual fund houses feared that markets regulator Sebi's new framework on compensation will adversely affect their key employee cash flow and make it difficult to retain talent.

In addition, the new rule will create regulatory arbitrage in favour of index funds and exchange-traded funds (ETFs) and will result in potential death of active fund management, fund houses said.

On Wednesday, Sebi asked asset management companies (AMCs) to pay at least 20 per cent of gross salary of key employees in the form of the units of the scheme managed by them.

The new rule covers all key employees who have been defined as heads of various functions and all employees who are involved in the fund management process -- fund managers, research teams, and dealers, among others.

The rule, aimed at aligning the interest of the key employees of AMCs with the unitholders of the mutual fund schemes, will come into effect from June 1.

As per Sebi, compensation paid in the form of units need to be proportionate to the asset under management (AUM) of the schemes.

Index funds, ETFs, overnight funds and close-ended funds have been exempted from the new rule.

Meanwhile, Markets regulator Sebi on Friday said updation of mutual fund scheme related documents for the half-year ended March 2021 can be completed by May 31 amid the ongoing coronavirus pandemic.

"Taking into account the difficulties expressed by the industry in light of continuing COVID 19 scenario, it has been decided that the updation of SID and KIM for the half-year ended March, 2021 shall be completed by May 31, 2021," Sebi said in a circular.

Scheme Information Document (SID) and Key Information Memorandum (KIM) are among the important documents which are prepared by asset management companies (AMCs) to provide information about a particular mutual fund scheme.

In addition, the regulator has modified its guidelines pertaining to updation of SID and KIM.

For the open ended and interval schemes, Sebi said "the SID shall be updated within next six months from the end of the 1st half or 2nd half of the financial year in which schemes were launched, based on the relevant data and information as at the end of previous month."