SEBI recently released (28th Apr 2021) a circular mandating 'key personnel' of Asset Management Companies to have 20% of their gross compensation routed through schemes in which they have an active role. (Circular No: SEBI/HO/IMD/IMD-I/DOF5/P/CIR/2021/553)

The circular is more of a guideline than an SOP and therefore it only comes into effect on 1st July 2021. It is anticipated that the circular will provide many more details before it comes into effect. The circular covers broad areas such as Key Employees, minimum compensation percentage, lock-in, diversification, clawback, applicability etc. If you're keen to read the circular itself, it's available at the link below.

Personally, it appears that the spirit of the circular is to promote AMCs to have skin in the game and so SEBI has come up with what appear to be reasonable guidelines. However, we've seen from industry responses thus far, that not everyone agrees.

Could there be a different path to achieve the same outcome. A better way?

While I'm certain that the folks at SEBI would have considered many alternatives and taken industry input, this is my personal opinion on alternative paths.

Let's imagine a scenario, you go to the showroom to buy a car. The car is everything that you want, looks great, fantastic performance, great safety, phenomenal mileage (petrol khatam hi nahi hondaa) etc. basically a car you like in every way possible. Yet, it's not the only option in the market, there are other equally good cars. So to help make up your mind, you ask for a meeting with the car manufacturers CXO. And since we're conjuring up a hypothetical scenario, let's say he agrees to meet you at the showroom.

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Now, if for some reason you saw him arrive at the showroom but the car he came in was from a different manufacturer, would you buy the car? I'm guessing not... you'd think that if the CXO himself doesn't use the car his company makes, then you're not using it either.

However, if you didn't see which car the CXO arrived in, you would have bought/rejected the car purely on it's merits. Am I right?

Let's suggest that the automobile regulation body (Ministry of road, SIAM, ARAI or someone equally high up the ladder) publishes a mandate which says that all CXOs of all car manufacturers must only drive cars in which they have an active role.

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Now the next time you go to buy a car and the CXO meets you, he arrives at the showroom in a car made by his company. But now you know that the only reason behind that is because he is mandated to do so by the regulatory body. Does this then impact your decision in any way? Does this even positively affect the quality/value of the car in any way? I'm guessing not.

So basically, just because it's mandated doesn't mean that the product has become better in any way. In fact, all it does is to put everyone on the same level field and hopes that regulation will drive innovation and performance rather than market dynamics.

Now, for the better way. I (again personal opinion only) feel that it would have been better to make Key Personnel investment as a mandatory 'Disclosure'. That way, CXO/ FM / Research and even junior staff would have full discretion on where they wanted to invest their money based on their personal situations.

The market (actually tech companies) would then have access to this data and since not everyone is doing it, the market would be able to genuinely identify people who put their money where their mouth is. You would most likely see market forces driving innovation, reducing expense ratios and generally moving the industry forward.

This is my personal opinion on how 'disclosure' may possibly have a greater positive impact on skin in the game and better serve the spirit of the SEBI circular better. I would love to hear other ideas and points of view.

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