Concept appears to be right

SEBI has reasons to believe that in the recent cases like MFs investing in NBFC debt, AT-1 bonds and low-quality debt, the interests of the fund managers were not aligned with that of the investors. Hence, SEBI had proposed that 20% of the pay of KMPs like CEOs, CIOs and fund managers should be paid in the form of units of the funds they handle. In addition, to bring in long-term level of commitment, SEBI has also proposed a lock-in for such units. Conceptually, it looks like a fair method of ensuring much better governance. Will it work? 

Fund managers are unhappy

Fund managers are unhappy because they fell they are being unfairly targeted for the actions of a handful of fund managers in the sector. Most executives of AMCs are also skeptical about its very implications for their asset allocation. For example, an individual managing the large cap fund may have the appetite for sector funds and mid-cap funds? In this case they may be forced into large cap funds, more than necessary. The other question; why should MFs alone be singled out for such restrictions and not extend the same logic to companies. 

Practical problems galore

The issue of asset allocation is a very pertinent point raised. Forcing funds on managers just because they manage the funds, would be unfair. Then there is the question of liquidity. SEBI insists on a mandatory lock-in although they can borrow against these units. That is also a forced leverage for someone who may not be keen on it. Then there is the issue of fund manager movements. How will the locked-in units be handled if the senior official of the fund decides to quit from one fund and either join another fund or leave the industry altogether. The biggest problem is that the best fund managers may be averse to accept a cash + units arrangement and this could create a talent drought for MFs. 

Rather, set an example

The intent is ok, but the implementation may raise too many questions. SEBI is right that there have been cases in the past where fund managers have not acted in the interests of the unitholders.  In such cases, the answer is to hold such AMCs and fund managers to book and disgorge the unitholder losses from them. That may sound harsh, but that is how it works in other countries. While market risk is something investors have to understand and accept, unitholders can’t be made the scapegoat for lousy decisions by fund managers. That is the gap that SEBI actually needs to attack. It will also set the right precedent!