In a notable development for the mutual fund sector, the Securities and Exchange Board of India (SEBI) has relaxed the “skin-in-the-game” regulations affecting key personnel, including CEOs, Chief Investment Officers (CIOs), and fund managers. This change aims to create a more sustainable environment for talent retention while keeping the interests of investors aligned with those managing their funds.

New Slabs for Employee Investment

Under the revised framework, SEBI has introduced four distinct salary brackets for employees. Those earning less than ₹25 lakh in cost to company (CTC) will no longer be required to invest a portion of their salary in mutual fund units. For employees earning more, the investment requirements will range from 10-18% or 12.5-22.5%, depending on their asset management company’s discretion.

• No investment required for CTC below ₹25 lakh
• 10-18% or 12.5-22.5% investment for higher earnings

These new guidelines are set to be implemented starting April 1, 2025.

Industry Reactions

Dhirendra Kumar, CEO of Value Research, expressed his approval of the updated rules, stating, “This is a much-needed loosening of the screws. The original intention was beneficial—ensuring fund managers had a stake in their decisions—but it became overly complex. The revised structure maintains the essence while enhancing practicality. A sensible fix.”

In 2021, SEBI initially established these regulations to align the financial interests of designated employees with those of unit holders, mandating that they invest 20% of their salary and benefits into the schemes they managed. Under the previous regime, employees were compensated partially in scheme units, creating significant pressure on talent retention.

Addressing Talent Retention Challenges

The industry faced significant pushback against the original rules. Many asset management companies (AMCs) reported difficulty retaining skilled professionals, particularly at mid-level positions. A CEO from a prominent fund house noted that the stringent guidelines made it increasingly challenging to keep talent onboard.

• 20% investment rule was debated within the industry
• Junior employees faced disproportionate challenges compared to senior roles

For instance, while senior executives like CIOs or CEOs could diversify their investments across multiple asset classes, junior fund managers, particularly those handling liquid funds, found themselves restricted to low-return investments.

Enhanced Flexibility for Liquid Fund Managers

The revised guidelines address this imbalance, permitting designated employees managing liquid funds to allocate 75% of their minimum investment to higher-risk options within the AMC’s portfolio. This flexibility allows employees to practice asset allocation, promoting a better alignment of interests.

Lock-In Period Adjustments for Employees

Regarding the lock-in period for employee investments, SEBI has introduced new measures. Retiring employees can redeem their units, except those tied to close-ended schemes, which will remain locked until their tenure concludes. For employees resigning before retirement, the lock-in period will now be shortened to one year post-employment.

Accountability Measures

In cases where designated employees breach the code of conduct or engage in misconduct, the AMC’s Nomination and Remuneration Committee is obligated to investigate and recommend appropriate actions to SEBI. Additionally, AMCs must publicly disclose the total compensation invested in mutual fund units by employees on their stock exchange website within 15 days after each quarter.

This regulatory shift by SEBI is a significant step towards balancing employee investment requirements with the practicalities of talent retention in the competitive mutual fund landscape.