SEBI's Skin-In-The-Game Rules: What A Junior Employee Working In Fund House Needs To Know

New Delhi: Market regulator SEBI on Monday clarified on its 'Skin-In-The-Game' rules issued earlier in the end of April this year. Under the fresh set of norms for junior employees, the provision could be implemented in a phased manner. The new set of rules will come into effect from October 1 this year. According to the new SEBI circular, in first year, 10% of compensation of junior employees will be invested in mutual fund of the fund house (October 1, 2021 to September 30, 2022); 15% in the 2nd year of implementation (October 1, 2022 to September 30, 2023) and 20% in the third year (October 1, 2023 onwards).

Who Are These Junior Employees

Those employees who are below 35 years of age and are not a Chief Executive Officer (CEO), head of any department and fund managers, SEBI said. 

CEO, head of any department and fund managers are required to invest 20% of their salaries in the mutual fund units right from October 1, 2021, and and also for a lock-in period for three years.

"Investment in units of the scheme, shall be made on the day of payment of salary," SEBI stated.

"All non-cash benefits and perks shall be accounted for in CTC (Cost-To-Company) at the perquisite value as per the Form 16 under Income Tax Act, 1961. However, superannuation benefits and Gratuity paid at the time of death or retirement, shall not be included in the CTC," it added.

Terms Tweaked By SEBI

SEBI in its new circular changed 'Key employees' as 'Designated employees' and rephrased 'paid in the form of units' as 'mandatorily invested in units'.

'Set Off' Clause

"Designated employees may set off their existing investments as on April 28, 2021, if any, against the fresh investments as required in the same schemes," SEBI said.

They "may set off their units, for which the required lock-in period of 3 years is expired, against the fresh investments required to be made in the same schemes as per provisions of the April circular. In such cases, asset management company (AMC) shall ensure that such units are locked in for the further period of 3 years or tenure of the scheme, whichever is less," it added.

After the expiry of the mandatory lock-in period, designated employees can redeem their units in open ended schemes twice in a financial year, with the prior approval of the Compliance Officer, it further stated.

Clawback Rules

Units allotted to the 'Designated Employees' will be subject to clawback in the event of gross violation of Code of Conduct or fraud or gross negligence by them, as determined by SEBI.

Every scheme shall disclose the 'compensation, in aggregate, paid in the form of units to the 'Designated Employees' on the website of the AMC, it added.

What's Skin-In-The-Game

The term used here for the new rules is derived from derby races; and in financial terms, it implies that if people have a skin in the game, preventable costs usually fails. Statistician and former options trader Nassim Nicholas Taleb also wrote a book titled 'Skin in the Game: Hidden Asymmetries in Daily Life'.