Thank you, SEBI, for the 25 percent pay hike….

“The reason for the unreason to which my reason turns so weakens my reason that with reason I complain of thy beauty.”
― Miguel de Cervantes Saavedra, Don Quixote

SEBI, the wise guardian angel of the investors, has decided that the fund performances will improve because twenty percent of the remuneration of “key” employees/ fund managers will be locked in to units of the fund they manage, for three years.

Anyone who can afford this, surely is not going to be bothered about this. It is a bonus. Good if it comes, no harm if it does not. Compensation packages of star fund managers and key persons will be suitably adjusted upwards.

As an employee, I have a contract to be paid in currency. Not in kind or kindness. The legality of this move by SEBI ought to be examined by legal experts. Surely, you cannot say that twenty percent of SEBI employees are put in some escrow and after three years, depending on a public vote on their usefulness to investors, the sum may be released. Can the Consumer Protection Societies force HUL Sales manager to take twenty percent of his salary in HUL products, at their MRP?

Clearly, micro management by the regulator, with zero practical experience in managing or being an investor seem to have Don Quixote for a role model.

One set of people will nod their heads. It is not as if the salaries of these people are two or three lakh rupees a year. When you make a crore plus, twenty percent is merely deferment of some luxury. And forcing someone to save is absurd. If the intention is to improve performance of a fund or stop dishonest practices, it is a failure. Every fund manager tries to do the best he can.  And if it is aimed at curbing dishonest practices, it is a waste. Dishonest practices target returns of far more than twenty percent of annual compensation. In fact, it could be twenty times annual compensation.

Yes, many will say, it is good to have ‘skin in the game’. It will be skin in the game if the retention actually hurts someone. Given the salaries they get, this will simply become a component outside the negotiable “CTC”. What SEBI has done is to just push up the expenses of the AMC.

The regulator has been slow in discovering frauds. The entire structure of the MF industry is flawed. The “Trustee” mechanism needs to be disbanded and the entire responsibility has to be on the AMC and its CEO. Trustees simply do not have the bandwidth to ensure compliance. And it is the CEO who is the day to day person. The Trustees will only know what the CEO chooses to tell. Trustees are often asked to approve things on email. How it goes is that the CEO will talk to one or two important persons, seek their blessings and send the email. The others will ask “have so and so signed?” If yes, they will sign. This is how the real world works. The Trustee is not an expert at risk or investment analyses. He is simply a respectable face, known to the promoter of the AMC. And will not be seen to support anything wrong. It is still no warranty of compliance and competence.

SEBI assumes that it has to develop the market as well as regulate it. The first part is a misguided one. Why should it allow a structured complex instrument to be part of a mutual fund asset? Why should finance and banking sector get a high weightage? The regulator has no business being ‘friendly’ to the industry.

Investor protection is a “no-man’s land”. SEBI does something token when there is something brought to their notice or there is a public outcry and their ‘investigations’ manage to find something. More often than not, their punishment is a token one and the big boys to in to appeal and SEBI loses the plot. Clearly, shades of Inspector Clouseau.

SEBI clearly is playing to the gallery. Insurance is a business where there is bigger damage to investor money thanks to exorbitant selling commissions. And there is no measurement or comparison. They also must have lost money in the ways that mutual funds did. IRDAI just kept quiet, because insurance is like a ponzi. Annual collections keep rising. Performance is never made public in the way the mutual funds are stripped naked in the open. Do they send you monthly portfolios? How much of your money actually gets invested? Does LIC have any kind of risk management? So many questions. 

In Mumbai, there is a famous eating house.  “Udipi Sri Krishna”, at Matunga.  There used to be a signboard which read “The owner of the restaurant eats here”. It is a selling point and there is no legal compulsion. If you like the food, you go there regularly. If you do not, you go to another one. Whether the owner eats there or not is not something that bothers me too much.

It is time our rulers woke up. Put people from industry in to SEBI. And make SEBI engage the best legal talent there is. Yes, many big name law firms will not work for SEBI because of fear that they will lose corporate business. Which is another reason why SEBI needs to employ people who have actually worked in the businesses they regulate. That will help to improve things.

Businessmen and investors. It will always be a cat and mouse game. The investors are always handicapped. One way to give them some relief is by speedy prosecution (not after eighteen years of the crime) and substantial punishment. The referee cannot and should not decide how the game is to be played. His job is to just ensure that the rules are followed. If I can afford to have twenty percent locked in every year, you can be sure that I do not count it in my belongings. After three years, I will start getting it back. And yes, what if my employer were to give me an interest free loan for the units I buy?