The Securities and Exchange Board of India (“SEBI”), in the exercise of powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992 read with Regulation 25 (16B)and 77 of Securities and Exchange Board of India (Mutual Funds) Regulations 1996 (“MF Regulations”), vide Circular No. SEBI/HO/IMD/IMD-PoD-1/P/CIR/2025/36[1], dated March 21, 2025, introduced amendments to the framework governing the alignment of interest of designated employees of the Asset Management Companies (“AMC”) with the interest of the unitholders (“Circular”). The Circular aims to facilitate ease of doing business by streamlining compliance requirements and operational flexibility for AMCs while ensuring continued protection of investor interests. The provisions laid down in this Circular shall come into effect from April 01, 2025.
This Circular builds upon the framework prescribed in the earlier SEBI Circular No. SEBI/HO/IMD/IMD-PoD-1/P/CIR/2021/675, dated April 28, 2021, which mandated AMCs to ensure that a portion of the compensation of key designated employees shall be paid in the form of mutual fund units. The latest amendments are based on industry feedback and seek to provide operational ease in implementing the framework.
Accordingly, in terms of Regulation 25(16B) of MF Regulations, the master circular for Mutual Funds dated June 27, 2024 (“Master Circular”) has been modified. The key highlights of the Circular are as enumerated below:
I. Modification of Clause 6.10.1.1 of the Master Circular:
A minimum percentage of the gross annual CTC (salary, perks, bonus, and non-cash compensation) of Designated Employees at AMCs, after deducting income tax and statutory contributions (such as PF and NPS), shall be compulsorily invested in units of mutual fund schemes that they oversee or are involved in. The manner for such investments shall be in accordance with the slabs as provided in the Circular.
II. Addition of Clause 6.10.1.5(A) in the Master Circular:
For Designated Employees managing liquid fund schemes, up to 75% (seventy-five percent) of the mandatory investment amount in liquid fund schemes may be allocated to other schemes managed by the AMC that carry higher risk than liquid fund schemes. This provision shall apply both to Designated Employees exclusively handling liquid fund schemes and to those overseeing other schemes in addition to liquid funds, but only concerning the portion required to be invested in liquid fund schemes. The risk level shall be determined based on the risk-o-meter of the immediately preceding month.
III. Modification of Clause 6.10.2.2:
Upon retirement at the superannuation age as defined in the AMC service rules, the units shall be released from the lock-in, allowing the Designated Employee to redeem them, except for units in close-ended schemes, which shall remain locked until the scheme’s tenure ends. However, if a Designated Employee resigns or retires before reaching the superannuation age, the lock-in period for investments made under Clause 6.10 of the Master Circular shall be reduced to one year from the end of employment or the completion of the 3 (three) year lock-in period, whichever is earlier. Units in close-ended schemes shall, however, remain locked until the scheme’s tenure is completed.
IV. Modification of Clause 6.10.2.4 of the Master Circular:
Open-Ended Schemes – After the mandatory lock-in period expires, the Designated Employees may redeem their units in open-ended schemes, subject to compliance with SEBI (Prohibition of Insider Trading) Regulations, 2015. These redemption transactions shall also be subject to trading restrictions during the closure period and require pre-clearance from the compliance officer when the closure period is not applicable, as per Clause 6 of Schedule B1 of the SEBI (Prohibition of Insider Trading) Regulations, 2015. However, the requirements under Clause 6 of Schedule B1 of the SEBI (Prohibition of Insider Trading) Regulations, 2015 shall not apply to mandatory subscription/investment in mutual fund units under Clause 6.10 of the Master Circular.
V. Addition of Clause 6.10.7.2 in the Master Circular:
In the event of a violation of the Code of Conduct under the MF Regulations, fraud, or gross negligence by Designated Employees, the Nomination and Remuneration Committee of the AMC shall conduct a preliminary examination and submit its recommendations to SEBI for consideration, subject to approval by the Trustees. If the AMC has not constituted a Nomination and Remuneration Committee, an equivalent body under the AMC Board shall undertake the preliminary examination and provide recommendations to SEBI after obtaining Trustee approval.
VI. Modification of Clause 6.10.8.3 of the Master Circular:
Every scheme shall disclose the aggregate compensation mandatorily invested in units for Designated Employees, as required under this Master Circular, on the website of Stock Exchanges. This disclosure shall be made at a quarterly aggregate level, reflecting the total investment across all relevant employees in a specific scheme. The disclosure must be published within 15 (fifteen) calendar days from the end of each quarter.
[1] https://www.sebi.gov.in/legal/circulars/mar-2025/facilitating-ease-of-doing-business-relating-to-the-framework-on-alignment-of-interest-of-the-designated-employees-of-the-asset-management-company-amc-with-the-interest-of-the-unitholders-_92842.html