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Tata Capital > Blog > What are the “Skin in the game” Rules by SEBI Set to be Implemented from October 1st?

What are the “Skin in the game” Rules by SEBI Set to be Implemented from October 1st?

What are the “Skin in the game” Rules by SEBI Set to be Implemented from October 1st?

The Securities and Exchange Board of India (SEBI) recently announced that its skin-in-the-game rules would be effective from October 1, 2021. The market regulatory body, founded in 1992, regulates the Indian capital markets and protects the investor’s interests by enforcing specific rules and regulations. Further, the statutory body ensures that the market works systematically, providing a transparent environment for the investors.

Read further to learn about the new rules and how they can affect the industry moving forward.

What are the skin-in-the-game rules?

Skin-in-the-game is a term derived from derby racing and is used for new rules. It is also a phrase made popular by the renowned investor and the ‘Oracle of Omaha’, Warren Buffet. Now, let’s understand what the rules are about.

The fresh set of norms issued by SEBI applies to the junior employees and will be implemented in a phased manner. Junior employees are those who are below the age of 35 and are not heads of any department, fund managers and CEOs. They must invest 10% of their compensation in units of their MF schemes in the first year. The share will increase to 15% in the second year, and from October 2023, employees must invest 20% of their compensation.

On the other hand, the key employees of the asset management companies must invest a minimum of 20% of their gross annual CTC from October 1, 2021. In a nutshell, the key executives will be required to invest in their own schemes. As a result, the Rs 33-trillion domestic mutual fund industry will invest thousands of crores in its schemes.

Additional Read: With the new SEBI rules, are Multi-cap funds worth the risk?

What is the objective?

With the new set of rules, SEBI expects that getting the designated employees to invest in their schemes will lead to better accountability. And it will pave the way for improved performance and better quality of securities.

Moreover, it is believed that this change will lead to a better sense of confidence for the investors as the fund manager’s interest aligns with them. Lastly, SEBI also aims to prevent fund managers from taking unnecessary risks and discourage instances of insider trading.

Additional Read: Active Investment vs Passive Investment: What is the Difference Between Active and Passive Funds?

The way ahead

Although the move is well-intended and aims to prevent fund houses from launching high-risk investment schemes, it has mixed reactions. However, this move can prevent fund houses from launching risky schemes to an extent, mainly the ones with smaller asset sizes.

At the end of the day, the responsibility of choosing a suitable scheme lies with the investor. Hence, before investing your savings in any scheme, consider the qualitative factors, the scheme’s past performance, and more. Make sure to invest in fund houses with prudent investment practices and a robust risk management system.

Finally, to make an informed decision and compare different mutual funds easily from the comfort of your home, choose Tata Capital’s Moneyfy app. It will help you pick suitable schemes based on your essential requirements and stay updated with the latest interest rates.

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