Mumbai: In a surprise move, Kotak Mahindra Asset Management Co. (AMC) Ltd said that effective from 15 July, all employees will have to invest only in the AMC’s own mutual fund (MF) schemes. Although it’s not mandatory for them to invest in MFs, the firm’s new rule says if the employees do invest in MFs, it has to be only in Kotak AMC’s.

“It is our statement to our customers that we believe in our own schemes. It’s like saying that the owner of the restaurant eats in the same restaurant," said Nilesh Shah, managing director, Kotak Mahindra AMC. Shah said this shows the firm’s belief in its own schemes, in a language that the customer understands.

The fund house has made the rule mandatory for all its employees, across branches. All employees with existing SIP commitments will be allowed to continue with the plans. However all fresh SIPs will need to be in Kotak AMC schemes. The rule will now form a part of the Code of Conduct of the fund house. If they are found to be investing in other fund houses, there will be a penalty, Shah confirmed to Mint.

“Yes, I am restricting the choices of my employees, but then, if I don’t take pride in my own fund house, if I don’t trust my own fund manager, how can I ask my customers to invest," he argued.

“Skin in the game" is not a new concept in the Indian MF industry. When PPFAS Asset Management Co. Ltd entered the Indian MF industry and launched its maiden scheme, PPFAS Long Term Value Fund in May 2013, it nudged its top management to invest in it.

“This is a good move. If the employees believe that their firm’s schemes are good enough for their customers, why not put your money in it? If Ratan Tata can be seen driving around in a Tata Nano and other Tata cars and if Anand Mahindra can be seen driving around his Bolero, why not have the same principles in the financial services industry?" said Rajeev Thakkar, chief investment officer, PPFAS Asset Management Co Ltd.

Not all are convinced. “This is not something that is done, typically. It could show that, perhaps, within Kotak MF, there isn’t a strong belief among employees to invest in their own funds, and hence this is made mandatory. I would rather have the employees invest in their own funds, voluntarily. That sends a much stronger signal," said the partner at a consulting firm who did not wish to be identified.

In February 2014, capital markets regulator Securities and Exchange Board of India (Sebi) made it mandatory for fund houses to put 1% of their own money, subject to a maximum of 50 lakh, in all their open-ended MF schemes. Sebi’s idea of showing “skin in the game" was to mandate that fund houses have their money invested in their own schemes at all times. Although Sebi’s rule doesn’t mandate that a fund house’s employees invest in its schemes, all fund houses make it mandatory for their employees, especially their fund managers, to take prior permission before buying or selling equity shares.

Many stock brokerages also require their employees to buy and sell shares in-house. “Our employees are allowed to trade only through our brokerage. Prior Permission from immediate managers is necessary. It is all very quick," said Raamdeo Agrawal, joint managing director of Motilal Oswal Financial Services Ltd.

According to Agrawal, it helps the organisation comply with Sebi’s insider trading rules.

Prasanth Prabhakaran, president, retail broking at India Infoline Ltd (IIFL), said employees of IIFL’s broking division have to invest “only though the employer broker".

Banks are also known to insist that their employees open savings bank accounts in-house to be able to receive salaries, albeit they are free to open and use bank accounts in other banks.

Legal experts believe that Kotak AMC’s move does not break competition commission laws. “This doesn’t look like a violation of competitions law norms since this does not lead to market distortion. Also, Kotak MF’s employees form a minuscule portion of the total investor base that’s out there. But it encroaches upon the personal freedom of the employee to choose where he or she wants to invest in. If an employee is penalized by Kotak MF for violation of its internal guideline mandating investment only in Kotak MF portfolio, the court of law will deem the penalty and the guideline invalid. Because it is unconstitutional," said Pradeep Joy, principal associate, SNG & Partners, Advocates & Solicitors.

Note: This story has been modified to to clarify the norms regarding existing SIPs of Kotak AMC staff

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