Home / Opinion / Is mutual fund houses’ angst against pay disclosure fair?

There has been disquiet in the offices of asset management companies (AMCs) over the past week. The story began some months ago when the market regulator, Securities and Exchange Board of India (Sebi), proposed that AMCs disclose top management remuneration (salaries, perks, stock options). The first reaction within the industry was disbelief and then defiance—we will resist this, said AMC chief executives officers (CEOs) in private conversations last year. Despite some back-room conversations between Sebi and the industry, the market regulator went ahead and announced on 18 March 2016 (http://bit.ly/1W5JJZJ) that AMC staff remuneration above a threshold of 60 lakh must be disclosed from 1 May 2016. Why 60 lakh? Because that is the threshold that other companies in India comply with.

It isn’t as if AMCs are being singled out to disclose their pay. Distributors have been asked by Sebi in the same circular to disclose commissions to investors. Step back and look at the corporate sector and we see that disclosure of remuneration of highly paid employees of a company is not a new thing. In 2011, the Ministry of Corporate Affairs hiked the disclosure threshold from 24 lakh to 60 lakh. Employees of a company who earned more than 60 lakh would need to be named, along with their remuneration. Increasing the focus on corporate governance by policymakers and regulators has made disclosures more nuanced.

The Companies Act, 2013, made it mandatory for companies to make the director pay-ratio disclosures in their annual reports. You can look at a study that gives you the analyst highlights of the data. Sebi has been keeping step with the changing laws, reflecting these thresholds in its corporate governance regulations for listed companies.

Why the focus on executive pay? Globally, there is evidence of pay grade inequality within a company with the CEO pay being a large multiple of the median pay in the company. Recognising that senior management has the power to reward itself, regulators and policymakers are using better disclosure to put out relevant information in the public domain. The view is that investors into a company and other stakeholders should be able to judge the value-add provided by a person who earns above a certain threshold. The issue took centre-stage after the 2008 crisis when Wall Street pay became the focus of the Occupy Wall Street movement that showcased the wealthiest 1% against the 99%, or the rest of the population, to highlight the disparity in terms of earnings and wealth between the rich and poor.

Why are the AMCs upset? The AMCs argue that this information is not relevant to the investor and they are not happy to make this disclosure. After Sebi handed them the ultimatum for disclosure starting 1 May 2016, different AMCs have used different means to make it difficult for investors to access this information. The Sebi regulation clearly says that “MFs/AMCs shall make the following disclosures pertaining to a financial year on the MF/AMC website under a separate head—‘Remuneration’". AMCs have used innovative means to make access to this disclosure difficult. Read this story to see how: http://bit.ly/1pXKfu2 . Not complying, asking investors for folio numbers, asking for the mobile number for a one-time password that will unlock the disclosure, an email ID where this will be mailed, an address where the AMC will mail the disclosure are all a part of the disclosure process meant to make access difficult.

Sebi seems to be agreeing with the partial disclosure by allowing that disclosure of a folio number is needed for an investor to access this information. But what if a prospective investor wanted to evaluate a fund house based on executive pay versus fund return over the years? Sebi, in another place in the same regulation, mandates ‘machine readable’ disclosure—which means that the disclosure can be downloaded in a CSV (comma-separated values) format—a format that allows sorting of data.

But Sebi needs more clarity about its own decision. If executive pay disclosure is good, then why allow AMCs to put roadblocks on the disclosure by making it selective and difficult to process?

So should AMCs not protest against a regulation they think is unfair? Yes, they should. They must. But there is a way to make this protest. They can approach the Securities Appellate Tribunal (SAT) to register their disagreement with Sebi’s regulation. I’m on the board of a small not-for-profit that is right now in the Supreme Court against a Sebi decision that the board thought was unfair. We went to SAT, were not happy and are now in the Supreme Court on a matter of principle. Firms in India hesitate to take regulators to court fearing total annihilation since an independent regulator in India has legislative, executive and judicial powers and, therefore, becomes a powerful entity. Firms need to take the institutional path to protest, rather than show their protest in shoddy disclosure practices. It is like saying: I don’t agree with traffic rules that say red means stop, so I will slow down but not stop at red.

Monika Halan works in the area of consumer protection in finance. She is consulting editor, Mint, member of the Financial Redress Agency Task Force and on the board of FPSB India. She can be reached at monika.h@livemint.com.

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