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The Securities and Exchange Board of India (Sebi) on Monday said its skin-in-the-game rules can be implemented in phases for junior employees of mutual fund houses.

For now, the regulator said, the employees can invest 10% of their compensation in mutual fund schemes operated by them instead of the required 20%.

This relaxation is not applicable to the chief executive officer, fund managers and heads of departments of a fund house.

The rules will come into effect from 1 October.

According to the Sebi notification, employees below 35 years, who are not head of any department, have to mandatorily invest 10% of the compensation in units of their mutual fund schemes in the first year.

It will be increased to 15% in the second year and, from 1 October 2023, all employees will be mandatorily required to invest 20% of their compensation in such schemes.

The markets regulator said that all non-cash benefits and perks have to be accounted for in cost to the company (CTC).

“However, superannuation benefits and gratuity paid at the time of death or retirement would not be included in the CTC," the regulator added.

On the expiry of a three-year lock-in period, Sebi said that the investment would get automatically redeemed in liquid mutual fund schemes.

For investments in open-ended schemes, the employees can redeem the units twice in a financial year, with prior approval of the compliance officer.

According to the rule, fund managers of fund-of-funds (FoF) schemes are required to invest 20% of their compensation.

However, FoF schemes investing in a single exchange-traded fund (ETF) are exempted under the rule.

Designated employees will be allowed to offset existing investments in their mutual fund houses against the rule. They will also be permitted to retain locked-in units beyond the lock-in period and these will also be counted towards compliance with the rule instead of being forced to buy fresh units.

In cases of violation of the code of conduct, fraud or gross negligence, the units will be clawed back and the redeemed amount will be credited to the scheme, Sebi added.

To make mutual fund managers more accountable with their investment decisions, the markets regulator had announced in April that ‘key employees’ of an asset management company, such as fund managers, chief experience officers, compliance officers, fund management and research teams, as well as sales heads and dealers, will have to be paid one-fifth of the compensation in the form of units held in mutual fund schemes managed by them.

In the new notification, the markets regulator replaced ‘key employees’ with ‘designated employees’ and the term ‘paid in form of units’ has been changed to ‘mandatorily invested in units’.

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