Sebi hints curbs on fund manager compensation

Ashish Rukhaiyar
Mumbai, 6 October 2011

Even as regulators in the developed markets deliberate on the sensitive matter of fees earned by bankers and brokers, the Indian capital market watchdog has hinted its intentions of regulating the commissions of private equity and venture capital f und managers. While the final norms are yet to be announced, various industry bodies are already opposing any such move.

In August, the Securities and Exchange Board of India (Sebi) released a concept paper on proposed alternate investment funds (AIF) regulations. Those were essentially meant to regulate venture capital funds, private equity funds, debt funds, real estate funds and PIPE (private investment in public equity) funds, among others. Further, the regulator said it “may” lay down the fee criteria as well.

“The Board (Sebi) may specify criteria for charging performance fee of the managers of AIF,” says regulation 13(1)(d) of the proposed norms. In other words, Sebi may decide the quantum of fees/commissions that a fund manager can charge from the investors.

Market participants say that any such move by the regulator would prove to be restrictive and impact the overall growth of the fund industry. They feel that since these funds deal with high net-worth individuals and other well-informed investors, negotiations on the fee count should be left to the parties involved.

The industry’s initial reaction, says Gautam Mehra, executive director (tax and regulatory services) of PwC India, has been that given that fund managers in AIFs would deal with sophisticated investors who understand the performance fee criteria. Since this is based on accepted and prevalent market practices, this may continue to be left to individual negotiations.

“This would depend on how the regulations around this are ultimately framed. If they lay down criteria that make the fee charging more restrictive than at present, it would impact the industry players,” he adds.

Interestingly, the Confederation of Indian Industry, while welcoming the proposed AIF norms, has suggested some changes. One of them is on the issue of the regulator retaining the powers to specify criteria for charging performance fees by the fund managers.

The industry body is of the view that the payment of performance fees should be market driven and based on the performance and record of the fund manager. On the other hand, the CFA Institute has suggested that part of the performance fees can be locked in for the duration of the fund.

“The popular industry view seems to be that any form of regulatory control may interfere with the commercials of the fund,” says Ashish Bhakta, partner, Advaya Legal.

“The proposed provision would empower Sebi to specify criteria for charging performance fee of the fund managers in such manner that the performance fee does not encourage excessive risk or highly speculative activities. This would negatively impact the growth of the fund management industry in India. Also the proposed provisions would restrict the ability of parties to come to a mutual understanding under a private contract between them,” he explains.

This is, however, not the first time that the 1992-formed Sebi is regulating the fee structure for the fund industry. In October last year, the regulator specified that portfolio managers should charge a performance-based fee only on the high water mark principle, that is, based on the increase in portfolio value in excess of the previously achieved high water mark.