Although the issue of executive compensation has not been as dominant in the corporate governance discourse in India as it has been in other leading economies, it has begun to attract significant attention lately. While we have not had a chance on this Blog to touch upon the recent debates, it would be useful to refer our readers to a couple of posts (hereand here) by Professor Balasubramanian on his blog on Governance and Responsibility. Apart from a discussion of some recent instances involving executive compensation, the posts contain a number of broader points on corporate governance in India.
Showing posts with label Executive Compensation. Show all posts
Showing posts with label Executive Compensation. Show all posts
Shareholder Power: Say-on-Pay
Recent Developments in the US: Dodd Frank Act, section 951, requires companies to approach shareholders for their non-binding vote on executive compensation and golden parachutes.
Recent Developments in the UK: A new proposal would require companies to approach their shareholders for a binding vote on executive pay.
Existing Position in India: Managerial remuneration has been historically restricted to a substantial extent. Subject to profitability of the company, senior management’s pay is subject to quantitative restrictions, to shareholders’ approval and often even to Central Government approval, all determined on the basis of sections 198, 269 and 309 and Schedule XIII of the Companies Act.
If the movements in the US and UK arose due to less regulation of executive pay, the grouse on the Indian side has been one of excessive regulation.Regulating the Pay of Bankers in the Private Sector
Last week, the Reserve Bank of India (RBI) issued compensation guidelines for implementation by private sector and foreign banks that become operational from the financial year 2012-2013. This approach is consistent with the trend that corporate governance norms in the banking sector tend to be more controlled than in other industry sectors. Apart from the fact that the pay of CEOs and wholetime directors requires the prior regulatory approval, the compensation guidelines set out detailed principles to be deployed in order for these banks to determine senior bankers’ pay.
The guidelines place emphasis on board’s oversight regarding compensation design and operation. For example, banks must constitute a remuneration committee consisting of independent directors that frames, reviews and implements the compensation policy. The guidelines also stipulate operational matters in sufficient detail, including the distribution between fixed component and variable component of the compensation. It encourages deferral arrangements in compensations so as to eliminate short-termism in the senior management’s approach. Other mechanisms, which received significant attention following the onset of the financial crisis, such as clawback arrangements are also required to be implemented. Reliance is also placed on greater disclosure of compensation arrangements, both at a quantitative level as well as qualitative level. While the guidelines stop short of imposing quantitative limits on pay, they set out stringent requirements that banks will have to comply with starting the next financial year.
On a related note, the Economist has a different take on the politics and economics of executive compensation generally, and bankers more specifically.
The guidelines place emphasis on board’s oversight regarding compensation design and operation. For example, banks must constitute a remuneration committee consisting of independent directors that frames, reviews and implements the compensation policy. The guidelines also stipulate operational matters in sufficient detail, including the distribution between fixed component and variable component of the compensation. It encourages deferral arrangements in compensations so as to eliminate short-termism in the senior management’s approach. Other mechanisms, which received significant attention following the onset of the financial crisis, such as clawback arrangements are also required to be implemented. Reliance is also placed on greater disclosure of compensation arrangements, both at a quantitative level as well as qualitative level. While the guidelines stop short of imposing quantitative limits on pay, they set out stringent requirements that banks will have to comply with starting the next financial year.
On a related note, the Economist has a different take on the politics and economics of executive compensation generally, and bankers more specifically.
Managerial Remuneration in Unlisted Companies: Process Eased
When the rest of the world is tightening the screws on payment of managerial remuneration in the wake of the financial crisis, the Ministry of Corporate Affairs (MCA) in India has eased the process for such payments in the case of unlisted companies. However, this is certainly understandable. The erstwhile process of requiring even unlisted public companies to approach the MCA for payment of managerial remuneration was criticized as being unduly onerous and inefficient on businesses. Moreover, questions arose as to whether the Government was the appropriate entity to determine compensation of managers, and whether the machinery was adequate to handle the flood of applications. In terms of overseeing payments to managers, there is no public shareholding in unlisted companies thereby attenuating the classic agency problem in corporate governance between managers and shareholders.
The MCA appears to have identified these issues, and rightly so, in removing the obstacle of requiring Government approval for public unlisted companies. A copy of the notification available on the Press Information Bureau website, is set out below:
The MCA appears to have identified these issues, and rightly so, in removing the obstacle of requiring Government approval for public unlisted companies. A copy of the notification available on the Press Information Bureau website, is set out below:
Schedul Xiii of the Companies Act 1956 Being Amended- Unlisted Companies Shall not Require Government Approval for Managerial Remuneration Where they have no Profits
The Ministry of Corporate Affairs issued today a notification on Managerial Remuneration in unlisted companies having no profits/inadequate profits. The notification reads as under:
Managerial Remuneration in unlisted companies having no profits/ inadequate profits
Companies are divided into private limited and public limited companies. Public limited companies are of two types – listed companies (whose shares are listed on a stock exchange) and unlisted companies. Normally, the general public does not hold shares in unlisted companies. Private limited companies are not subject to any limits on managerial remuneration. Public limited companies (listed and unlisted) with no profits/ inadequate profits are currently required to approach the Ministry for approval in those cases where the remuneration of Directors/ equivalent managerial personnel exceeds certain limits.
2. The matter has been re-examined in the light of the evolving economic and regulatory environment. The primary purpose of regulations over managerial remuneration is to protect stakeholders, particularly shareholders and creditors. Unlisted companies are in several respects similar to private limited companies. A substantial number of the applications coming to the Ministry fall under this category and the Ministry’s limited manpower is disproportionately involved in this exercise. In the case of unlisted companies so long as the conditions specified in Schedule XIII, including special resolution of shareholders and absence of default on payment to creditors, are fulfilled approval will not be needed hereafter.
3. Accordingly, Schedule XIII of the Companies Act 1956 is being amended to provide that unlisted companies (which are not subsidiaries of listed companies) shall not require Government approval for managerial remuneration in cases where they have no profits/ inadequate profits, provided they meet the other conditions stipulated in the Schedule.
Subscribe to:
Posts (Atom)