Government releases executive pay
check-list for listed companies

The Economic Times
July 7, 2013

NEW DELHI: To ensure proper disclosures and regulatory compliance by listed companies with regard to their top executive salaries and appointments, the government has come out with an exhaustive check-list for documents required to be filed in such cases.

The release of this 10-page check list by the Corporate Affairs Ministry comes at a time when there is a growing public and regulatory scrutiny of pay packages doled out by the companies to their CEOs and other top executives. [EXPAND Read more]

While the US and some European countries are framing new rules to give shareholders larger say on pay of top management personnel at listed firms, market regulator Sebi and investor advisory firms in India have also said that executive salaries should reflect the financial performance of the companies.

India largely follows a disclosure-based regulatory regime for the corporates, but strong checks and balances are being put in place to curb the practice of unreasonable fat pay packages, a senior official said, while adding that the new check list is a step in that direction.

The new check list has been prepared after taking into account various regulatory requirements to be fulfilled by listed companies while seeking the government approval for matters like appointment and remuneration of top executives as also their pay hike, hiring of foreign nationals in leadership roles, recruitment of relatives of directors, among others.

“This is for the first time that the Ministry has come out with an exhaustive list of procedural guidelines for executive remuneration. While these guidelines are already in place, this is an exhaustive check list and takes into consideration various kinds of scenarios,” the official said.

The move is aimed at fostering better corporate governance practices at the companies — an issue where Sebi (Securities and Exchange Board of India) is also deliberating over wide-ranging changes in the relevant regulations.

While a proposal is underway to put in place a revamped set of corporate governance regulations, Sebi Chairman U K Sinha last week said it is not fair for top executives to get higher compensation at companies that are not performing well.

Sinha, however, emphasised that regulations would continue to remain largely disclosure-based and any disruptive norms were unlikely to be forced on the firms.

In recent times, there have been increasing concerns about corporate governance practices at various companies and regulators are mulling over various steps to ensure that the investors’ interest remains protected.

As per the new check-list, a listed company seeking higher pay for its board member and other top executives would need to furnish certificate stating that it has not defaulted on debt repayments. If there has been a default, then the firm has to submit a no-objection certificate from the lender about the proposed pay hike.

Other documents required include those stating details of turnover, net profit/loss, dividend payout and effective capital for the last three financial years. Such information should be duly certified by a chartered accountant.

The company needs to provide “full and proper justification in favour of the proposal” to increase executive pay. Also, it needs to provide a comparative analysis in terms of remuneration practices in the industry, while taking into account the size of the company, the profile of the position as well as that of the concerned person, among others.

According to an official, the check list would help the Ministry keep a better check on the companies’ compliance to the relevant regulatory framework for executive remuneration, while it would also help in speedy disposal of the applications filed by the companies in these matters.

“There have been instances where the Ministry had to do back referencing of details about companies seeking approval for managerial remuneration since all required information are not furnished. This check list would help the expediting the process for companies as they will be aware about the requisite information before seeking various approvals with regard to executive pay,” he added.

The Corporate Affairs Ministry has said the check list is to ensure that companies provide all the requisite information at the time of making statutory applications under different sections of the Companies Act 1956.

Under current norms, a listed company can pay up to 11 per cent of its annual net profit as compensation to its board members. The cap is for company boards having both whole-time and non-whole time directors. In the case of boards having only whole time directors, the ceiling is 10 per cent.

For paying remuneration beyond these limits, the listed companies have to seek approval from the Ministry.

The Ministry is already looking to review the norms governing executive pay practices at the companies to bring them in tune with the changing times in terms of the economic advances in the country. [/EXPAND]