RBI Issues Stricter Norms For Management Compensation At NBFCs

The Reserve Bank of India has laid down stricter guiding principles for compensation of senior management and key managerial personnel at non-bank financial companies. This is part of the regulator's move to strengthen the regulatory framework for large NBFCs and bring it closer to banks.

In October 2021, the RBI had introduced a scale-based regulatory framework which split lenders into four categories: base layers, middle layer, upper layer and top layer. The guidelines are aimed at reducing regulatory arbitrage between banks and non-bank lenders.

The latest compensation guidelines will be effective April 1, 2023, and will apply to all NBFCs, except those categorised under the base layer, the regulator said.

Setting Up A Board Committee

• The RBI has mandated that larger NBFCs will need to set up a nomination and remuneration committee within their boards.

• The NRC shall oversee the framing, review and implementation of compensation policy of the company which should have the approval of the board.

• The NRC may ensure that compensation levels are supported by the need to retain earnings of the company and to maintain adequate capital.

• NRC may also ensure ‘fit and proper’ status of proposed or existing directors and that there is no conflict of interest in appointment of directors on the board of the company, key managerial personnel and senior management.

Principles Of Compensation

• Senior management and key managerial personnel shall be paid in fixed and variable pay.

• All the fixed items of compensation, including the perquisites and contributions towards superannuation/retiral benefits, may be treated as part of fixed pay.

• Monetary equivalent of benefits of non-monetary nature (such as free furnished house, use of company car, etc.) may also be part of fixed pay.

• The variable pay may be in the form of share-linked instruments, or a mix of cash and share-linked instruments.

• The proportion of variable pay in total compensation needs to be commensurate with the role and prudent risk-taking profile of the officials.

• The variable pay should be truly and effectively variable and can be reduced to zero based on performance at an individual, business unit and company-wide level.

• Certain portion of variable pay, as decided by the board of the company, may be deferred to time horizon of the risks.

• Officials engaged in financial control, risk management, compliance and internal audit functions may have a higher proportion of fixed pay in their compensation.

• However, a reasonable proportion of their compensation must be kept variable for exercising options of malus or clawback.

Other Norms

• Boards may not offer guaranteed bonuses to senior management and key managerial personnel. However, in the context of new hiring, a joining or sign-on bonus could be considered. Such bonus will neither be considered part of fixed pay nor of variable pay.

• The deferred compensation may be subject to malus or clawback arrangements in the event of subdued or negative financial performance of the company and/or the relevant line of business or employee misconduct in any year.

• While setting criteria for the application of malus and clawback, NBFCs may also specify a period during which malus and/or clawback can be applied, covering at least the deferral and retention periods.