Executive Summary:
These guidelines, issued by the Reserve Bank of India, outline the compensation policy for Key Managerial Personnel (KMP) and senior management in Non-Banking Financial Companies (NBFCs). The policy requires NBFCs to establish a Board-approved compensation framework, including a Remuneration Committee, principles for pay structures, and malus/clawback provisions. These guidelines are effective from April 1, 2023, and apply to all NBFCs under the Scale Based Regulatory (SBR) framework, excluding those in the Base Layer and government-owned NBFCs.
Key Points / Main Content:
Applicability:
* Applies to all NBFCs under SBR framework, excluding Base Layer NBFCs and government-owned NBFCs.
* Effective from April 1, 2023.
Nomination and Remuneration Committee (NRC):
* NBFCs must constitute an NRC with powers, functions, and duties as per Section 178 of the Companies Act, 2013.
* NRC shall oversee framing, review, and implementation of the compensation policy, subject to board approval.
* NRC may coordinate with the Risk Management Committee (RMC).
* NRC may ensure compensation levels align with earnings retention and capital adequacy (ICAAP).
* NRC may ensure fit and proper status of directors, KMPs, and senior management, and address conflicts of interest.
Principles for Compensation:
* Compensation must be reasonable, considering statutory requirements and industry practices.
* Compensation packages should align fixed and variable pay components with prudent risk-taking, adjusting for all risks and time horizons.
* The mix of cash, equity, and other compensation forms should be consistent with risk alignment.
Fixed Pay:
* Includes all fixed compensation items, such as perquisites and superannuation/retiral benefits.
* Reimbursable perquisites with monetary ceilings and the monetary equivalent of non-monetary benefits can be part of fixed pay.
Variable Pay:
* May consist of share-linked instruments or a mix of cash and share-linked instruments, compliant with statutory provisions.
* The proportion of variable pay should align with the role and risk-taking profile of KMPs/senior management.
* Higher responsibility roles should have a higher proportion of variable pay.
* Variable pay should be genuinely variable and can be reduced to zero based on performance.
* Performance measures and their relation to remuneration should be clearly defined.
* A portion of variable pay may be deferred based on the time horizon of risks, as decided by the Board.
Control and Assurance Functions:
* Personnel in financial control, risk management, compliance, and internal audit should be compensated independently of business areas they oversee.
* These personnel may have a higher proportion of fixed compensation, but a reasonable portion can be variable pay.
Guaranteed Bonus:
* Guaranteed bonuses are prohibited for KMPs and senior management, except for sign-on bonuses for new hires, which are not considered fixed or variable pay.
Malus/Clawback:
* Deferred compensation is subject to malus/clawback arrangements for subdued financial performance or employee misconduct.
* NBFCs should identify situations that trigger malus/clawback clauses on the entire variable pay.
* The period for applying malus/clawback should cover at least the deferral and retention periods.
Impact Analysis:
NBFCs (excluding Base Layer and Government Owned):
* Impact: Must comply with the guidelines when structuring compensation packages for KMP and senior management. This will likely require revisions to existing compensation policies and practices.
* Action Required: Establish a Nomination and Remuneration Committee (NRC). Develop/Revise and implement a board-approved compensation policy that aligns with the specified principles, including fixed/variable pay structures and malus/clawback provisions.
Key Managerial Personnel (KMP) and Senior Management:
* Impact: Their compensation packages will be subject to the new guidelines, potentially affecting the proportion of fixed versus variable pay, deferral arrangements, and the possibility of malus/clawback.
* Action Required: Understand the new compensation policy and how it affects their individual compensation structure, including performance metrics, deferral terms, and conditions for malus/clawback.
Boards of Directors of NBFCs:
* Impact: Required to oversee and approve the compensation policy, ensuring it aligns with the regulatory guidelines and promotes prudent risk-taking.
* Action Required: Establish/Delegate authority to the Nomination and Remuneration Committee (NRC) to develop and implement the compensation policy. Review and approve the proposed compensation policy, ensuring it meets all regulatory requirements and aligns with the company's risk profile and performance objectives.
Key Entities Referenced
Non-Banking Financial Companies: Entities regulated by the Reserve Bank of India, subject to the guidelines outlined in the document.
Key Managerial Personnel: Individuals defined in Section 2(51) of Companies Act, 2013, whose compensation is subject to these guidelines.
Senior Management: Individuals as defined in Explanation to Section 178 of the Companies Act, 2013, whose compensation is subject to these guidelines.
Scale Based Regulatory SBR framework: A regulatory framework for NBFCs introduced vide circular DOR.CRE.REC.No.6003.10.001202122 October 22, 2021
Nomination and Remuneration Committee NRC: A committee to be constituted by NBFCs to oversee the framing, review, and implementation of compensation policy.
Reserve Bank of India: The central bank of India, which issued the guidelines on compensation of Key Managerial Personnel (KMP) and Senior Management in NBFCs
Companies Act, 2013: Indian legislation that defines Key Managerial Personnel and provides for Nomination and Remuneration Committees.
Risk Management Committee RMC: A committee that works in coordination with Nomination and Remuneration Committee NRC to achieve effective alignment between compensation and risks.
RBI/2022-23/36
DOR.GOV.REC.No.29/18.10.002/2022-23 April 29, 2022
All Non-Banking Financial Companies
Madam/Sir,
Guidelines on Compensation of Key Managerial Personnel (KMP) and Senior
Management in NBFCs
As you are aware, a revised Scale Based Regulatory (SBR) framework for NBFCs
was put in place vide circular DOR.CRE.REC.No.60/03.10.001/2021-22 October 22,
2021. In terms of para 3.2.3 (h) of the said circular, in order to address issues arising
out of excessive risk taking caused by misaligned compensation packages, NBFCs
are required to put in place a Board approved compensation policy. The policy shall
at the minimum include, (a) constitution of a Remuneration Committee, (b) principles
for fixed/ variable pay structures, and (c) malus/ clawback provisions. Further, in terms
of para 3.2.3 (i) it was also decided that the Board of NBFCs should delineate the role
of various committees, including Nomination and Remuneration Committee (NRC). It
was envisaged that detailed circulars will be issued in due course by the Reserve
Bank. Accordingly, these guidelines have now been framed and furnished in Annex.
2. The guidelines are intended only for providing broad guidance to NBFCs and their
NRCs in formulating their compensation policy. While formulating the compensation
policy, it has to be ensured that all statutory mandates and the rules and directions
issued under them are fully complied with.
िविनयमन िवभाग, क�द्रीय काया�लय , 12वी/ं13वी ंमंिजल, क�द्रीय काया�लय भवन, शहीद भगत िसंह माग�,फोट�,मुंबई -400001
दूरभाष: 022-22601000 फै�: 022-22705691 ई-मेल: cgmicdor@rbi.org.in
Department of Regulation, Central Office, 12/13th floor, Central Office Building, Shahid Bhagat Singh Marg, Fort, Mumbai-400001
Tel: दूरभाष: 022-22601000 Fax No-022-22705691 email: cgmicdor@rbi.org.in
िहंदी आसान ह�, इसका प्रयोग बड़ाइए3. These guidelines will be applicable for fixing the compensation policy of Key
Managerial Personnel1 and members of senior management2 of all Non-Banking
Financial Companies under SBR framework, except those categorised under ‘Base
Layer’3 and Government owned NBFCs.
4. These guidelines shall come into effect from April 01, 2023.
Yours faithfully
(Scenta Joy)
Chief General Manager
1 KMPs: As defined in Section 2 (51) of Companies Act, 2013, as amended from time to time.
2 ‘Senior Management’ are the same as defined in ‘Explanation’ to Section 178 of the Companies Act, 2013.
3 Base Layer – as defined in RBI Circular DOR.CRE.REC.No.60/03.10.001/2021-22 dated October 22, 2021 on
Scale Based Regulation (SBR): A Revised Regulatory Framework for NBFCs, as amended from time to time.
2Annex
Guidelines on Compensation of Key Managerial Personnel and Senior
Management in NBFCs: Minimum Scope and coverage
1. Nomination and Remuneration Committee (NRC)
The Boards of all applicable NBFCs shall constitute a Nomination and Remuneration
Committee (NRC). The NRC shall have the constitution, powers, functions and duties
as laid down in section 178 of the Companies Act, 2013. The NRC, inter alia, shall
also have the mandate to oversee the framing, review and implementation of
compensation policy of the company which should have the approval of the board.
The NRC may work in close coordination with Risk Management Committee (RMC) of
the company to achieve effective alignment between compensation and risks. Further,
the NRC may ensure that compensation levels are supported by the need to retain
earnings of the company and the need to maintain adequate capital based on Internal
Capital Adequacy Assessment Process (ICAAP). NRC may also ensure ‘fit and proper’
status of proposed/existing directors and that there is no conflict of interest in
appointment of directors on Board of the company, KMPs and senior management.
2. Principles for compensation
2.1 Components and risk alignment: The compensation of Key Managerial
Personnel (KMPs) and senior management needs to be reasonable, recognising all
relevant factors including adherence to statutory requirements and industry practices.
The compensation packages may comprise of fixed and variable pay components
aligned effectively with prudent risk taking to ensure that compensation is adjusted for
all types of risks, the compensation outcomes are symmetric with risk outcomes,
compensation pay-outs are sensitive to the time horizon of the risks, and the mix of
cash, equity and other forms of compensation are consistent with risk alignment.
2.2 Composition of Fixed Pay: All the fixed items of compensation, including the
perquisites and contributions towards superannuation/retiral benefits, may be treated
as part of fixed pay. All perquisites that are reimbursable may also be included in the
fixed pay so long as there are monetary ceilings on these reimbursements. Monetary
3equivalent of benefits of non-monetary nature (such as free furnished house, use of
company car, etc.) may also be part of fixed pay.
2.3 Principles for Variable Pay
2.3.1 Composition of Variable Pay: The variable pay may be in the form of share-
linked instruments, or a mix of cash and share-linked instruments. It shall be ensured
that the share-linked instruments are in conformity with relevant statutory provisions.
2.3.2 Proportion: The proportion of variable pay in total compensation4 needs to be
commensurate with the role and prudent risk taking profile of KMPs/ senior
management. At higher levels of responsibility, the proportion of variable pay needs
to be higher. There should be proper balance between the cash and share-linked
instruments in the variable pay in case the variable pay contains share linked
instruments. 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. In order to do so, performance measures and their relation to remuneration
packages should be clearly defined at the beginning of the performance measurement
period to ensure that the employees perceive the incentive mechanism.
2.3.3 Deferral of variable pay: Not all the variable pay awarded after performance
assessment may be paid immediately. Certain portion of variable pay, as decided by
the Board of the company, may be deferred to time horizon of the risks. The portion of
deferral arrangement may be made applicable for both cash and non-cash
components of the variable pay. Deferral period for such an arrangement may be
decided by the Board of the company.
2.3.4 Control and assurance function personnel: KMPs and senior management
engaged in financial control, risk management, compliance and internal audit may be
compensated in a manner that is independent of the business areas they oversee and
commensurate with their key role in the company. Accordingly, such personnel may
have higher proportion of fixed compensation. However, a reasonable proportion of
compensation may be in the form of variable pay, so that exercising the options of
malus and/or clawback, when warranted, is not rendered infructuous.
4 Total compensation includes fixed and variable pay
43. Guaranteed bonus
Guaranteed bonus may not be paid to KMPs and senior management. However, in
the context of new hiring joining/sign-on bonus could be considered. Such bonus will
neither be considered part of fixed pay nor of variable pay.
4. Malus / Clawback
The deferred compensation may be subject to malus5/clawback6 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. A representative set of
situations may be identified by the NBFC, which require them to invoke the malus and
clawback clauses that may be applicable on entire variable pay. 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 periods7.
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5 A malus arrangement permits the NBFC to prevent vesting of all or part of the amount of a deferred remuneration.
Malus arrangement does not reverse vesting after it has already occurred.
6 A clawback is a contractual agreement between the employee and the NBFC in which the employee agrees to
return previously paid or vested remuneration to the NBFC under certain circumstances.
7 Retention period: A period of time after the vesting of instruments which have been awarded as variable pay
during which they cannot be sold or accessed.
5