Mumbai, September 12, 2017
Well-known current and former CEOs of some key Indian blue chips lead the list of people whose revised compensation packages have been delayed for the past three years as government approval is pending due to existing provisions of the Companies Act.
Guenter Butschek of Tata Motors, Anand Kripalu of USL, and S Raghunandan of Jyothy Labs are some of the CEOs who are yet to be paid in full.
Provisions of the Act stipulate low limits on salaries for CEOs of loss-making companies while inclusion of stock options under CEO compensation prevent profitable firms from doling out automatic hikes. Many firms with none or low profits are unable to attract top talent for turnaround roles owing to the inability to execute Esop plans.
In mid-2016, the government struck down United Spirits' proposed pay packages for CEO Anand Kripalu of Rs 6.49 crore as it breached the limit of 15% of profits prescribed under the Companies Act. USL got shareholders approval in September 2014 for the proposal and its appeal to the government to reconsider its stance is currently pending.
Indian laws stipulate that companies can pay up to 15% of profits in case of profitable companies while loss-making companies face a cap on remuneration. CEO salaries for them are linked to a percentage of capital and in many cases the amounts are very low. A turnaround company which returns to profits need not seek central government approval but the picture has got complicated by inclusion of stock options as part of the compensation package. Stock options have increased the package, pushing it past the prescribed limit for profitable companies and forcing companies to seek central government approval.
This is what has happened in the case of USL and Jyothy Laboratories
"We had applied for the requisite approval from the central government for the excess remuneration," a USL spokesperson said. "The government vide letters dated April 28, 2016, did not approve the company's application. On May 24, 2016, the company submitted the applications, along with detailed explanations to reconsider the proposal. The company is awaiting response from the government."
An amendment to the remuneration clause in the Companies Act is awaiting approval in Rajya Sabha. Lok Sabha has already passed it. Salary, perquisites and bonus were always a part of the management compensation ceiling but the inclusion of Esops created a problem for many companies.
The demand for relaxing this rule came from many startup and infra firms who have a long gestation period and are prevented from attracting talents and restricted from paying top salaries due to insufficient profits.
The government has now sought to amend Section 197 of the Act dealing with managerial remuneration by way of changes in sub-sections (1), (3), (9), (10) and (11) and the insertion of new sub-sections (16) and (17) with a view to omitting altogether the requirement for government approval and the imposition of necessary safeguards in the form of additional disclosures, special resolutions and auditor certifications, etc.
The Parliamentary Standing Committee which reviewed the amendment to the Companies Act 2013 recommended doing away with the need for central government approval.
"The ministry has taken too long to clear this proposal and we had even hoped that it would look into a one-time approval to clear the pending list of remuneration payable," said the chairman of a leading conglomerate seeking anonymity.
A Tata Motors spokesperson confirmed the issue with CEO compensation. "It is true that Tata Motors is in discussion with ministry of external affairs on the compensation of MD of Tata Motors. These talks are going on smoothly and the company's application is under active consideration," a Tata Motors spokesperson said.
Tata Motors' standalone operations has been making losses since 2014. In 2013-14, it made a loss of Rs 1,178 crore which increased to Rs 4,418 crore in 2014-15. In 2016-17, it posted a loss of Rs 2,385 crore. Jyothy's Raghunandan is waiting for his compensation package of approximately 1% of the company's outstanding equity worth about Rs 70 crore.
"Our hands are tied until amendments or approvals come in from the central government. We have been told that an amendment is likely to happen soon in Rajya Sabha," a spokesperson for the company said.
'Govt Should Have No Say'
"Compensation of CEOs should be the decision of the board, shareholders and the NRC committee. The government (or the babus) should have no say in this," said Anil Singhvi of IiAS. "I find it absurd when government tries to play a role in deciding how much CEOs should be paid," he said.
"The government is just trying to regulate that public money is responsibly managed by the publicly listed companies," said Ajay Raghavan, partner, labour and employment practice advisory, Trilegal.
"The direct impact is that if companies are not doing well, then the leadership team should be held accountable. Companies need to go through scrutiny."
Other companies have also faced similar problems. Jindal Steel & Power (JSPL) paid excess managerial remuneration of Rs 7.01 crore to the chairman and Rs 62 lakh to the managing director and chief executive officer in FY15. The shareholders' approval was taken by way of special resolution for payment of minimum managerial remuneration, as per Schedule V to the Companies Act, 2013.
The process of securing government nod for waiver of recovery of excess managerial remuneration paid is on. There was consolidated loss of Rs 1,454.6 crore in FY15 compared with profit of Rs 1,893.8 crore in the previous year.
[The Economic Times]