Empowering shareholders on executive compensation

By Sandip Bhagat and Raya Hazarika, S&R Associates
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Recent shareholder activism and regulatory action have focused attention on the issue of executive compensation in India. The Companies Act, 2013 (act), restricts the total managerial remuneration payable by a public company to its directors and managers in a financial year to no more than 11% of its net profits for that financial year. Consistent with recent trends in shareholder empowerment and corporate governance, the Ministry of Corporate Affairs amended the act in September 2018 to permit shareholders of public companies to decide on the payment of remuneration exceeding the 11% ceiling or the limits prescribed where the company had inadequate or no profits (instead of seeking central government approval).

Sandip-Bhagat-S&R-Associates
Sandip Bhagat
Partner
S&R Associates

There are further sub-limits to the overall ceiling. Remuneration to the managing director (MD) or whole-time director (WTD) or manager exceeding 5% (individually) or 10% (collectively) of net profits, or other directors exceeding 1% (where there is MD/WTD/manager) or 3% (in all other cases) of net profits, requires a special resolution of shareholders at a general meeting. In addition, prior approval from financial institutions, non-convertible debenture holders and any other secured creditor is required where the company has defaulted in payment of its dues.

Substantial powers are given to the shareholders in matters of managerial remuneration. The public shareholders of Apollo Tyres rejected the reappointment and remuneration of Neeraj Kanwar (a member of the controlling group) as the MD in September 2018. Although the controlling shareholders held 40.81% of the company, the resolution failed without sufficient votes from public shareholders. A revised proposal reducing the overall compensation by 30% (with 70% of total compensation being performance-based) was placed before the shareholders, and then approved in December 2018.

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Sandip Bhagat is a partner and Raya Hazarika is an associate at S&R Associates, a law firm with offices in New Delhi and Mumbai.

S&R Associates
64 Okhla Industrial Estate, Phase III
New Delhi – 110 020, India

One Indiabulls Centre, 1403 Tower 2 B
841 Senapati Bapat Marg, Lower Parel
Mumbai – 400 013, India

Contact details
New Delhi: Tel +91 11 4069 8000
Mumbai: Tel: +91 22 4302 8000
Author email: sbhagat@snrlaw.in |
rhazarika@snrlaw.in

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