On 29th April 2022, Reserve Bank of India (RBI), issued guidelines on Key Managerial Personnel (KMP) and Senior Management in NBFCs. These guidelines intend to provide regulating framework to Non-Banking Financial Company (NBFCs) and their Nomination and Remuneration Committees (NRCs).
These guidelines shall come into effect from April 01, 2023.
Key points:
- Non-Banking Financial Company (NBFC) support real economic activity and regulate supplemental channel of credit intermediation alongside. After the revised Scale Based Regulatory (SBR) Framework, back in 22 October, 2021, different facets of regulation of NBFCs covering capital requirements, governance standards, prudential regulation, etc., it was decided to issue an integrated regulatory framework for NBFCs under SBR providing a holistic view of the SBR structure, to set regulations being introduced and respective timelines.
- These guidelines will be applicable to all the KMPs (defined under Section 2 (51) of Companies Act, 2013), except the ones under ‘Base Layer’ and Government owned NBFCs.
- The NBFCs have to act in accordance to the Board approved compensation policy. This will include-
(a) constitution of a Remuneration Committee
(b) principles for fixed/ variable pay structures
(c) malus/ clawback provisions
- NRCs will be constituted under Sec.178 of the Companies Act, 2013, which will work in close co-ordination with Risk Management Committee (RMC). It will ensure that “fit and proper” status of directors is maintained to achieve effective functioning of appointments and conflict resolution of the directors/KMPs/senior management.
- Components and risk alignment of the Principles: The risk cover and compensation should be reasonably evaluated by the KMPs. Compensation packages include-
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- Composition of Fixed Pay- Under the provisions of Para 2.2 of the Annex, fixed compensation will be including the perquisites and contributions towards superannuation/retirement benefits, along with monetary equivalent of benefits of non-monetary nature, etc.
- Composition of Variable Pay: Under the provisions of Para 2.3.1 of the Annex, variable compensation will be including share-linked instruments, or a mix of cash and share-linked instruments.
- The deferred compensation may be subject to malus/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. NBFCs may also specify a period during which malus and/or clawback can be applied, covering at least the deferral and retention periods.
- The committee has to ensure the risk management and Compensation levels are regulated under Internal Capital Adequacy Assessment Process (ICAAP).
- Guaranteed bonus: Only new hiring joining/sign-on will be paid the bonus, which neither will be part of fixed or variable payments.
- Guaranteed bonus will not be paid to KMPs and senior management.