Earlier this month, Sobha Kapoor and Ekta Kapoor, who are part of Balaji Telefilms’ promoter group, faced the wrath of shareholders when they failed to secure the required votes on resolutions proposing salary increases for them. In recent months, several promoter-directors, including Siddharth Lal of Eicher Motors and Pawan Munjal of Hero MotoCorp, have faced similar situations. Obviously, large institutional shareholders – and public shareholders – do not like promoter-directors to increase their remuneration at a time when the prospects for business recovery are clouded by the expected third wave of the Covid pandemic. 19. According to experts, it is incumbent on the nomination and remuneration committee (CNR) of the board of directors of a company to bring more transparency, objectivity and fairness in the establishment of remuneration and salary increases. promoters.
“There is a feeling that the promoters must share the pain in this Covid year. When the growth of income and profits has slowed, or is negative, how to justify a disproportionate increase in remuneration reserved for promoters only? Asks Shriram Subramanian, Founder and CEO, InGovern Research Services. The reason for the anxiety of shareholders is not difficult to understand. The Aon India executive compensation study for 2021, released in April, suggests that CEOs of promoters of BSE 100 companies earn, on average, 30% more than professional CEOs. In India, the pay gap between promoter-director and professional director could reach 20 to 30 times, says JN Gupta, managing director of Stakeholders Empowerment Services, a proxy consulting firm.
Most experts believe that the weak link in bridging the pay gap between promoter-administrators and professional administrators is the NRC. “Performance evaluation by the NRC is now just a formality, except for real-blood companies,” explains Prabal Basu Roy, administrator and advisor to the chairman of the boards. Gupta describes them as “puppet” NRCs. “Often, the NRC does not address issues related to the compensation of promoter-directors,” he adds. The board’s assessment of director performance is largely an internal exercise, with few companies calling on outside professionals to support their assessment effort.
Experts point out that the NRC, when evaluating the compensation of promoter-directors, tends to forget that the promoter’s wealth is linked to its shareholding – the promoter’s average stake in listed companies in India is said to be around 45 per cent. cent, and that two out of three listed companies are controlled by families.
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Amit Tandon, Founder and Managing Director, Institutional Investor Advisory Services (IiAS), a proxy advisory firm, says the fastest way to ensure that adequate controls are in place is to process promoter-director compensation as a related party transaction. This would mean that companies would have to have approval for these payments from the majority of minority shareholders.
The 2013 Companies Act does not distinguish between promoter-directors and professional directors in terms of remuneration. Nor does it set a legal cap on executive compensation, provided the company obtains shareholder or lender approval for it. A for-profit state-owned enterprise is permitted to pay the remuneration of its supervisory staff up to 11 percent of net profit. Anything beyond that would require a special resolution that must be approved by 75 percent of the shareholders.
However, the listing regulations of the Securities and Exchange Board of India (Sebi) state that the annual remuneration of a director who is part of the promoter group cannot exceed 2.5% of net profit, or 5 crore rupees, whichever is greater. Beyond that, the company is expected to seek shareholder approval through a special resolution.
Some pundits, such as InGovern’s Subramanian, believe promoter-directors should cap their cash compensation and take the bulk of their payouts as dividends. “That way, it’s fair to all the shareholders who took the risk of investing and supporting the promoter. “Compensation should be compared to the total return to the shareholder,” says Subramanian.
Not everyone agrees with this line of thinking. IiAS believes that the declaration of dividends should not favor a specific category of shareholders, namely promoters or controlling shareholders, as this could have an impact on the long-term interests of shareholders.
Performance-based agreements for promoter payments are seen as a more viable option for setting promoter compensation. “Sebi could perhaps force listed companies (with a turnover exceeding Rs 500 crore) to adopt an executive compensation policy approved by shareholders and an independent expert. We have also seen similar developments in the case of the dividend declaration policy, ”says Amit Agarwal, Partner, Nangia & Co.
But one thing the experts agree on is that the NRC needs to bring more transparency to the performance reviews of promoter-directors. “It is important to establish and publish evaluation principles to assess the effectiveness and contribution of each director. When establishing this assessment, NRC should consider the relative performance of the organization against a relevant peer group, ”says Pothen Jacob, Practice Leader – Executive Compensation and Governance at Aon India.
Making connections between the organization’s relative performance and director compensation can make the compensation proposal much more credible and acceptable to shareholders, he adds.
Experts point out that the combination of promoter compensation paid versus what promoters earn from dividends also has a tax planning angle. Generally, in the case of a business promoter earning more than 5 crore rupees as annual income, dividends will be taxed at the maximum rate of 42.74% (30% tax + 37% surcharge + 4 % of cess). In the hands of the company, however, the payment of dividends is not tax deductible, so there are no inherent tax advantages to the company except for cash outflows and depletion of funds. reservations.
But the payment of the promoter’s remuneration is fully tax deductible in the hands of the company. “So obvious tax planning ensues, as there is a tax arbitration in cases where a company opts for promoter compensation over the dividend,” Agarwal explains.