The Law Reviews - The Executive Remuneration Review

11/2/21, 11:18 AM The Law Reviews - The Executive Remuneration Review
The Executive Remuneration Review:

India
Nohid Nooreyezdan, Shreya Rao, Veena Gopalakrishnan, Aishwarya Srivastava
and Nishanth Ravindran
AZB & Partners

01 November 2021
Introduction
The terms of employment and remuneration of a large section of the Indian

workforce are governed by statutory employment laws. However, in most
cases, senior executives are exempt from the applicability of such
employment laws and their terms of employment and remuneration are
ordinarily contractually driven. That said, based on the position in which the
senior executive is engaged, certain corporate and securities laws
considerations are triggered.
India revamped its law regulating companies in 2013 and the terms with
respect to executive remuneration were also closely reviewed as part of this
exercise. The objectives of ensuring transparency and parity in executive
remuneration, however, have always been discussed while keeping in mind
the need to pay senior executives as per market standards to attract the
right talent. In this regard, Dr Jamshed J Irani's Report on Company Law
dated 31 May 2005 highlighted the need for companies to adopt
remuneration policies to attract, retain and motivate executives to enhance
the performance of the company and that the decision on how to
remunerate executives should be left up to the company. This report
further stated that this decision should be transparent and based on
principles that ensure fairness, reasonableness and accountability.
Executive remuneration (i.e., the remuneration of managing directors, key

managerial persons and managers) is governed by the Companies Act, 2013
(the Companies Act) and the Securities and Exchange Board of India (SEBI).
The remuneration of senior executives is typically a combination of fixed
salary, incentives linked to individual and organisational performance, and
stock-linked incentives. Recent instances of financial and other impropriety
by senior executives have significantly impacted companies, their
reputation and their valuation. Organisations have now started evaluating
compensation structures and reviewing terms of executive employment
more closely. Consequently, more robust covenants are being included in
employment documents to detail responsibilities, build in the required
checks and balances, and highlight consequences of breach, such as
including clauses to clawback bonuses and other discretionary payments.
Taxation
https://thelawreviews.co.uk/title/the-executive-remuneration-review/india 1/23
This chapter seeks to highlight certain key issues that companies should i
keep in mind when structuring executive compensation.

Income tax for employees
Income tax in India is levied by the Income Tax Act, 1961 (ITA), which follows i
a scheduler approach to taxation of income. Residents are taxed on global i
income while non-residents are taxed on Indian source income. Residency
is based on a day count test. An intermediate category of Resident but not
Ordinarily Resident (RNoR) is available for transitory persons, who are
taxable only on Indian source income in spite of satisfying the residency
test in a given year. Further, a globally resident Indian citizen may be
deemed to be resident in India and taxable on Indian source income if such
person is not liable to be taxed in any other country. Citizenship, with some
exceptions, is generally not relevant to the determination of tax liability.
Whether income is considered to be of Indian source would depend on the

nature of income and whether it satisfies the relevant source ruling under
the ITA. For example, capital gains is considered to have its source in India if
it derives from the transfer of a capital asset situated in India, whereas
employment income is taxable if the employment is rendered in India,
although this requirement may be subject to minimum periods of stay in
India under a relevant tax treaty. The rule for the business income of
consultants and contractors would depend on whether they are considered
to be providing technical services. If not, business income would only be
considered to have an Indian source if there exists a business connection in
India (under the provisions of the ITA), or a permanent establishment or
fixed base in India (under a relevant tax treaty).
The maximum marginal tax rate applicable to the 'total income' (including
salary income) of individuals is 30 per cent. Individuals may be subject to a
surcharge ranging from 10 per cent–37 per cent, which would result in an
effective maximum rate of 42.74 per cent in the highest band. All taxpayers
including individuals are subject to a 'cess' (tax or levy) of 4 per cent over tax
and surcharge. Capital gains are not subject to ordinary or progressive slab
rates of income tax. Capital gains tax is levied at a flat rate, which may vary
from zero per cent to 40 per cent, depending on the residence and type of
the taxpayer, type of capital asset, mode of transfer and the holding period
of the asset.
Compensatory payments may be taxable either as employment income, if

in consideration for a relationship of employment, or as profits and gains of
business and profession, if in consideration of a consultancy or
contractorship. A third possibility is capital gains income, if the payment is
structured as being due on redemption of a security held by an individual.
Typically, one of the objectives of equity incentive structuring will be to try
to accomplish capital gains treatment to the extent possible, as the rates
are frequently lower. Salary income is taxable at the earlier of receipt or
accrual, whereas profits and gains from business are taxable on an accrual
or cash basis, depending on the nature of taxpayer and system of
accounting adopted. Capital gains, on the other hand, are taxable in the
year of transfer of shares, irrespective of when the consideration is received.
This may create characterisation difficulties in relation to deferred income
such as earn-out payments, which are paid over a period of time.
Equity incentives are frequently used in the Indian context, primarily

comprising employee stock options (ESOPs) or sweat equity. ESOPs are not
taxable upon grant or vesting. They are taxable upon exercise, at ordinary
income tax rates, on the spread between exercise price and the fair market
value of the share issued upon exercise. Employees receive a step up in
basis (cost of acquisition) of the share and are required to pay a capital
gains tax on disposition of the share, on the difference between the
stepped up cost of acquisition and the sale price of the share. The tax
consequences on delivery of shares would be similar to those described
above, notwithstanding that they may be subject to forfeiture at some
point in the future, say upon termination of employment. This means that,
if a share is issued to an employee at lower than fair market value, he or she
would be taxable on the difference between price paid and the fair market
value of the share, at ordinary rates applicable to salary income. When the
share is subsequently forfeited, presumably for nil value or a very low value,
the employee may claim a capital loss on the difference between fair
market value (on the date of issuance) and price received.
Social security benefits
The Employees' Provident Funds and Miscellaneous Provisions Act, 1952 i

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(EPF Act) is the primary social security legislation in India. This statute is
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applicable to employers with 20 or more employees and requires the
employer and employee to make contributions to a statutory retirement
fund at the rate of 12 per cent of the basic wages, dearness allowance and
retaining allowance, capped at 15,000 rupees. Only employees who are
earning less than 15,000 rupees per month or who are already existing
members of the statutory fund are mandatorily to be covered under the
fund.
In this regard, courts have held that the term 'basic wages' would include
all components of wages that are universally paid, across the board to all
employees. Therefore, any ad hoc payments that may be specifically paid to
certain employees would be exempt for the purposes of contributions to
the provident fund.
Additionally, the EPF Act was amended in 2008 to bring within its purview
'international workers'. An international worker, for the purpose of the
statute, means (1) an Indian employee having worked or going to work in a
foreign country with which India has entered into a social security
agreement and being eligible to avail the benefits under a social security
programme of that country, by virtue of the eligibility gained or going to
gain under the said agreement; or (2) an employee other than an Indian
employee, holding other than an Indian passport, working for an
establishment in India to which the EPF Act applies. Note that the wage
ceiling of 15,000 rupees mentioned above for computing contributions
under the EPF Act is not applicable to international workers.
In addition to the EPF Act, various states in India have enacted state-
specific labour welfare fund statutes that require employers and employees
to make periodic contributions to a state labour welfare fund. Further, India
also provides for a statutory end of service entitlement under the Payment
of Gratuity Act, 1972 (the Gratuity Act). This statute prescribes compulsory
gratuity payable by establishments where 10 or more persons are employed
or were employed on any day of the preceding 12 months. The Gratuity Act
entitles every employee who has completed five years of continuous service
(taken as four years and 240 days for those with a six-day work week and
four years and 190 days for those with a five-day working week), upon
termination of employment, to gratuity calculated at the rate of 15 days'
wages, based on the rate of wages last drawn, for each year of completed
service or part thereof in excess of six months, currently subject to a
maximum of 2 million rupees).
Tax deductibility for employers
Remuneration paid to employees is generally deductible. This includes i

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bonuses and commissions, approved payments (within certain limits)
towards gratuity, pensions, a recognised provident fund or superannuation
fund. Some exceptions where deductions are not allowed are: if a salary is
paid by an Indian employer to a non-resident outside India, without tax
being deducted, or if a non-monetary perquisite is provided by the
employer, in which case the employer is liable to pay the tax, with the said
perquisite being exempt in the hands of the employee. Employers can
claim the deduction on an accrual basis if they follow the mercantile
system of accounting (which companies are required to do) or on payment
basis if they follow the cash system of accounting, which is an option
available to certain employers such as sole proprietorships. However, even
employers who follow the mercantile system may be required to claim
certain deductions on an actual payment basis, with examples being
contribution to a provident fund or super annuation fund or sums payable
in lieu of leave not taken by the employee. These deductions are subject to
the employer complying with their withholding tax obligations on
payments to employees.
Other special rules
There are no specific rules applicable to employees in connection with a

change in control. However, where employees hold shares in an entity that
undergoes a merger or demerger, and receive shares in a new entity in
exchange for such shareholding, it should not result in tax consequences
for the employees, provided that the restructuring is a tax qualifying
merger or demerger under the ITA and relevant conditions are satisfied.
Tax planning and other considerations
Payments towards enhanced health, life insurance or similar benefits are

deductible when made by employees, and may be deductible (in some
circumstances) in the hands of the employer, when made by the employer.
Structuring options such as personal service corporations are not common

in the Indian context, primarily because India follows the classical system of
corporate taxation. This means that the tax rate applicable to individuals (at
a maximum rate of 42.7 per cent under current law) would be more
favourable than the tax rate applicable to distributions made by a
corporation (with the corporation paying tax at 25 per cent plus – 30 per
cent surcharge and cess and the shareholder paying tax at applicable
personal tax rates on any dividends received). Other forms of intermediate
holding entity may also result in tax inefficiencies. Personal holding
companies are set up in some situations, for example by fund managers
who are expected to receive a carried interest from an offshore fund,
although these structures are becoming less common with the recent
introduction of the Indian general anti-avoidance rule.
Trusts are commonly used in the Indian planning context, to provide an

economic right to the employee without a title to the underlying equity.
This is particularly the case where large numbers of employees are sought
to be compensated. These trusts are generally set up as determinate
irrevocable trusts, which are considered tax transparent in India. Having
said this, it is important to be mindful of tax consequences while setting up
a trust structure for equity incentives, as tax can be levied at various stages,
such as upon the trust if it is settled for the benefit of non-relatives and
receives shares at lower than fair market value.
Globally resident employees do also frequently consider secondment

arrangements when they take up employment in India as it enables them
to receive their salary payment outside India, subject to the payment of tax
dues in India. In comparison, under Indian exchange control provisions,
Indian resident employees are required to repatriate to India any foreign
exchange dues that may be payable to them, with certain exceptions.
It is relevant to examine the provisions of the applicable tax treaty while

evaluating tax consequences for a globally resident employee, as these will
frequently provide for minimum thresholds of physical stay in India prior to
the salary income being taxable in India. Provisions pertaining to taxation of
dependent personal services in several treaties require a minimum period
of stay of 183 days in India, in order for salary income to be taxable in India,
as well as separate provisions relating to allocation of taxing rights over
pensions and annuity. India has a large network of treaties, which tend to
be broadly based on the OECD model treaty.
Employment law
The terms of employment with senior executives are largely governed by i
contract, and therefore it is very important that the employment

agreements be detailed with robust confidentiality, intellectual property
assignment, termination rights and other relevant restrictive covenants. We

have highlighted key areas in this regard below.
Non-compete covenants
Section 27 of the Indian Contract Act, 1872 (Contract Act) provides that any i
agreement that restrains a person from exercising a lawful profession, tradei
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or business is void to the extent of such restriction. The only exception
under Section 27 of the Contract Act is with respect to restrictions on
carrying on business of which goodwill is sold. This exception is, however,
subject to the restriction being reasonable with respect to (1) the nature of
business that the individual is restrained from engaging in; (2) territorial
restrictions; and (3) the period of restriction. Since contracts in restraint of
trade are prima facie void, the onus is on the party supporting the contract
to show that the restraint falls within the exception and is reasonable.
Post employment non-competition covenants have consistently been held

to be unenforceable in India. While courts have held non-competition
covenants during the term of employment to be enforceable, those
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applicable post-employment are consistently considered void. However,
post employment non-competition covenants are commonly included to
deter employees from engaging with competition.
Given that post-employment, non-competition obligations are

unenforceable, employers rely on confidentiality obligations to protect their
intellectual property and proprietary information. In this regard, of the
restrictive covenants that are imposed on employees, courts in India are
typically most inclined to uphold and enforce restrictive covenants in
relation to non-disclosure of confidential information. There is no fixed
standard of what information constitutes 'confidential information' and the
same could vary based on factors including the industry of the employer.
Garden leave
As post-employment, non-competition covenants have been held to be i

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unenforceable in India, employers typically resort to including the right to
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require employees to proceed on garden leave while they are serving out
their notice period; typically, the notice period included the employment
agreements for executives are longer than the notice periods contained in
regular employee agreements. Garden leave is a process by which
employees are indirectly restrained from joining competitors by paying
money to the employees for the garden leave period.
Non-solicitation covenants:
In an employer–employee relationship, non-solicitation agreements are i

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generally understood to refer to contracts whereby an employee is
restricted from soliciting the employer's clients, customers, vendors or
employees for a predetermined duration after termination of the
employment. While it is an established position of law in India that
restrictive covenants seeking to operate post termination of employment

are void, courts in India have, on a case-by-case basis, upheld the validity of
non-solicitation agreements even after conclusion of the employment.
The position under Indian law in relation to the enforceability of non-

solicitation restrictions is that courts typically would not grant a specific
injunction to enforce a non-solicitation covenant and would be more
inclined to grant damages. That said, practically, allegations of breach of
non-solicitation clauses are difficult to establish in a court of law.
Termination of employment
To carry out termination of employment, an employer would need to

adhere to the specific requirements in relation to termination of
employment under the Industrial Disputes Act, 1947 (the ID Act), state-
specific legislation applicable to commercial establishments (S&E Acts),
and the terms of employment contained in the employment
documentation and company policies.
Requirements under the ID Act
The ID Act is only applicable to employees categorised as 'workmen' – that

is, a person employed in any industry to do any manual, unskilled, skilled,
technical, operational, clerical or supervisory work for hire or reward. This
definition excludes persons employed mainly in a managerial or
administrative capacity and those persons who are employed in a
supervisory capacity drawing monthly wages in excess of 10,000 rupees.
Senior executives would ordinarily not fall within the purview of the ID Act.
With respect to employees who are not 'workmen' (which would include
executives), termination of their employment will need to be as per the S&E
Act (if applicable) and the contractual terms of employment.
Requirements under S&E Acts
S&E Acts typically require that employment of employees who have been in
employment for a certain period are terminated for 'reasonable cause' and
with prior notice of one month or pay in lieu. However, these requirements
could vary based on the state in which the establishment is located.
Requirements per the terms of employment
The employer would also be required to adhere to the terms of v
employment as contained in employment contracts and the organisation's

policies. If the terms of employment are more beneficial to employees
(such as a longer notice periods, higher severance, etc.) than those offered
under statute, the more beneficial terms would need to be provided.
However, given that executives are largely exempt from statutory

employment law protections for wrongful termination, it is essential to
clearly document the terms of employment, minimum commitment in
terms of duration of employment, termination of employment (for cause
and otherwise) and consequences of termination.
There are no specific limits on severance remuneration that is payable to

executives from an employment law perspective. Additionally, executives
will also be eligible to payment of gratuity and leave encashment, in
addition to other contractual severance payments.
Change of control
The implications of change in control do not apply to executives, unless v

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contractually determined. In this regard, rules in relation to the termination
of employment in connection with a change in control depends on the
category of employee and the manner in which the change in control has
occurred. In this regard, please note the following.
In relation to the transfer of 'workmen' pursuant to transfer of an

'undertaking': the ID Act prescribes the process of transfer of workmen in
case of the transfer of ownership or management of an 'undertaking'.
Where there is a transfer of ownership or management of an undertaking
from one employer to a new employer, every 'workman' who has been in
continuous service for not less than one year (240 days) is deemed to be
retrenched (terminated), unless the following conditions are fulfilled:
a. the workmen are being transferred under terms and conditions that are not less favourable than the terms
and conditions of service immediately before the transfer;
b. the employment is not being interrupted by the transfer;
c. the transferee, under the terms of transfer or otherwise, is legally liable to pay the workmen, in the event of
termination of his or her service, compensation on the basis that their service had been continuous and not
affected by the transfer; and
d. the workmen consent to their transfer.
If all of the conditions mentioned above are not met, then the workmen
who have been in continuous service for one year (240 days) or more shall
be deemed to have been retrenched and be entitled to the following from
the transferor entity: (1) one month's notice or wages in lieu thereof; and (2)
retrenchment compensation calculated at the rate of 15 days' 'average pay'
for every year of continuous service or part thereof in excess of six months.
In relation to the transfer of non-workmen or for transfers not pursuant to a

transfer of undertaking: for non-workmen or where the transfer is not
pursuant to a transfer of undertaking, the mode of transfer of employment
is via contractual agreement between the transferor entity, employee and
transferee entity. The transfer documentation should capture (1) cessation
of employment with the transferor and settlement of dues; (2)
commencement of employment with the transferee entity and terms of
employment; and (3) consent of the employees to transfer to the transferee
entity. Typically, such transfers are on terms that are not less favourable
applicable immediately before the transfer and employees are generally
provided with continuity in service. If their employment is to be terminated,

the employer would be required to adhere to the process prescribed under
their employment agreement and the S&E Acts (if applicable).
Reason for termination and constructive dismissal
Employment law statutes largely permit for termination of non-workmen v

with notice or payment in lieu of notice in cases of termination simpliciter. i
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Employers can terminate employment without notice or payment in lieu of
notice if the termination is on grounds of misconduct. However, it is
required that the employers adhere to the principles of natural justice
when determining whether there has been misconduct. The law regarding
constructive termination is yet to develop in India, and currently this
concept is not applicable under Indian law.
Unions and collective bargaining agreements
All categories of employees (including executives) are permitted to unionise

in India. However, executives generally tend not to unionise or to
collectively bargain.
Securities law
i Stock-based employee benefits
Stock-based employee benefits in India are often structured in the form of

stock options, restricted stock units, stock appreciation rights, or a hybrid of
such forms. Issuance of such stock-based benefits is governed by the
Companies Act and the regulations promulgated by the SEBI, as applicable.
For companies other than listed companies, issuance of ESOPs is governed

by the Companies Act and the Companies (Share Capital and Debentures)
Rules, 2014 (the SCD Rules). The Companies Act defines an ESOP as an
option given to the directors, officers or employees of a company or of its
holding company or subsidiary company or companies, if any, giving such
persons the benefit or right to purchase, or to subscribe for, the shares of
the company at a future date at a predetermined price.
With respect to unlisted companies, the Companies Act and the SCD Rules
prescribe, inter alia, the following conditionalities in respect of the issuance
of ESOPs.
Eligibility
The following persons are eligible for the receipt of ESOPs:

a. a permanent employee of the company who has been working in India or outside India;
b. a director of the company, whether a whole-time director or not but excluding an independent director; or
c. an employee as under clauses (a) or (b) above of a subsidiary, in India or outside India, or of a holding company
of the company.
Companies are not permitted to grant stock options to an employee who is

a promoter or a person belonging to the promoter group; or a director who
either him or herself or through his or her relative or through any body
corporate, directly or indirectly, holds more than 10 per cent of the
outstanding equity shares of the company.
These restrictions are not applicable in respect of a 'start-up company', for a

period of 10 years from the date of its incorporation or registration.
Minimum vesting period
There must be a minimum period of one year between the grant of the
ESOPs and the vesting of such ESOPs.
Approvals
Issuance of ESOPs is subject to receipt of shareholders' approval by a

special resolution – that is, the votes cast in favour of the resolution are not
to be less than three times the number of votes cast against the resolution.
Further, while a company may undertake to vary the terms of any ESOPs
not yet exercised by a special resolution, such variation must not be
prejudicial to the interests of the option holders.
Miscellaneous
Employees do not have right to receive any dividend or to vote or in any

manner enjoy the benefits of a shareholder in respect of ESOPs granted to
them, till such time that shares are issued on exercise of the ESOPs. A
company has the freedom to specify any lock-in period for the shares
issued pursuant to exercise of the ESOPs, and is to determine the exercise
price in conformity with applicable accounting policies, if any.
Listed companies
For listed companies, the Securities and Exchange Board of India (Share
Based Employee Benefits) Regulations, 2014 (SBEB Regulations) govern
employee stock option schemes, employee stock purchase schemes, stock
appreciation rights schemes, general employee benefits schemes, and
retirement benefit schemes. The SBEB Regulations prescribe, inter alia, the
following conditionalities in respect of the issuance of ESOPs.
Eligibility
The eligibility critieria and exclusions with respect to stock-linked incentives

under the SBEB Regulations are the same as under the SCD Rules. The
SBEB Regulations additionally state that an employee will be eligible to
participate in the company as determined by the compensation committee
of the company.
Minimum vesting period
Approvals
A minimum vesting period of one year is prescribed in respect of options

granted under an employee stock option scheme or a stock appreciation
right scheme.
As with a private company, no scheme may be offered to employees in the

absence of approval accorded by the shareholders by way of special
resolution. Further, a company may not vary the terms of any scheme
(including of a scheme offered but not yet exercised) in any manner that
may be detrimental to the interests of the employees.
Miscellaneous
In case of a new issuance of shares under any scheme, such newly issued i
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shares are to be listed immediately in any recognised stock exchange
where the existing shares are listed, subject to:
a. compliance with the other stipulations of the SBEB Regulations;
b. filing of a statement with SEBI in such regard, and receipt of an in-principle approval from the stock
exchanges; and
c. notification to the stock exchanges as per the statement specified by SEBI as and when an exercise is made.
Sweat equity
For companies other than listed companies, the SCD Rules govern the
grant of sweat equity by the company to its executives. 'Sweat equity'
means equity shares issued by a company to its directors or employees at a
discount or for consideration other than cash, for providing their know-how
or making available rights in the nature of intellectual property rights or
value additions. The SCD Rules, inter alia, prescribe the following
conditionalities for issuance of sweat equity shares.
Eligibility
Permanent employees and directors (whether whole time or not) of a

company, its subsidiary in India or outside India, its holding company are
eligible to be issued sweat equity in a company.
Approvals
Issuance of sweat equity is subject to receipt of shareholders' approval in a

general meeting by way of passage of a special resolution.
Miscellaneous
a. Subject to exemption afforded to start-ups, a company may not issue sweat equity shares for more than 15 per i
cent of its existing paid-up equity share capital in a year or shares of the issue value of 50 million rupees, i
whichever is higher. i
b. The issuance of sweat equity shares in a company may not exceed 25 per cent of the paid-up equity capital of
the company at any time.
c. The sweat equity issued to directors or employees is locked in and non-transferable for a period of three years
from the date of allotment.
d. The sweat equity shares are to be issued at a price determined by a registered valuer and justified under a
valuation report addressed to the board of directors, with the gist and critical elements of the valuation report
required to be shared with the shareholders at the general meeting convened for obtaining their approval.
For a listed company, the SEBI (Issue of Sweat Equity) Regulations, 2002
(the Sweat Equity Regulations) govern the granting of sweat equity to
employees, directors and promoters.
An issuance of sweat equity under the Sweat Equity Regulations requires

approval of the shareholders by way of special resolution. Further, the
pricing of the sweat equity shares must adhere to the floor price and
valuation norms as specified under the Sweat Equity Regulations.
The company is also required to submit a statement to the stock exchanges

within the prescribed time period, providing requisite details of the
issuance, including the number of sweat equity shares, pricing, total
amount invested, details of the persons participating in the issuance, and
consequent changes in the capital structure after and before the issuance
of sweat equity.
Sale of company stock and short-swing trading
The sale of a company's stock by its executives must adhere to the trading i
norms under the concerned SEBI regulations, as applicable. These trading v
norms may be further supplemented by a company via its articles of
association to include further stipulations in relation to the sale of company
stock by executives.
For listed or proposed-to-be listed entities, the Securities and Exchange

Board of India (Prohibition of Insider Trading) Regulations, 2015 (the Inside
Trading Regulations) place various restrictions on 'insiders', such as a
prohibition on communication of any unpublished price-sensitive
information and trading in securities that are listed or proposed to be listed
on a stock exchange when in possession of unpublished price-sensitive
information. An 'insider' in the context of the Insider Trading Regulations is
any 'connected person' and any person in possession or with access to
unpublished price-sensitive information. A connected person includes any
person who is or has during the six months prior to the concerned act been
associated with a company, directly or indirectly, in any capacity (including
as a director, officer or an employee of the company or holding any
position, including a professional or business relationship with the
company) that allows or can reasonably be expected to allow such person,
directly or indirectly, access to unpublished price-sensitive information.
While short-swing trading rules are not formally crystallised under the
Insider Trading Regulations, an insider is permitted to formulate a trading
plan and present it to the compliance officer for approval and public
disclosure, pursuant to which trades may be carried out on his or her behalf
in accordance with this plan. Such trading plan may establish the
mechanics of permitted trades, a violation of which would be addressed as
a violation of the Insider Trading Regulations and is punishable as such.
Trading under the trading plan cannot commence on behalf of the insider
earlier than six months from the public disclosure of the plan. Further, the
trading plan must:
a. not entail trading for the period between the 20th trading day prior to the last day of any financial period for
which results are required to be announced by the issuer of the securities and the second trading day after the
disclosure of such financial results;
b. entail trading for a period of not less than 12 months;
c. not entail overlap of any period for which another trading plan is already in existence;
d. set out either the value of trades to be effected or the number of securities to be traded along with the nature
of the trade and the intervals at, or dates on which, such trades shall be effected; and
e. not entail trading in securities for market abuse.
Anti-hedging rules
The Reserve Bank of India has issued the Guidelines on Compensation of

Whole Time Directors/Chief Executive Officers/Material Risk Takers and
Control Function Staff (the RBI Guidelines), applicable to private-sector
banks including local area banks, small finance banks and payments banks.
Per the RBI Regulations, banks are not to permit employees to insure or
hedge their compensation structure to offset the risk alignment effects
embedded in their compensation arrangement. The RBI Guidelines call
upon the banks to enforce the same by establishing appropriate
compliance arrangements.
Disclosure
i Disclosure of remuneration information
The Companies Act requires every company to file an annual return with i
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the Registrar of Companies, disclosing details of the remuneration of its
directors and key managerial personnel, including gross salary,
commission, and stock option and sweat equity.
Additionally, every listed company is to disclose particulars of remuneration

of its directors in the report of its board of directors, detailing the following:
a. the ratio of the remuneration of each director to the median remuneration of the employees of the company
for the financial year;
b. the percentage increase in remuneration of each director, chief financial officer, chief executive officer,
company secretary or manager, if any, in the financial year;
c. the percentage increase in the median remuneration of employees in the financial year;
d. the number of permanent employees on the rolls of the company; and
e. affirmation that the remuneration is as per the remuneration policy of the company.
Perquisites
Perquisites are defined to include the following under the Companies Act i
i
as read with the Income-tax Act, 1961 (the Income Tax Act) subject to
i
prescribed thresholds (materiality or otherwise), qualifications, and
exceptions:
a. the value of rent-free accommodation provided by an employer and the value of any concession in the matter
of rent respecting any accommodation provided by an employer;
b. the value of any benefit or amenity granted or provided free of cost or at concessional rate in specified cases
including by a company to an employee who is a director thereof, and by a company to an employee being a
person who has substantial interest in the company;
c. any sum paid by an employer in respect of any obligation which, but for such payment, would have been
payable by the concerned person;
d. any sum payable by an employer to effect an assurance on the life of the assessee or to effect a contract for an
annuity;
e. the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the
employer, or a former employer, free of cost or at concessional rate;
f. the amount of any contribution and accretions to specified superannuation fund or provident fun by the
employer in respect of the assessee; and
g. the value of any other fringe benefit or amenity as may be prescribed.

The Income Tax Act and allied rules prescribes valuation norms for various
classes of perquisites, with perquisites accordingly required to be valued
in monetary terms and taxed as part of the employee's salary income.
Disclosures for related party agreements
A related party is defined under the Companies Act to include a director or

his or her relative, in addition to a key managerial personnel or his or her
relative. Every contract or arrangement with a related party is required to
be referred to in the report of the board of directors to its shareholders,
along with the justification for entering into such contract or arrangement.
A related party's appointment to any office or place of profit in a company,

subsidiary company, or associate company is required to be undertaken
only with the consent of the board of directors, or by way of passage of a
resolution by the company's shareholders where the appointment to such
office or place of profit entails a monthly remuneration exceeding 250,000
rupees.
In this context, an 'office or place of profit' includes:

a. when held by a director, any office or place, by virtue of which the director receives from the company
anything by way of remuneration over and above the remuneration to which he or she is entitled as director,
by way of salary, fee, commission, perquisites, any rent-free accommodation or otherwise; and
b. when held by an individual other than a director, any office or place, by virtue of which such individual receives
from the company anything by way of remuneration, salary, fee, commission, perquisites, any rent-free
accommodation or otherwise.
Corporate governance
The Companies Act defines 'remuneration' as any money or its equivalent i
given or passed to any person for services rendered by him or her and
includes perquisites. All companies (whether private, public or listed) are
subject to corporate governance norms applicable to executive
remuneration as explored below.
Nomination and remuneration committee
Every listed public company, and every company fulfilling the following- i
i
listed criteria, is required to constitute a nomination and remuneration
committee (NRC):
a. public companies with paid-up share capital of 100 million rupees;
b. public companies with turnover of 1 billion rupees; and
c. public companies that have, in aggregate, outstanding loans, debentures and deposits exceeding 500 million
rupees.
The NRC must consist of three or more non-executive directors out of

which not less than one-half are to be independent directors. Further, the
chair of the company (whether executive or non-executive) may be
appointed as a member of the NRC but may not chair the NRC.
The NRC is to recommend to the board of directors a policy relating to the

remuneration of the directors, key managerial personnel and other
employees. The NRC is further tasked with certain obligations including
ensuring that:
a. the level and composition of remuneration is reasonable and sufficient to attract, retain and motivate directors
of the quality required to run the company successfully;
b. the relationship of remuneration to performance is clear and meets appropriate performance benchmarks;
and
c. the remuneration to directors, key managerial personnel and senior management involves a balance between
fixed and incentive pay reflecting short- and long-term performance objectives appropriate to the working of
the company and its goals.
Ceiling on remuneration
The Companies Act prescribes limits on the remuneration payable by a i

i
public company to its directors, prescribing that the total managerial
i
remuneration payable by a public company to its directors, including its
managing director and whole-time director, and its manager in any
financial year shall not exceed 11 per cent of the net profits of that company.
Additionally, in respect of a managing director, whole-time director or

manager, the total remuneration payable to any one such person must not
exceed 5 per cent of the net profits of the company, and if there is more
than one such person, the remuneration to all such persons is to not
exceed 10 per cent of the net profits.
Corporate governance for foreign companies
In respect of directors that are neither a managing director nor a whole- i

v
time director, the remuneration to all such directors must not exceed 1 per
cent of the net profits of the company if there is a managing director or
whole-time director or manager, and should not exceed 3 per cent in any
other case.
Further, in any financial year, if the concerned company has no profits or if

its profits are inadequate, the Companies Act prescribes limits to the yearly
remuneration that are pegged to the effective capital of a company.
The Companies Act further provides that in respect of cases where a

company has inadequate or no profits, the company may fix the
remuneration within the limits specified under the Companies Act, at such
amount or percentage of profits of the company, as it may deem fit and
while fixing the remuneration, the company is to have regard to criteria
including:
a. the financial position of the company (including its financial and operating performance over the three
preceding financial years);
b. the remuneration or commission drawn by the individual concerned in any other capacity or from any other
company;
c. securities held by the director, including options and details of the shares pledged as at the end of the
preceding financial year;
d. the performance of the director and proportionality of remuneration; and
e. professional qualifications and experience of the individual concerned.
Further, the Companies Act also prescribes remuneration limits for the
non-executive directors and independent directors, in situations of no
profits or inadequate profits.
The above-stated limits are exclusive of sitting fees paid to the directors
that are separately capped at 100,000 rupees per meeting of the board of
directors or committee thereof.
Further, subject to the prescribed procedure under the Companies Act, a

public company may elect to increase the above-stated thresholds for
remuneration by way of passage of a special resolution in its general
meeting.
In addition, as per the SEBI (Listing Obligations and Disclosure

Requirements), 2015 (the LODR Regulations) applicable to listed
companies, approval of shareholders by special resolution shall be obtained
every year, in which the annual remuneration payable to a single non-
executive director exceeds 50 per cent of the total annual remuneration
payable to all non-executive directors, giving details of the remuneration
thereof.
Clawback/recoupment of remuneration
The LODR Regulations also provide that fees or compensation payable to v
executive directors who are promoters or members of the promoter group

shall be subject to the approval of the shareholders by special resolution if
the annual remuneration payable to such executive director exceeds 50
million rupees or 2.5 per cent of the net profits of the listed entity,
whichever is higher; or where there is more than one such director, the
aggregate annual remuneration to such directors exceeds 5 per cent of the
net profits of the listed entity.
Where not less than 50 per cent of the paid-up share capital of a foreign
company is held by one or more citizens of India or by one or more
companies or bodies corporate incorporated in India, whether singly or in
the aggregate, such company is to comply with the provisions of the
Companies Act made applicable to it in India as if it were a company
incorporated in India.
Every foreign company (i.e., a company or body corporate incorporated

outside India that has a place of business in India whether by itself or
through an agent, physically or through electronic methods, and conducts
any business activity in India in any other manner), is required to submit a
profit and loss account and balance sheet containing the prescribed
particulars to the Registrar of Companies. To the extent that these relate
and are pertinent to the executives of a company (such as related-party
transactions involving the executives of the company including advances
due by directors or other officers of the company or any of them either
severally or jointly with any other persons, or amounts due by firms or
private companies respectively in which any director is a partner or a
director or a member), the relevant disclosures are required to be made in
the prescribed form to the Registrar of Companies.
The Companies Act contemplates the recovery of remuneration from

certain specified executive personnel in the event of fraud or non-
compliance.
If a company is required to restate its financial statements because of fraud

or non-compliance, this company is to recover from any past or present
managing director, whole-time director, manager or chief executive officer
(by whatever name called) who, during the period for which the financial
statements are required to be restated, received remuneration (including
any stock options) in excess of what would have been payable to him or her
as per restatement of financial statements.
The Companies Act also contemplates the procurement of insurance

coverage by a company on behalf of its managing director, whole-time
director, manager, chief executive officer, chief financial officer or company
secretary towards indemnifying them against any liability in relation to the
company. The premium paid in relation to such insurance is not treated as
part of the remuneration payable to any such personnel. However, if the
concerned executive is proved to be guilty, premium paid toward such
insurance is treated as part of the remuneration.
Further, under the labour laws pertaining to payment of gratuity, if

employees eligible for receipt of gratuity are terminated from employment
on account of any acts, wilful omission or negligence that causes
substantial damages to the company, these employees can be required to
forfeit their gratuity entitlement to recoup the losses of the company.
Shareholders approvals and executive remuneration
In respect of the limits on executive remuneration prescribed under the v

i
Companies Act for a public company (as detailed above), the shareholders
i
of a company may elect to increase such limits by way of passage of a
special resolution.
In respect of stock-based executive remuneration, the issuance of any

sweat equity shares or other form of stock-based benefit by a company
requires the approval of the company's shareholders by way of passage of a
special resolution. Shareholders further enjoy information rights in relation
to such proposed issuances.
Further, the articles of association of a company may provide additional

rights to a company's shareholders in respect of oversight or control over
managerial and executive remuneration.
Government approval of executive remuneration
While the earlier regulatory regime required approval of the central v

i
government for payment of managerial remuneration beyond the limits
i
specified under the Companies Act, such approval is no longer required i
and a company may undertake to pay its executives beyond the specified
thresholds upon receipt of the prescribed shareholders' approvals.
Proxy advisory firms
Proxy firms supplement statutory corporate governance norms in India,

and advise on a range of issues including appointment and remuneration
of key executives.
Proxy firms are regulated by SEBI, which prescribes disclosure standards

and other norms to ensure transparency and prevent any conflict of
interest in relation to the activities undertaken by proxy firms.
Executive remuneration in banks
Executive remuneration in banks is regulated by a special regime as

prescribed by the RBI under the Banking Regulation Act, 1949. In this
context, the RBI, in November 2019, issued Guidelines on Compensation of
Whole Time Directors/Chief Executive Officers/Other Risk Takers and
Control Function Staff keeping in mind international best practices, with a
view to providing sound compensation practices. The Guidelines have been
made applicable with effect from 1 April 2020. They rely on the principles
issued by the Financial Stability Board in 2009 with the objective of
ensuring effective governance of compensation, alignment of

compensation with prudent risk-taking, and effective supervisory oversight
and stakeholder engagement in compensation. As per the Guidelines,
private banks are, inter alia, required to:
a. formulate and adopt a comprehensive compensation policy covering all their employees and conduct an
annual review of the same. The policy should cover all aspects of the compensation structure such as fixed pay,
perquisites, performance bonus, guaranteed bonuses (joining and sign-on bonuses), severance packages and
share-linked benefits;
b. constitute a nomination and remuneration committee of the board to oversee the framing, review and
implementation of compensation policy of the bank on behalf of the board. This committee should work in
close coordination with the risk management committee of the bank, to achieve effective alignment between
compensation and risks;
c. ensure that for the whole-time directors, chief executive officers and material risk-takers:
compensation is adjusted for all types of risks;
compensation outcomes are symmetric with risk outcomes;
compensation payouts are sensitive to the time horizon of the risks; and
the mix of cash, equity and other forms of compensation is consistent with risk alignment;
d. ensure that the fixed portion of compensation is reasonable, taking into account all relevant factors including
adherence to statutory requirements and industry practice;
e. ensure a proper balance between the cash and share-linked components in the variable pay and ensure that
the limits on variable pay as prescribed under the guidelines are adhered to;
f. have deferred compensation subject to malus and clawback arrangements in the event of subdued or
negative financial performance;
g. not permit employees to insure or hedge their compensation structure to offset the risk alignment effects
embedded in their compensation arrangement;
h. members of staff engaged in financial and risk control, including internal audit, should be compensated in a
manner that is independent of the business areas they oversee; and
i. make disclosure on remuneration of whole-time directors, chief executive officers and material risk-takers on
an annual basis, at the minimum, in their annual financial statements.
The RBI issued instructions with regard to, inter alia, the remuneration of
non-executive directors with an objective to attract qualified competent
individuals to the position. Pursuant to the notification, the RBI has
permitted banks to provide for payment of compensation to non-executive
directors in the form of a fixed remuneration, in addition to sitting fees and
expenses related to attending the meetings, provided that this
remuneration for a non-executive director, other than the chair of the
board, cannot exceed 2 million rupees per annum. This fixed remuneration
is expected to be commensurate with an individual director's
responsibilities and demands on time.
Developments and conclusions
Footnotes
The current economic climate has brought the topic of corporate

governance to the forefront, with shareholders wanting to ensure that their
companies are effectively managed. Consequently, corporate governance is
becoming more critical not only from a compliance perspective but also
from a value and reputation perspective.
Additionally, the Code on Wages, 2019 received Presidential Assent on 8

August 2019 and was published in the gazette. The Wage Code seeks to
consolidate and replace the Payment of Wages Act, 1936; the Minimum
Wages Act, 1948; the Payment of Bonus Act, 1965; and the Equal
Remuneration Act, 1976. Further, the Code on Social Security, 2020 received
Presidential Assent on 28 September 2020 and was published in the
gazette. The Social Security Code intends to consolidate, into a single code,
nine central labour statutes related to social security, which, inter alia,
include the Employees' Provident Fund and Miscellaneous Provisions Act,
1952; the Employees' State Insurance Act, 1948; the Maternity Benefit Act,
1961; the Payment of Gratuity Act, 1972; and the Unorganised Workers'
Social Security Act, 2008. It proposes to extend the social security benefits
to employees and workers, in both the organised and the unorganised
sectors, including 'gig workers'. Both the Wage Code and the Social Security
Code have not yet been brought into effect entirely.
Separately, with the objective of aligning interests of key employees of asset

management companies with the unitholders of the mutual fund scheme,
SEBI introduced a compensation framework, which will be effective from 1
October 2021.
1
Nohid Nooreyezdan is a senior employment partner, Shreya Rao is a tax
partner, Veena Gopalakrishnan is an employment partner, Aishwarya
Srivastava is an associate and Nishanth Ravindran is a senior associate at
AZB & Partners.

2
Section 27 of the Contract Act – Every agreement, by which anyone is
restrained from exercising a lawful profession, trade or business of any kind,
is to that extent void. Exception 1 – saving of agreement not to carry on
business of which goodwill is sold – one who sells the goodwill of a business
may agree with the buyer to refrain from carrying on a similar business,
within specified local limits; so long as the buyer, or any person deriving
title to the goodwill from him or her, carries on a like business therein,
provided that such limits appear to the court reasonable, regard being had
to the nature of the business.
3
Niranjan Shankar Golikari v. The Century Spinning and Mfg. Co. Ltd. (AIR 1967 SC 1098).
Nohid Nooreyezdan
Author
[email protected]
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11/2/21, 11:18 AM The Law Reviews - The Executive Remuneration Review

The Executive Remuneration Review:

AZB & Partners

The terms of employment and remuneration of a large section of the Indian

Executive remuneration (i.e., the remuneration of managing directors, key

keep in mind when structuring executive compensation.

Whether income is considered to be of Indian source would depend on the

Compensatory payments may be taxable either as employment income, if

Equity incentives are frequently used in the Indian context, primarily

The Employees' Provident Funds and Miscellaneous Provisions Act, 1952 i

Remuneration paid to employees is generally deductible. This includes i

There are no specific rules applicable to employees in connection with a

Tax planning and other considerations

Payments towards enhanced health, life insurance or similar benefits are

Structuring options such as personal service corporations are not common

Trusts are commonly used in the Indian planning context, to provide an

Globally resident employees do also frequently consider secondment

It is relevant to examine the provisions of the applicable tax treaty while

The terms of employment with senior executives are largely governed by i

contract, and therefore it is very important that the employment

assignment, termination rights and other relevant restrictive covenants. We

Post employment non-competition covenants have consistently been held

Given that post-employment, non-competition obligations are

As post-employment, non-competition covenants have been held to be i

In an employer–employee relationship, non-solicitation agreements are i

restrictive covenants seeking to operate post termination of employment

The position under Indian law in relation to the enforceability of non-

To carry out termination of employment, an employer would need to

The ID Act is only applicable to employees categorised as 'workmen' – that

The employer would also be required to adhere to the terms of v

employment as contained in employment contracts and the organisation's

However, given that executives are largely exempt from statutory

There are no specific limits on severance remuneration that is payable to

The implications of change in control do not apply to executives, unless v

In relation to the transfer of 'workmen' pursuant to transfer of an

b. the employment is not being interrupted by the transfer;

d. the workmen consent to their transfer.

In relation to the transfer of non-workmen or for transfers not pursuant to a

provided with continuity in service. If their employment is to be terminated,

Employment law statutes largely permit for termination of non-workmen v

All categories of employees (including executives) are permitted to unionise

i Stock-based employee benefits

Stock-based employee benefits in India are often structured in the form of

For companies other than listed companies, issuance of ESOPs is governed

The following persons are eligible for the receipt of ESOPs:

Companies are not permitted to grant stock options to an employee who is

These restrictions are not applicable in respect of a 'start-up company', for a

Issuance of ESOPs is subject to receipt of shareholders' approval by a

Employees do not have right to receive any dividend or to vote or in any

The eligibility critieria and exclusions with respect to stock-linked incentives

A minimum vesting period of one year is prescribed in respect of options

As with a private company, no scheme may be offered to employees in the

Permanent employees and directors (whether whole time or not) of a

Issuance of sweat equity is subject to receipt of shareholders' approval in a

An issuance of sweat equity under the Sweat Equity Regulations requires

The company is also required to submit a statement to the stock exchanges

For listed or proposed-to-be listed entities, the Securities and Exchange

b. entail trading for a period of not less than 12 months;

e. not entail trading in securities for market abuse.

The Reserve Bank of India has issued the Guidelines on Compensation of