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    Many companies face a tricky situation on exec bonuses as new norms kick in

    Synopsis

    New rules make shareholder approval mandatory for all bonuses paid to top executives.

    Bank-2---BCCL
    Legal experts say this is a one-time anomaly since the listed companies are geared to implement the new law from the current fiscal.
    Top executives of listed companies face challenges over bonuses thanks to new disclosure norms implemented by the Securities and Exchange Board of India (Sebi). The new rules make minority shareholder approval mandatory for all bonuses paid to top executives on or after April 1.

    However, companies pay bonuses with a lag – money received this financial year is for services rendered in the last one. Effectively, minority shareholder approval will be needed for bonuses promised to top officials in the last fiscal.

    Also, top executives of several mid-cap companies are concerned about shareholder backlash since the stock performance of most has been poor in the past year. ET has confirmed the development with executive directors of two listed companies, both non-banking financial companies (NBFCs).

    Legal experts say this is a one-time anomaly since the listed companies are geared to implement the new law from the current fiscal.

    “We have already made requests to Sebi to clarify its position since the issue seems to be an unintended consequence of the new regulation,” said one of the directors cited above. “Our employment contracts of last year did not have any clause that suggested the bonus promised to us was subject to shareholder approval.”

    The second person cited above said companies are in a tricky situation due to the poor market returns. After two years of outperformance, the mid-cap and smallcap indices saw a slump in the last fiscal. While the BSE mid-cap index has lost over 10 per cent since April 1, 2018, the BSE Small-cap index has fallen by more than 20 per cent.

    “One ought to understand that poor stock performance of a company may not always be due to bad corporate performance,” the person said. “Sometimes, there is weakness in overall markets and hence even the companies with strong business performance might register poor share performance.”

    Legal experts are unsure about the correct interpretation of Sebi’s new rules since top executives are entitled to promised bonuses while this could infringe upon shareholders’ rights.

    “The amendment does not clarify if it is applicable from the date on which the bonus accrued or the date on which it becomes payable,” said Shruti Rajan, partner, Cyril Amarchand Mangaldas. “There is always room to argue that such compliances cannot be retrospective in nature, especially when it is to the detriment of a director who has been promised a certain compensation package at a point in time when the relevant law did not exist.”

    Legal experts said companies could seek either a formal clarification from Sebi or gets its view informally and use that as a guiding principle. “Logically, the bonuses for last year should not be subject to the new law that was introduced this year,” said Sandeep Parekh, founder, Finsec Law Advisors. “However, companies have little choice in the current scenario.”



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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