RBI issues direction on share sops for private bank honchos

NEW DELHI: The RBI said on Monday the fair value of the share-linked incentives paid to chief executive officers, whole-time directors and other key functionaries by the private banks should be recognised as an expense during the relevant accounting period.

The Reserve Bank has also asked all banks, including local area banks, small finance banks and foreign banks to comply with its directions for all share-linked instruments granted after the accounting period ending March 31, 2021.

The central bank had issued guidelines on the compensation of whole-time directors/ chief executive officers/ material risk takers and control function staff in November 2019.

Issuing a clarification in this regard, the Reserve Bank of India said, "the fair value (of share-linked incentives) ...should be recognised as expense beginning with the accounting period for which approval has been granted".

In terms of the extant guidelines, share-linked instruments are required to be fairly valued on the date of grant using the Black-Scholes model.

For the purpose of inclusion of such share-linked instruments in the bank's compensation policy, they should be fair valued on the date of grant by the bank using Black-Scholes model, the central bank had then said.

The Black-Scholes model, also known as the Black-Scholes-Merton model, is a mathematical model for pricing an options contract. In particular, the model estimates the variation over time of financial instruments.

The RBI issued the clarification saying "it has been observed" that banks do not recognise grants of the share-linked compensation as an expense in their books of account concurrently.

"Banks should ensure compliance to above instructions for all sharelinked instruments granted after the accounting period ending March 31, Reserve bBank of India said.