Making clawback clause effective
The provision isn’ t part of legal statute in India, making it vulnerable to legal challenge
On January 30, the board of ICICI Bank stirred up a hornet’s nest by announcing it would claw back all the bonuses and stock options given to former Chief Executive Officer (CEO) and Managing Director (MD) Chanda Kochhar between April 2009 and March 2018. This followed a report by a probe panel headed by former Supreme Court judge B NS ri krishna that indicted Kochhar for violation of the bank’s Code of Conduct in the Videocon loan case.
The rarely used clause in the employment agreement has left legal experts and HR executives divided on whether the bank's board has gone overboard and on the challenges in the implementation of these provisions.
“This is probably one-of-akind or a unique situation,” says K Sudarshan, managing partner, India, EMA Partners International. Till now, following a breach in the employment contract, there have been instances of companies claiming back joining bonus, or amounts spent on training and development of a senior executive, say HR experts.
Experts point out enforcing clawback provision in an employment contract is open to legal challenge once invoked. “The question will be whether it will pass legal scrutiny and the process of recovery itself,” says Sudarshan.
According to Vikram Shroff, partner at law firm Nishith Desai Associates, a clawback provision, similar to Section 304 of the Sarbanes-Oxley Act in the US, does not exist under Indian corporate or labour laws. “Accordingly, it is necessary for employers to include such provisions in the individual employment contract or in the bonus and incentive plans, as applicable,” he says.
Section 304 of the Sarbanes-Oxley Act — popularly known as the ‘clawback provision’ — allows the US Securities and Exchange Commission (SEC) to impose severe financial penalties on a CEO and a chief financial officer if the company’s financial statements have been materially inaccurate.
Though the provision does not exist under Indian statute, clawback clauses have been part of employment agreements in the banking and financial services sector for many years, say HR experts. Of late, these provisions have started appearing for sales functions in information technology companies, points out Atul Gupta, a partner at Trilegal, a law firm. excessive risk-taking and misconduct,”
“In principle, clawback provisions says Ronesh Puri, managing director at should be extended to key managerial personnel,” Executive Access. says Shroff. HR experts agree that Puri points out the time period for this will ensure better accountability claiming the refund by an organisation among key management personnel (KMP) has to be reasonable; otherwise, this could in any company. The Indian accounting be challenged as a violation of the Indian standards define key managerial personnel Contract Act. as those who have the authority and the “From a legal standpoint, organisations responsibility for planning, directing and are not permitted to make deductions from controlling the activities of a company. guaranteed components of 'wages' for lower
The Reserve Bank of India (RBI) guidelines paid employees, except in very limited say banks and financial institutions circumstances,” says Gupta. However, in should put in place appropriate modalities the case of C-suite executives, banks and to incorporate the clawback mechanism in other financial institutions can exercise respect of variable pay. These guidelines greater control and flexibility when it comes by the RBI were a “reaction to the global to structuring the terms and conditions financial crisis and aimed at creating around discretionary incentives, conditional accountability amongst senior management bonuses, for their and decisions stock options, and to he prevent adds.
For instance, in its compensation policy for board members, ICICI Bank has specified a clawback provision, which says that the employees covered under this “will agree to return the previously paid variable pay to the Bank, in event of an enquiry determining gross negligence or integrity breach”.
Most experts believe that the ICICI Bank-Chanda Kochhar clawback case is likely to end up being challenged in the court. “A lot depends on framing of the clause and whether a correlation is established and the proof of it,” says Puri.
“Given her senior position... her rights would largely depend on the policies and contractual terms that ICICI has in place with her, and the approach and findings of the report based on which this action was taken,” adds Gupta.