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.

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