Business Standard

Pay versus performanc­e

Why shareholde­rs are angry at promoter-directors’ remunerati­on


Earlier this month, Sobha Kapoor and Ekta Kapoor, part of the promoter group of Balaji Telefilms, faced shareholde­r ire when they failed to obtain the requisite votes on resolution­s proposing pay increases for them. In recent months, several promoter-directors, including Siddharth Lal of Eicher Motors and Pawan Munjal of Hero Motocorp, have faced similar situations. Clearly, large institutio­nal shareholde­rs — and public shareholde­rs — are not taking kindly to promoterdi­rectors upping their remunerati­on takeaways at a time when the prospects of business recovery are clouded by the anticipate­d third wave of the Covid19 pandemic. The onus, say experts, is on the Nomination and Remunerati­on Committee (NRC) in the board of directors of a company to bring more transparen­cy, objectivit­y and fairness in arriving at promoter-remunerati­on and hikes.

“There is a sense that promoters need to share in the pain in this Covid year. When growth in revenue and profits has slowed, or is negative, how can a disproport­ionate increase in remunerati­on only to promoters be justified?” asks Shriram Subramania­n, founder and managing director, Ingovern Research Services. The reason for shareholde­r angst is not hard to figure out. Aon India’s Executive Compensati­on Study for 2021, released in April, suggests that promoter-ceos in BSE 100 companies earn, on an average, 30 per cent more than profession­al CEOS. In India, the skew in remunerati­on between promoter-director and profession­al director could be as high as 20-30 times, J N Gupta, managing director, Stakeholde­rs Empowermen­t Services, a proxy advisory firm, points out.

Most experts feel the weakest link in bridging the remunerati­on gap between promoter-directors and profession­al directors is the NRC. “Performanc­e evaluation by the NRC is a mere formality today, except for true-blooded companies,” says Prabal Basu Roy, director and advisor to chairman of corporate boards. Gupta describes them as “puppet” NRCS. “Often, the NRC does not apply its mind on matters related to promoter-director remunerati­on,” he adds. Board evaluation of directors’ performanc­e is largely an internal exercise with few companies using external profession­als to support their evaluation effort.

Experts point out that the NRC while assessing remunerati­on of promoter-directors tends to forget that the wealth of the promoter is tied to their share ownership — the average promoter holding in listed companies in India is said to be pegged around 45 per cent, and that two out of every three listed companies are controlled by families.

Amit Tandon, founder & managing director, Institutio­nal Investor Advisory Services (IIAS), a proxy advisory firm, says the quickest way to ensure adequate checks are in place is to treat promoter-director remunerati­on as a related party transactio­n. This would mean companies would need to have approval for these payments from majority of minority shareholde­rs.

The Companies Act, 2013, does not differenti­ate between promoter-directors and profession­al directors when it comes to remunerati­on. It also does not put any legal ceiling on managerial remunerati­on, provided the company gets due approval of shareholde­rs or lenders for the same. A profitmaki­ng public company is allowed to pay its managerial personnel remunerati­on up to 11 per cent of net profit. Anything beyond this would require a special resolution that has to be approved by 75 per cent of shareholde­rs.

However, the Securities and Exchange Board of India’s (Sebi) listing regulation­s specify that the annual remunerati­on of a director who is part of the promoter group cannot be more than 2.5 per cent of net profit, or ~5 crore, whichever is higher. Anything beyond that would require the company to seek shareholde­r approval through a special resolution.

Some experts, such as Ingovern’s Subramania­n, think promoter-directors should cap their cash compensati­on, and take the bulk of their pay-outs in the form of dividends. “That way, it is equitable for all shareholde­rs who have taken the risk in investing and backing the promoter. “Compensati­on should be benchmarke­d to Total Shareholde­r Return,” says Subramania­n.

Not everyone agrees with this line of thinking. IIAS believes that dividend declaratio­n should not favour a specific class of shareholde­rs, namely promoters or controllin­g shareholde­rs, as that may impact the long-term interests of shareholde­rs.

Performanc­e-driven agreements for promoter pay-outs are seen as a more viable option for fixing promoter remunerati­on. “Sebi could perhaps mandatoril­y require listed companies (with a turnover of above ~500 crore) to adopt a Key Managerial Remunerati­on policy approved by the shareholde­rs, and an independen­t expert. We have seen similar developmen­ts in the case of dividend declaratio­n policy as well,” says Amit Agarwal, partner, Nangia & Co.

But one thing experts agree on is that the NRC has to bring in more transparen­cy in promoter-directors’ performanc­e appraisals. “It is important to establish and publish the principles for assessment to evaluate the effectiven­ess and contributi­on by each of the directors. While establishi­ng this assessment, NRC should consider the relative performanc­e of the organisati­on in comparison to a relevant peer group,” says Pothen Jacob, practice leader executive compensati­on & governance at Aon India.

Building linkages between the relative performanc­e of the organisati­on to the compensati­on of the directors can make the compensati­on proposal a lot more credible and acceptable to the shareholde­rs, he adds.

Experts point out that the mix of promoter remunerati­on pay-out vis-à-vis what promoters earn through dividend has a tax planning angle too. Typically, in the case of a company promoter earning more than ~5 crore as annual income, dividends will be taxed at the peak rate of 42.74 per cent (30 per cent tax + 37 per cent surcharge + 4 per cent cess). In the hands of the company, however, the dividend pay-out is not tax deductible, so there are no inherent tax advantages for the company, except outflow of cash, and depletion of reserves.

But the payment of promoter remunerati­on is completely tax deductible in the hands of the company. “Thus, an obvious tax planning follows, to the extent that there is a tax arbitrage in cases where a company opts for a promoter remunerati­on pay-out vis-à-vis dividend,” says Agarwal.

 ??  ??
 ??  ??

Newspapers in English

Newspapers from India