Centre will not regulate salaries of top executives, rules likely next month

The central government’s role in deciding how much top executives of a company should be paid will soon be over. The Ministry of Corporate Affairs (MCA) is framing a set of rules to do away with the current provision in the law that requires a public limited company to seek central government’s approval to fix or raise salaries of the managerial persons, including CEO, chief financial officer (CFO) and executive directors (EDs) beyond a threshold.

The rules, aimed at improving the ease of doing business in the country, are likely to be announced next month. The provisions of Section 197 of the Companies Act are being amended to allow the companies to decide on the managerial compensation with the shareholders’ approval. Currently, under the Companies Act, a public limited company can pay up to 11% of the net profit to its top management, but needs approval of the government to hike it. The salaries paid by the firms having inadequate profit or are loss-making are, however, linked to a percentage of their effective capital.

With the change in rules, the company will be able to decide on the managerial compensation through a special resolution.

Many companies are awaiting the government’s nod to increase compensation of CEOs. “Once the rules are framed and announced, these cases will be disposed of. We will ask the companies to take the special resolution route to make changes in the salaries of top executives,” said a ministry official.

However, if the CEO, CFO or any other managerial person is a foreigner, the company will still be required to approach the government on the compensation issue.

The government approval will also be required where cases are pending against the top executives.

“Government leaving the decision to raise salaries to shareholders is a step towards further liberalisation,” Ramakant Rai, partner at Trilegal, said. “It is anyway unnecessary to put a limit on the CEO pay as the government has got nothing to do with how much a company pays its top executives. It is a hindrance, particularly for the loss-making companies and those with low profits to get high-performing CEOs to turn them around,” he said.

Source: DNA Money