RBI has issued a circular on 1st June, 2015 wherein it has given guidelines on the compensation of non executive directors of private sector banks. Accordingly private sector banks can give profit related commission to its non executive directors upto a limit of Rs.10 lakhs per annum. It can also provide sitting fees as per the guidelines given in the Companies Act, 2013 and reimbursement of its expenses. However in case of remuneration of part time non executive Chairman, the private sector banks will have to take prior approval from the RBI.
The salient features of the guidelines are given below:
Guidelines on Compensation of Non-executive Directors (Except Part-time
Chairman) of Private Sector Banks
1. Compensation Policy
1.1 The Board of Directors, in consultation with its Remuneration Committee, should formulate and adopt a comprehensive compensation policy for the non-executive Directors (other than the part-time non-executive Chairman). While formulating the policy, the Board shall ensure compliance with the provisions of the Companies Act, 2013.
1.2 The Board may, at its discretion, provide for in the policy, payment of compensation in the form of profit related commission to the non-executive directors (other than the Part-time Chairman), subject to the bank making profits. Such compensation, however, shall not exceed Rs.1 million per annum for each director.
2. Sitting fees and reimbursement of expenses
2.1 In addition to the directors’ compensation mentioned in para 1.2 above, the bank may pay sitting fees to the non-executive directors and reimburse their expenses for participation in the Board and other meetings, subject to compliance with the provisions of the Companies Act, 2013.
3. Regulatory Approval / Supervisory Oversight
As hitherto, banks in private sector would be required to obtain prior approval of RBI for granting remuneration to the part-time non-executive Chairman under Section 10B(1A)(i) and 35B of the Banking Regulation Act, 1949. The compensation policies of banks would be subject to supervisory oversight including review under the Supervisory Review and Evaluation Process (SREP) under Pillar 2 of Basel II framework. Deficiencies would have the effect of increasing the risk profile of banks with attendant consequences, including a requirement of additional capital if the deficiencies are very significant.
Banks are required to make disclosure on remuneration paid to the directors on an annual basis at the minimum, in their Annual Financial Statements.