Less than two months after introducing a new companies Bill that gives companies freedom to fix managerial remuneration, the ministry of corporate affairs (MCA) is re-thinking the issue.
A limit on compensation paid to top executives is preferable in the context of what has happened in developed nations, Minister of Corporate Affairs Premchand Gupta told Business Standard.
The stated aim of the new Companies Bill 2008 that seeks to replace a 62-year old Companies Act of 1956 was to reduce government control and move to a disclosure-based regulatory regime.
"After seeing what has happened in the past two or three months, the freedom to fix managerial remuneration by companies should come with some strings attached so that they don't get an absolute free hand to take decisions," said Gupta.
Gupta was referring to the current global financial crisis in which top executives were given guaranteed compensation even as their firms posted huge losses. Western governments, which have rescued many financial institutions from the brink of bankruptcy, have either frozen or put restrictions on managerial remuneration.
At present, firms in India cannot pay more than 5 per cent of net profits, as defined under the Act, to any single director. The combined remuneration for directors, including managing director needs to be within an overall ceiling of 11 per cent. This ceiling on net profits has been withdrawn in the Bill.
There's no cap in the draft bill, but let the standing committee take a view on this, said Gupta.
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E Balaji, chief executive officer of Ma Foi Management Consultants, a Chennai-based HR firm, said it wouldn't be correct to compare the remuneration of the Indian managers with their western counterparts because the former take home much less. "It would be like comparing apples with oranges," he added.
Indian industry has been asking that managerial remuneration should be left to the company to decide, with the prior shareholder approval.
Balaji said the government shouldn't get involved in issues that should be decided by the shareholders in a free market economy.
However, Ketan Dalal, executive director, PricewaterhouseCoopers, an accounting and advisory firm, said it’s a good idea if the ministry retains the power to change the ceiling based on prevailing economic conditions.