Solution

RBI issued guidelines for compensation of key managerial personnel and senior management of non-banking finance companies, RBI said that the finance companies have to constitute a nomination and remuneration committee (NRC), which will have the mandate to oversee the framing, review and implementation of compensation policy of the company with the approval of the board. NRC will also have to work with the risk management committee of the company to achieve effective alignment between compensation and risks. NRC may ensure that compensation levels are supported by the need to retain earnings of the company and the need to maintain adequate capital based on Internal Capital Adequacy Assessment Process (ICAAP). These guidelines are as per the scale-based regulation for NBFCs introduced by RBI in October last year. RBI has said that all the fixed items of compensation, including the perquisites and contributions towards superannuation/retiral benefits, may be treated as part of fixed pay. These guidelines will come into effect from April 1, 2023 and will be effective on all the finance companies, apart from the ones in the base layer. The proportion of variable pay in the total compensation of the management of NBFCs should be commensurate with their role and prudent risk-taking profile and at higher levels of responsibility, the proportion of variable pay should be higher. The board of NBFCs may not offer guaranteed bonuses to the senior management and key managerial personnel.