Fit and Proper Criteria for Directors of NBFCs

NBFCs need to ensure their Directors are suitable for their roles. This involves checking their qualifications, expertise, track record, and integrity. While the Reserve Bank does its due diligence before issuing a Certificate of Registration (COR) to an NBFC, NBFCs themselves must also have an ongoing internal process to assess their Directors. To standardize this process, NBFCs should follow these steps before appointing someone to their Board:

• Conduct thorough due diligence on potential or existing Directors. This includes assessing their qualifications, expertise, track record, integrity, and other ‘fit and proper’ criteria. NBFCs should use the declaration format provided in Appendix XXIII-A for this purpose.
• Carry out this due diligence process at the time of appointment or renewal.
• Have a Nomination and Remuneration Committee to review the declarations.
• Based on the information in the declarations, the Committee should decide whether to accept the Director.
• Annually, on March 31st, get a declaration from Directors confirming that their information hasn’t changed, or providing updated details if it has.

Guidelines on Compensation for Key Managerial Personnel and Senior Management in NBFCs

Nomination and Remuneration Committee (NRC)

NBFCs must have a Nomination and Remuneration Committee (NRC). This committee, as per the Companies Act, 2013, oversees the compensation policy of the company. The NRC should align compensation with risks and ensure it supports the need to retain earnings and maintain adequate capital. It also checks the ‘fit and proper’ status of directors and manages conflicts of interest.

Principles for Compensation

Components and Risk Alignment:

Compensation for Key Managerial Personnel (KMPs) and senior management should be reasonable and aligned with risks. It includes fixed and variable pay, ensuring risk-adjusted compensation, symmetry with risk outcomes, sensitivity to risk time horizon, and a balance of cash, equity, and other forms.

Composition of Fixed Pay:

Fixed pay includes all guaranteed pay elements like perquisites and retirement benefits. Reimbursable perquisites and non-monetary benefits like company cars should also be included, with monetary ceilings.

Principles for Variable Pay:

Composition:

Variable pay can be share-linked or a mix of cash and shares, complying with statutory provisions.

Proportion:

Variable pay should match the role and risk profile of the individual. Higher roles should have a larger variable component. The balance between cash and shares in variable pay is crucial. Performance measures should be clear from the start.

Deferral:

A part of the variable pay may be deferred, applicable to both cash and non-cash components. The Board decides the deferral period.

Control and Assurance Personnel:

Those in control and assurance roles should have compensation independent of the business areas they oversee. A higher fixed compensation proportion is suggested, but a reasonable part should be variable.

Guaranteed Bonus:

Guaranteed bonuses are not recommended for KMPs and senior management. Joining or sign-on bonuses are exceptions but are not part of fixed or variable pay.

Mauls/Claw Back:

Deferred compensation may be subject to malus or clawback in cases of poor financial performance or misconduct. NBFCs should identify situations for invoking these clauses and specify applicable periods.