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Remuneration to Directors and KMPs of Insurers – Enhanced Guidelines with Extended Coverage

Introduction

The remuneration payable to Chief Executive Officers (“CEOs”), Whole-Time Directors (“WTDs”) and Managing Directors (“MDs”) of insurance companies is governed under Section 34A of the Insurance Act, 1938. This provision requires insurers to procure prior approval from the Insurance Regulatory and Development Authority of India (“IRDAI”) in relation to such remuneration. The IRDAI (Remuneration of Non-Executive Directors of Private Sector Insurers) Guidelines, 2016 and IRDAI (Remuneration of Chief Executive Officer/Whole Time-Director and Managing Director of the Insurers) Guidelines, 2016 dated August 5, 2016 (collectively, the “Erstwhile Guidelines”) have historically governed this matter. In supersession of the Erstwhile Guidelines, the IRDAI has recently notified the Guidelines on Remuneration of Directors and Key Managerial Persons of Insurers, on June 30, 2023, which includes the IRDAI (Remuneration of Non-Executive Directors of Insurers) Guidelines, 2023 and IRDAI (Remuneration of Key Managerial Persons of Insurers) Guidelines, 2023 (collectively, the “Revised Guidelines”). The Revised Guidelines are effective from the FY 2023-24 i.e. from April 1, 2023 and the insurers are required to complete the process of framing/reviewing the remuneration policy within three months of the issuance of the Revised Guidelines.

The Erstwhile Guidelines governed the remuneration of CEOs, WTDs, MDs and Non-Executive Directors (“NEDs”) of the insurers but did not cover other Key Management Persons (“KMPs”)[1] of an insurer such as the Chief Financial Officer, Appointed Actuary, Chief Investment Officer, Chief Risk Officer, Chief Compliance Officer and the Company Secretary. The Revised Guidelines have brought all KMPs within its ambit, therefore implying that their remuneration is  now subject to the conditions set out under the Revised Guidelines. We analyse the revised framework for remuneration payable to NEDs and the other KMPs here.

Compensation Framework 

A. NEDs

 The Erstwhile Guidelines prescribed a remuneration cap of INR 10,00,000 per annum payable to NEDs. This cap has been increased to INR 20,00,000 per annum under the Revised Guidelines. In addition, the Revised Guidelines also address the following matters in connection with NEDs:

  • Avoidance of Conflict of Interest: The Board has been tasked with the responsibility to ensure that in structuring, implementing and reviewing the remuneration policy, the decision-making process identifies and manages the conflict of interests. In other words, the IRDAI expects that the members of the Board (NEDs, in this case) are not placed in a position of actual or perceived conflict of interest in respect of remuneration decisions.
  • Restrictions on equity-linked benefits: NEDs are not entitled to any equity-linked benefits.
  • Age Limit: An upper age limit of 75 years has been introduced for NEDs. NEDs, who have already attained the age of 75 years on or before issuance of the Revised Guidelines, will need to be replaced with new incumbent members before July 2024. We note that this is in line with the Reserve Bank of India (“RBI”) prescription on private sector banks in India, which specifies a similar age limit of 75 years for NEDs.
  • Tenure for independent directors: An independent director can be appointed for a maximum term of 10 consecutive years. Any re-appointment (after five consecutive years) shall only be after passing of a special resolution by the insurer. After completion of 10 years, a mandatory cooling period of at least three years has to be observed by such independent director to be eligible for re-appointment.

 

Remuneration to Directors and KMPs of Insurers – Enhanced Guidelines with Extended Coverage

B.       KMPs

Unlike the Revised Guidelines, prescriptions under the Erstwhile Guidelines were applicable only in relation to remuneration of CEO/ WTD/ MD of insurers. The Revised Guidelines inter alia prescribe the following in relation to compensation payable to KMPs: 

  • Avoidance of Conflict of Interest: The IRDAI has prescribed a similar condition set out above for the NEDs, but the same is made applicable to MD/ WTD since they are also members of the Board.
  • Age and tenure of MD/CEO/WTD:

    • An upper age limit of 70 years has been introduced for MD/ CEO/ WTD. Further, a cooling-off period of one year is mandatory if an MD/CEO/WTD held such post for a continuous period of 15 years.

    • In the event, the MD/CEO or WTD is appointed by a promoter/ major shareholder, then such KMP may not hold such post for a continuous period of more than 12 years. However, upon a reasoned application by the insurer, the IRDAI may allow such KMPs to hold office up to 15 years.

    • This prescription is also aligned with that of the RBI for the private sector banks, with the key difference in the cooling-off period for re-appointment as CEO/MD/ WTD being one year under the Revised Guidelines, as opposed to three years prescribed by the RBI.

    • This prescription is also aligned with that of the RBI for the private sector banks, with the key difference in the cooling-off period for re-appointment as CEO/MD/ WTD being one year under the Revised Guidelines, as opposed to three years prescribed by the RBI.
  • Excess of Remuneration: Excess of annual remuneration exceeding INR 4,00,00,000 (including all perquisites plus bonuses, etc., by whatsoever names), is required to be borne by the shareholders and debited to the Profit and Loss account. Under the Erstwhile Guidelines, the limit was set at INR 1,50,00,000.
  • Variable Pay: In relation to variable pay to KMPs, the following key prescriptions are provided in the Revised Guidelines:
    • Any variable pay or performance incentive shall be paid/ granted to any KMP only once during a financial year.
    • Variable pay shall be at least 50% of the fixed pay for the corresponding period and should not exceed 300% of the fixed pay –
      • If the variable pay is up to 200% of the fixed pay, then 50% of it shall be paid via a non-cash instrument; and
      • If variable pay exceeds 200% of the fixed, then 70% of it shall be paid via a non-cash instrument.
    • 50% of the variable pay needs to be deferred over a period of not less than three years and the first vesting shall happen one year after the commencement of such period.
    • However, no variable pay is required to be deferred for an amount up to INR 25,00,000 for a particular year. 
  • Issuance of ESOPs and Sweat Equity: In relation to ESOPs and sweat equity being issued to KMPs, the following key prescriptions are provided in the Revised Guidelines: 
    • ESOPs are not explicitly kept outside the computation of total remuneration. Further, KMPs of the insurers are not eligible to be issued/granted any sweat equity shares.
    • In case of an unlisted insurer:
      • the total number of ESOPs granted in a year cannot exceed 1% of the paid-up capital of the insurer.
      • the total number of ESOPs issued, granted, vested and outstanding at any point of time cannot exceed 5% of the paid-up capital of the insurer.
    • In case of an unlisted insurer:
      • Share-linked instruments are to be reckoned at fair value as on the date of grant.
      • The norms for grant, valuation and disclosure of such instruments are required to be framed by insurers in line with relevant statutory provisions (including the guidelines and regulations issued by the Securities and Exchange Board of India). 

Regulating the Pay to KMPs

Given that the remuneration arrangements are an aggregate of fixed pay and a variable pay for a particular financial year, the Revised Guidelines place significant emphasis on the variable pay to the KMPs. The minimum parameters which are required to be taken into account for determination of performance assessment of all KMPs for payment of variable pay or incentives including: (a) overall financial soundness; (b) improvement in grievance redressal status; and (c) overall compliance status with respect to applicable laws, constitute at least 60% of the total weightage in the performance assessment matrix of MD/CEO/WTDs. The same parameters are applicable to the performance assessment of all other KMPs and should constitute at least 30% of the total weightage in the performance assessment matrix of such KMPs individually. Apart from the performance assessment for payment of incentives and variable pay, these parameters also form the basis for revision of the fixed pay.

While insurers may also define additional parameters, which shall be in line with the business plan of the insurers, these parameters are required to be spelt out in the remuneration policy. From an enforceability perspective, the insurers are now also required to put in place appropriate mechanism to incorporate malus and claw-back provisions in respect of variable pay linked to the defined parameters in the employment contracts of all KMPs as well as in the remuneration policy.

The Revised Guidelines also clearly state that an immediate and prompt action of the Board and the management of the insurer is required in the event of gross negligence, integrity breach, materially inaccurate financial statements due to the result of misconduct including fraud, poor compliance in respect of corporate governance and regulatory matters, etc. by the KMPs.

Conclusion

While the Erstwhile Guidelines did not define the share-linked instruments, the Revised Guidelines goes on to include ESOPs, employee stock purchase schemes and stock appreciation rights schemes as remuneration payable by an insurance company to its KMPs – it is however pertinent to note that the Erstwhile Guidelines, while recognising ESOPs as a mode of employee incentive, required insurers to keep ESOPs outside the ambit of “variable pay” while computing the total remuneration, subject to the condition that the extent of ESOPs granted are reasonable.

The IRDAI, giving due regard to the market practices adopted by insurers in relation to compensation payable to NEDs and KMPs, has expressly recognised several aspects of variable pay such as the different kinds of “share-linked instruments”. The IRDAI has also adopted a new approach by choosing to regulate compensation payable to all KMPs (i.e., KMPs other than MD/CEO and WTDs). The newly-introduced provisions under the Revised Guidelines are in line with the market practice adopted by the insurers, and hence are closer to the commercial reality.


[1] Regulation 2(1)(j) of the IRDAI (Registration of Indian Insurance Companies) Regulations, 2022: “Key Management Person” shall include members of the core management team of an insurer or applicant including all whole-time directors or Managing Directors or Chief Executive Officer and the functional heads one level below the Managing Director or Chief Executive Officer, including the Chief Financial Officer, Appointed Actuary, Chief Investment Officer, Chief Risk Officer, Chief Compliance Officer and the Company Secretary.

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Photo of Indranath Bishnu Indranath Bishnu

Indranath is a partner with Cyril Amarchand Mangaldas and is a part of the general corporate practice in the Mumbai region. His work is focussed on the Insurance industry where he specializes in mergers and acquisitions and joint ventures and regulatory matters. He…

Indranath is a partner with Cyril Amarchand Mangaldas and is a part of the general corporate practice in the Mumbai region. His work is focussed on the Insurance industry where he specializes in mergers and acquisitions and joint ventures and regulatory matters. He is currently  leading the team from Cyril Amarchand Mangaldas engaged to advise the Regulations Reforms Committee constituted by the Insurance Regulatory and Development Authority. He has advised various government bodies including Department of Financial Services (Ministry of Finance) and the Insurance Regulatory and Development Authority of India on reforms in the insurance sector. He currently serves as a member on the committee constituted by the Insurance Regulatory and Development Authority of India to study and recommend capital requirements for Insurance entities. On the transactional side, Indranath advises multiple corporations, both Indian and foreign, in relation to investments in the insurance sector as well as establishment, operation, management and control of insurance companies and intermediaries in India.  He can be reached at indranath.bishnu@cyrilshroff.com

Photo of Anirud Sudarsan R Anirud Sudarsan R

Principal Associate in the General Corporate practice at the Mumbai office of Cyril Amarchand Mangaldas. Anirud joined the firm in the year 2017 after graduating from West Bengal National University of Juridical Sciences, Kolkata. He advises clients, which include promoters and investors of…

Principal Associate in the General Corporate practice at the Mumbai office of Cyril Amarchand Mangaldas. Anirud joined the firm in the year 2017 after graduating from West Bengal National University of Juridical Sciences, Kolkata. He advises clients, which include promoters and investors of insurers, private equity funds, insurance companies and insurance intermediaries, on mergers & acquisitions and foreign investments in India.

He has worked on several transactions in relation to acquisition of private and public companies, business transfers and initial public offerings in the Indian insurance sector. Anirud also regularly advises insurers and insurance intermediaries in relation to, amongst other aspects: Corporate Governance, General Corporate Strategies, Business Ventures and Partnerships, Distribution and other forms of engagement between insurers and insurance intermediaries and Data Protection, Data transfer, Data Localisation. He can be reached at anirud.sudarsan@cyrilshroff.com

Photo of Ayushi Agrawal Ayushi Agrawal

Associate in General Corporate practice in the Mumbai office of Cyril Amarchand Mangaldas. Ayushi is involved in advising private and public companies, key Indian financial institutions (including banks) on mergers & acquisitions, business alliance, restructuring, and foreign investments in India, with a special…

Associate in General Corporate practice in the Mumbai office of Cyril Amarchand Mangaldas. Ayushi is involved in advising private and public companies, key Indian financial institutions (including banks) on mergers & acquisitions, business alliance, restructuring, and foreign investments in India, with a special focus on the insurance sector. She can be reached at ayushi.agrawal@cyrilshroff.com