The rules, aimed at improving the ease of doing business in the country, are likely to be announced next month.
The central government's role in deciding how much CEOs should be paid will soon be over.
The Ministry of Corporate Affairs (MCA) is framing a set of rules to do away with the current provision in the law that requires a public limited company to seek central government's approval to fix or raise salaries of the managerial persons, including Chief Executive Officer (CEO), Chief Financial Officer (CFO) and Executive Directors (EDs) beyond a threshold.
The rules, aimed at improving the ease of doing business in the country, are likely to be announced next month. The provisions of the Section 197 of the Companies Act are being amended to allow the companies to decide on the managerial compensation with the shareholders' approval.
Currently, under the Companies Act, a public limited company can pay upto 11% of the net profit to its top management but needs approval of the government to hike it further. The salaries paid by the firms having inadequate profit or loss-making are, however, linked to a percentage of their effective capital.
With the change in rules, the company will be able to decide on the managerial compensation through a special resolution.
Many companies are awaiting the government's nod to increase compensation of the CEOs. "Once rules are framed and announced, these cases will be disposed off. We will ask the companies to take the special resolution route to make changes in the salaries of top executives," said an official in the ministry.
However, if the CEO, CFO or any other managerial person is a foreigner, the company will still be required to approach the government on the compensation issue. The government approval will also be required where cases are pending against the top executives.
"Government leaving the decision to raise salaries onto shareholders is a step towards further liberalization," says Ramakant Rai, partner at Trilegal. "It is anyway unnecessary to put a limit on the CEO pay as the government has got nothing to do with how much a company pays its top executives. It is a hindrance, particularly for the loss-making companies and those with low profits to get high-performing CEOs to turn them around,"he adds.
‘Liberalisation’
The move is a step towards further liberalization, said Ramakant Rai, partner at Trilegal. “It is anyway unnecessary to put a limit on the CEO pay as the govt has got nothing to do with how much a company pays its top executives.”
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