RBI Raises Ceiling On Remuneration Of Non-Executive Directors

Posted On - 4 March, 2024 • By - Sheetal Agarwal

On February 9, 2024, the Reserve Bank increased the annual cap on non-executive directors’ compensation in private banks from Rs 20 lakh to Rs 30 lakh. This was done in accordance with the authority granted by Section 35B of the Banking Regulation Act of 1949.

A member of a company’s board of directors who does not occupy an executive position is known as a non-executive director. Non-executive directors serve as impartial consultants and are not in charge of the business’s day-to-day operations. Nonetheless, they participate in the formulation and planning of corporate policies and are subject to the same legal obligations and liabilities as the executive directors. Non-executive directors are not thought of as employees of the company, even though they typically get paid for their efforts. They attend board and management team meetings and devote a portion of their time to company oversight. By offering a wide view of the company’s problems and defending the interests of shareholders, they bring value.

In addition to sitting fees and expenses associated with attending board and committee meetings in accordance with current statutory norms and practices, the Reserve Bank of India stated in its notification dated January 26, 2021 regarding “Corporate Governance in Banks – Appointment of Directors and Constitution of Committees of the Board” that the bank may provide for payment of compensation to non-executive directors in the form of a fixed remuneration commensurate with an individual director’s responsibilities and demands on time and which are deemed sufficient to attract qualified competent individuals. But, a non-executive directors’ fixed compensation—apart from the board chair’s—mustn’t go over ₹20 lakh annually.

The latest announcement goes on to say that the banks need board approval and sufficient standards in place before they may assess the present salary for its non-executive directors. The Board of the bank may choose to set a lower amount within the ₹30 lakh yearly cap based on the size of the bank, the non-executive directors’ experience, and other relevant factors. Banks ought to disclose in their Annual Financial Statements the minimum amount of compensation that is paid to the directors each year. All private sector banks, including wholly owned subsidiaries of foreign banks and small financing banks (SFBs) and payment banks (PBs), will be subject to the guidelines on the evaluation of fixed remuneration provided to non-executive directors.

Over time, there have been significant changes to the Corporate Governance standards brought about by the Companies Act of 2013 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations). These changes have affected the role of Non-Executive Directors (NEDs) and the extent of their involvement with the Board and the Company. Payment to the non-executive directors of the company was subject to verification of criteria including sitting fee, remuneration, and reimbursement of real expenditures incurred, as per the provisions of the Companies Act, 2013 read with the Listing Regulations. The guidelines on the compensation of non-executive directors of private sector banks, which were issued via circular DBR.No.BC.97/29.67.001/2014-15 on June 1, 2015, are revoked in the notification dated February 9, 2024.

Non-executive directors in banks play pivotal roles in governance, strategic direction, and risk management. They oversee compliance, financial performance, and stakeholder engagement, ensuring the institution’s stability and long-term success. By fostering transparency and effective leadership, they uphold ethical standards and regulatory compliance. Through their oversight and guidance, non-executive directors contribute to the resilience and sustainability of the bank, mitigating risks and maximizing opportunities in an ever-evolving financial landscape.