Chanda Kochhar and 'clawback provisions'

'If she contests it, then these people will have to fight it in court.'
Sachin P Mampatta reports.

Illustration: Uttam Ghosh/Rediff.com

ICICI Bank's move to stop all unpaid retirement benefits and recover bonuses since 2009 from former CEO Chanda Kochhar for allegedly violating various regulations is a rare case where a top executive in the country is facing 'clawing back' of compensation.

Though uncommon in India, there have been a slew of incidents of 'clawing back' of compensation in countries like the US and Denmark.

For instance, US insurer United Health Group CEO and chairman William W McGuire had to face clawback provisions, which resulted in loss of compensation worth over $600 million in 2007.

This followed an investigation into backdating of options.

A September 2018 report on Denmark's largest bank Danske Bank talked of a clawback in compensation for CEO Thomas Borgen.

The bank is alleged to have helped launder around $235 billion.

Canada-based Valeant Pharmaceuticals International had to battle former CFO Howard Schiller over the return of compensation of $26.1 million.

There was a scandal after allegations of accounting fraud at the company.

In the case of US-based financial services firm Wells Fargo, chairman and CEO John Stumpf had to return over $60 million in compensation.

The bank had been involved in a scandal where staff is said to have opened fraudulent accounts in the names of customers.

Top executives at the bank JP Morgan Chase returned over $100 million.

This was following a rogue trader which cost the company $6 billion.

Kochhar was accused of favouring the Videocon group which had business relations with her husband.

An independent inquiry found that she was guilty of conflict of interest.

This decision reversed an earlier move.

J N Gupta, co-founder and managing director of corporate governance advisory Stakeholder Empowerment Services, said that the change in position of the board against Kochhar could also come into question.

It had earlier given Kochhar a clean chit.

"One cannot absolve the...board," he said.

Meanwhile, the Reserve Bank of India's own guidelines have talked about clawback provisions.

'A clawback is a contractual agreement between the employee and the bank in which the employee agrees to return previously paid or vested remuneration to the bank under certain circumstances,'according to the Reserve Bank's compensation guidelines of 2012.

'Banks may put in place appropriate modalities to incorporate the clawback mechanism in respect of variable pay, taking into account relevant statutory and regulatory stipulations as applicable,' added the RBI's compensation guidelines of 2012.

ICICI Bank, too, has provisions for a clawback, according to a copy of its 2018 compensation policy available on its Web site.

'Employees will be required to sign clawback agreements for variable pay. In a clawback arrangement, the employee will agree to return, in case asked for, the previously paid variable pay to the bank in the event of an inquiry determining gross negligence or integrity breach, taking into account relevant regulatory stipulations,' it said.

Amit Tandon, founder and managing director of Institutional Investor Advisory Services India, said there is limited precedent in India on enforcing clawback provisions.

The modalities of such an action will be closely monitored.

Shriram Subramanian, founder and managing director of proxy advisor InGovern Research Services, said companies will most likely make sure that agreements with professional chief executives become more watertight.

People will want to make it easier to enforce such clawback if it is required, according to him.

The current case will be closely watched for the precedent it sets, according to Shriram.

"If she contests it, then these people will have to fight it in court," he said.

"The general prevalence in India is to restrict the exercise of options during the time period where the inquiry for such 'cause' is taking place and in cases where the employee is adjudged guilty of 'cause' both the vested and unvested options lapse," said Gaurav Chaubey, director at consulting firm Grant Thornton Advisory..

"The treatment of the shares resulting from the exercise of options as well as any cash payed out due to equity-linked compensation plans can be clawed back along with a penalty if the provisions for the same exists in the...(compensation plan)...document."