Guidelines on Compensation of Whole Time Directors/ Chief Executive Officers/ Material Risk Takers and Control Function staff - Clarification

Last updated: 31 August 2021

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The Reserve Bank of India (RBI) has issued a clarification regarding the compensation of Whole Time Directors, Chief Executive Officers, Material Risk Takers, and Control Function staff in banks. The clarification focuses on the accounting treatment of share-linked instruments. Previously, these were required to be fair-valued using the Black-Scholes model at the time of grant. Now, banks must recognise the fair value of these instruments as an expense from the accounting period for which approval has been granted. This applies to all share-linked instruments granted after the accounting period ending March 31, 2021.

Reserve Bank of India

RBI/2021-22/95
DOR.GOV.REC.44/29.67.001/2021-22

August 30, 2021

All Private Sector Banks (including Local Area Banks, Small Finance
Banks, Payments Banks) and Foreign Banks operating in India

Dear Sir/Madam,

Guidelines on Compensation of Whole Time Directors/ Chief Executive Officers/ Material Risk Takers and Control Function staff – Clarification

Please refer to para 2.1.2 (f) of our circular DOR.Appt.BC.No.23/29.67.001/2019-20 dated November 04, 2019 on the captioned subject. In terms of the extant guidelines, share-linked instruments are required to be fair valued on the date of grant using Black-Scholes model. However, it has been observed that banks do not recognise grant of the share-linked compensation as an expense in their books of account concurrently. Therefore, in the interest of better clarity, the following sentence is being added to the extant instructions contained in the said paragraph:

“The fair value thus arrived at should be recognised as expense beginning with the accounting period for which approval has been granted”.

2. Banks should ensure compliance to above instructions for all share-linked instruments granted after the accounting period ending March 31, 2021.

Yours faithfully,

(Shrimohan Yadav)
Chief General Manager

FAQ :

The notification clarifies the guidelines on the compensation of Whole Time Directors, Chief Executive Officers, Material Risk Takers, and Control Function staff in banks, specifically concerning share-linked instruments.

The RBI has clarified that the fair value of share-linked compensation, calculated using the Black-Scholes model, must now be recognised as an expense from the accounting period for which approval has been granted.

Banks must comply with these instructions for all share-linked instruments granted after the accounting period ending March 31, 2021.

All Private Sector Banks (including Local Area Banks, Small Finance Banks, Payments Banks) and Foreign Banks operating in India are affected.

The Black-Scholes model is to be used for the fair valuation of share-linked instruments on the date of grant.

Notification No : RBI/2021-22/95 DOR.GOV.REC.44/29.67.001/2021-22
Source : https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12157&Mode=0

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