Sources of rules and practiceOverview
Provide an overview of the primary sources of law, regulation and practice that govern or affect executive compensation arrangements or employee benefits.
In India, the terms of employment differ between so-called ‘workmen’ and ‘non-workmen’. ‘Non-workmen’ or ‘executive employees’ are personnel who have managerial, administrative or supervisory functions and who earn compensation above specified thresholds. Under the Constitution of India, ‘employment’ is a subject in the concurrent list, enabling both the central and the state governments to enact legislation (as appropriate), subject to certain matters reserved for the central government.
The primary sources of law that govern an executive’s compensation and benefits are derived from legislation enacted by both the central and state governments and interpreted through judicial precedents.
Executive compensation arrangements are typically contractual in nature. Organisations are given flexibility in structuring these; however, they must take into consideration the thresholds stipulated by specific legislations, such as:
- the lowest wages that must be provided to specified categories of establishments or employees pursuant to notifications issued under the Minimum Wages Act 1948; and
- higher thresholds for senior management under the Companies Act 2013.
Further, for a publicly traded company, the renumeration provided to senior management (ie, C-level employees and one level below, excluding the board of directors) are also subject to disclosure requirements under the Securities and Exchange Board of India (SEBI).
On 8 August 2019, the central government notified the Code on Wages 2019, which consolidates the provisions contained in four central wage legislations, namely:
- the Minimum Wages Act 1948;
- the Equal Renumeration Act 1976;
- the Payment of Wages Act 1936; and
- the Payment of Bonus Act 1965.
However, until the central government notifies the effective date of implementation of the Wages Code, the provisions contained in the Minimum Wages Act, the Equal Renumeration Act, the Payment of Wages Act and the Payment of Bonus Act, as well as the applicable state rules, will continue to govern executive compensation arrangements with regard to:
- the payment of minimum wages;
- the method of payment of compensation and permissible deductions, if any;
- overtime wages; and
- statutory bonus.
Further, employee benefits such as provident funds and compulsory insurance, which are regulated under the central Employees’ Provident Funds and Miscellaneous Provisions Act 1952 and the Employees’ State Insurance Act 1948, could affect executive compensation arrangements, depending on the executive’s salary and the applicability of such legislation to the establishment in which the executive is employed.
Additionally, retirement benefits such as gratuity regulated under the central Payment of Gratuity Act 1972 may also affect the compensation structure of executives who have completed at least five years of continuous service in an establishment.Enforcers
What are the primary government agencies or other entities responsible for enforcing these rules?
Employment legislations in India, both at the central and state level, provide for statutory authorities (designated as an ‘inspector’ or a ‘commissioner’), entrusted with the responsibility to enforce the provisions thereunder. Additionally, the jurisdictional registrar of companies, constituted under the Ministry of Corporate Affairs and the SEBI (in the case of publicly traded companies) are empowered to enforce specific restrictions regarding the compensation payable to senior executives. Once the Wages Code takes effect, state governments will also be authorised to appoint jurisdictional inspectors-cum-facilitators and implement web-based inspection schemes to ensure the effective implementation of the Wages Code.
Disputes arising from decisions of the aforesaid statutory authorities may be appealed to and consequently adjudicated by employment tribunals and the civil courts, as applicable. Disputes arising out of contractual employment arrangements entered into with executives may also be resolved through mediation or arbitration, provided that this is authorised under such contractual arrangements.
GovernanceGovernance requirements and shareholder approval
Are any types of compensation or benefits generally subject to specific corporate governance requirements or approval by shareholders or government agencies? What is the general process for obtaining approval?
The renumeration payable by a public company to its key managerial personnel (KMP) is subject to corporate approvals prescribed under the Companies Act. A ‘KMP’ includes:
- the chief operating officer;
- the chief financial officer;
- the managing director;
- full-time directors;
- company secretaries; and
- other full-time employees who are no more than one level below the board directors and are designated by the board of directors.
The remuneration payable to a KMP may be determined by either the articles of association of the company or, if the articles of association so prescribe, by way of a special resolution passed by the shareholders of the company. Additionally, if the total renumeration payable to all KMP in a company exceeds 11% of the net profits of the company, the renumeration must be approved by the shareholders of the company. The quantum of the sitting fee payable to an independent director appointed by a public company will be determined by the board of directors. Further, any renumeration payable to the directors of a publicly traded company or a public unlisted company whose share capital or turnover is above a specified threshold must be approved by the nomination and renumeration committee constituted by the company’s board of directors.
Publicly traded companies must also adhere to the disclosure requirements prescribed under the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements Regulations), 2015, whereby the ratio of remuneration paid to each director and the median employee’s remuneration, along with other prescribed details, must be disclosed.Consultation
Under what circumstances does the establishment or change of an executive compensation or benefit arrangement generally require consultation with a union, works council or similar body?
If an organisation has entered into a collective bargaining agreement or settlement with a recognised trade union or employee association, the employer must ensure that any change in the compensation structure of its executives is subject to the contractual terms of such agreement or settlement. However, trade unions or employee associations in India generally constitute workmen and may not be relevant in the context of executive employees.
Separately, any alteration in the remuneration payable to senior executives of a publicly traded company or a public unlisted company whose share capital or turnover is above a specified threshold will need approval from the nomination and renumeration committee constituted by the company’s board of directors.Prohibited arrangements
Are any types of compensation or benefit arrangements prohibited either generally or with respect to senior management?
Indian law does not prohibit any compensation or benefit structure, other than the limits on renumeration prescribed under the Companies Act and the SEBI regulations with regard to KMP and senior management (as applicable). However, any loans extended to directors and transactions between related parties are restricted under the Companies Act and must be approved by the shareholders of the company by way of a special resolution, as well as by the audit or renumeration and nomination committee, in case of a publicly traded company or a public unlisted company whose share capital or turnover is above a specified threshold.Rules for non-executives
What rules apply to compensation and benefits of non-executive directors?
Non-executive directors are generally appointed by institutional funds or financial investors. They are not officers in charge of the day-to-day operations of the company. The maximum renumeration payable to a non-executive director must be subject to the overall limits prescribed under:
- the Companies Act;
- the articles of association of the company; and
- the SEBI regulations (in case of a publicly traded company).
Further, as per the Companies Act, non-executive and independent directors, along with the other directors of the board, may be provided with sitting fees, which must not exceed Rs100,000 per meeting.
Additionally, as per the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, approval of shareholders by way of a special resolution must be obtained every year if the annual remuneration payable to a single non-executive director in a publicly traded company exceeds 50% of the total annual remuneration payable to all non-executive directors of the company.
DisclosureMandatory disclosure of executive compensation
Must any aspects of an executive’s compensation be publicly disclosed or disclosed to the government? How?
A publicly traded company must disclose certain details in the report released by its board of directors at the end of each financial year. These details pertain to:
- the ratio of remuneration of each director to the median renumeration of the employees of the company;
- the percentage increase in renumeration of each director and other key managerial personnel;
- the percentage increase in the median remuneration of employees in the financial year; and
- a statement showing the names of the top 10 employees who have drawn remuneration in excess of the limits prescribed under the Companies Act.
This information may also need to be disclosed to shareholders of the company on request.
Employment agreementsCommon provisions
Are employment agreements required or prevalent? If so, what provisions are common? Are any terms prohibited or unenforceable?
Employment agreements for executive employees are prevalent in India and are mandated and governed under certain state-specific legislations regarding shops and commercial establishments.
Employment agreements are generally in written form and include information relating to the employee’s:
- date and place of hire;
- working hours; and
- compensation structure.
Employment agreements also contain details relating to:
- the duties of the employee;
- termination and notice (both on account of material breach and convenience-based terminations); and
- post-employment covenants, such as:
- IP assignments;
- non-solicitation; and
- non-compete restrictions.
In the context of business transfers or reorganisations, where employees are transferred to an acquirer or surviving entity, the employment agreements also include provisions relating to ‘continuity of service’, which essentially seek to ensure that the period during which the employee was engaged with the transferor entity is taken into account while calculating the total duration of employment at the time of cessation of the employee’s services, for the purpose of determining statutory gratuity benefits.
Non-compete clauses are not generally enforceable under Indian law, as they are considered to be a restraint of trade under the statute governing contracts. Nonetheless, these provisions are typically included in employment agreements to act as a deterrent for employees from joining competing businesses.
Incentive compensationTypical structures
What are the prevalent types and structures of incentive compensation? Do they vary by level or type of organisation?
Incentive compensations can be structured as either:
- a statutory bonus payable to employees who earn up to Rs21,000 (approximately $296) per month under the Payment of Bonus Act; or
- a contractual bonus payable to employees, at the discretion of the employer.
The amount of incentive compensation varies depending on a multitude of factors. While a statutory bonus payable only to the employees identified above ranges from 8.33% to 20% of the annual wages of those employees, a contractual bonus which is generally payable to executive employees varies based on the financial performance of the organisation and the tenure and performance of the executives entitled to such a bonus.
Are there limits generally on the amount or structure of incentive compensation? Are there limits that adversely affect the tax treatment of the compensation relative to the employer or the executive?
A statutory bonus payable to employees who earn up to Rs21,000 (approximately $296) per month under the Payment of Bonus Act is capped at 20% of the employee’s annual wages per financial year. With respect to a contractual bonus being paid to key managerial personnel, the amount of the bonus must be within the overall restrictions on managerial remuneration prescribed under the Companies Act.
The amount of tax payable by an executive on the incentive compensations that they earn will depend on the overall remuneration of that executive. The government has formulated tax slabs, which determine the amount of tax payable by executives, with executives earning higher remuneration falling within a higher tax slab and being subject to higher taxation under Indian income tax law.Deferral
Is deferral and vesting of incentive awards permissible? Are there limits on the length or type of vesting and deferral provisions?
A statutory bonus payable to eligible employees under the Payment of Bonus Act cannot be deferred. Once accrued, the bonus must be paid within eight months from the end of the financial year in which it has accrued. However, a contractual bonus payable to executives is generally discretionary and may be subject to limits, deferrals and conditions (eg, completion of a specified tenure of employment or achieving certain pre-determined targets).
Are there limitations on the individuals or groups eligible to receive the compensation? Are there aspects of the arrangement that can only be extended to certain groups of employees?
Since contractual incentives for executives are discretionary, there are no limits with respect to granting them to an individual or a group of employees, provided that the total quantum of cash incentives payable to an individual does not exceed the limits on managerial remuneration prescribed under the Companies Act. In contrast, a statutory bonus must be mandatorily paid to an eligible employee who:
- earns up to Rs21,000 (approximately $296) per month; and
- has been employed at the organisation for a minimum of 30 days in the given financial year.
Can it be held that recurrent discretionary incentive compensation has become a mandatory contractual entitlement? Is this rebuttable?
While it is customary for organisations to grant contractual incentives to their executives at the end of each financial year, there are no statutory provisions that entitle an executive to such an incentive. Instead, they are purely discretionary and therefore rebuttable. The granting of contractual incentives depends on several conditions, including:
- the financial performance of the employer;
- market conditions; and
- the tenure and performance of the executive.
Senior executives may be entitled to additional contractual incentives as well.Effect on other employees
Does the type or amount of incentive compensation awarded to an executive potentially affect the compensation that must be awarded to other executives or employees?
While the type or amount of the contractual incentive provided to an individual would not affect the nature of contractual incentives awarded to other executives in the organisation, executives within the same band or designation in an organisation are typically granted similar incentives. Additionally, in most circumstances the terms of such incentives are confidential.Mandatory payment
Is it permissible to require repayment of incentive compensation under certain circumstances? Are there circumstances under which such repayment is mandatory?
Given that contractual incentives to executives are discretionary, an employer can mandate the repayment of such an incentive in certain circumstances. For instance, a signing bonus paid to an executive at the time of commencement of services may need to be repaid if the executive resigns or is terminated within a short period.
On the other hand, while the Payment of Bonus Act does not mandate the repayment of a statutory bonus under any circumstances, an eligible employee may be disqualified from receiving a statutory bonus if they are found guilty of fraud, theft or misappropriation of the employer’s assets, or are dismissed from service for a sexual harassment offence.
Can an arrangement provide that payment is conditioned on continuing employment until the payment date? Are there exceptions?
Contractual incentives can be structured in such a way that payment is made subject to the executive remaining in employment with the organisation until the payment date or to provide exceptions to this. However, a statutory bonus under the Payment of Bonus Act must be paid to employees earning up to Rs21,000 (approximately $296) per month within eight months from the end of the financial year in which the bonus has accrued, and cannot be made subject to the employee continuing to be employed at the organisation until the date of payment.
Equity-based compensationTypical forms
What are the prevalent forms of equity compensation awards in your jurisdiction? What is a typical vesting period? Must the arrangements be offered to a broad group of employees, or can the employer select the participants?
Employee stock options are the most prevalent form of equity compensation to executives in India. As per the Companies Act, there is a minimum of one year between the grant and vesting of stock options. Moreover, companies may specify additional lock-ins on the sale of shares issued pursuant to the exercise of stock options (with a mandatory period of one year in the case of publicly traded companies). Companies have the discretion to offer equity compensation awards to an executive (depending on a pre-determined eligibility criteria) or a specified group of executives, provided that such executives are eligible to receive equity compensation under the Companies Act.
Companies that have been in business for at least one year may also allot sweat equity shares to their directors or executives. These are shares issued at a discount in consideration against know-how, value additions or intellectual property provided by the executive to the company. Sweat equity shares allotted by publicly traded companies must be locked-in for a period of three years.
Additionally, equity settled stock appreciation rights (SARs) are another form of equity-based compensation used by publicly traded companies. The implementation of these rights is regulated by the Securities and Exchange Board of India (Share-Based Employee Benefits) Regulations 2014.
Must equity-based compensation be granted by the company’s board of directors (or its committee) or can the authority be delegated to officers or employees of the company? Are there limitations or requirements that apply to delegation?
Equity compensation to executives, in the form of stock options, must be granted in accordance with a company’s employee stock option plan (ESOP) approved by its board of directors and shareholders. Companies may also constitute separate employee welfare trusts or compensation committees to administer the grant, vesting and exercising options under their ESOP.
Additionally, publicly traded companies must comply with the SEBI (Share-Based Employees Benefits) Regulations 2014 when granting equity compensation to their executive employees, including equity settled SARs.
Shares issued to an executive employee on exercise of stock options must be issued by the board of directors of the company, in accordance with the Companies Act.Tax treatment
Are there forms of equity compensation that are tax-advantageous or disadvantageous to employees or employers?
The exercise of stock options or the allotment of shares pursuant to employee share purchase plans (ESPPs) is a taxable event. It is construed as a perquisite in the hand of the employee (ie, a benefit to which an employee is entitled on account of their employment), and the employer is required to deduct tax at source from the employee’s salary at the applicable rate and deposit this with the tax authorities within a stipulated timeframe. In the event that an employee sells the shares allotted pursuant to an ESOP or ESPP, the employee is liable to pay capital gains tax, depending on the period for which they have held such securities. Given that the tax treatment is broadly the same under ESOPs and ESPPs (being two prevalent forms of equity compensation), there are no specific tax advantages or disadvantages in choosing one form of equity compensation over the other.Registration
Does equity-based compensation require registration or notice? Are exemptions, or simplified or expedited procedures available?
Employee stock options are generally granted to executives pursuant to grant letters. Details of such stock options are recorded in the statutory register of employee stock options maintained by the company under the Companies Act. Apart from this, there are no registration or notice requirements with respect to stock options granted by a company. With regard to equity compensation issued in the form of sweat equity shares, the company must file statutory returns after the allotment of such shares with the jurisdictional registrar of companies.
In terms of procedures, the ESOP of a company may allow a mechanism for accelerated vesting of options under conditions such as:
- a change in control event;
- resignations for good reason; or
- death or permanent disability of an executive.
Under certain ESOPs, it is also common to have executives furnish powers of attorney in favour of certain senior employees of the company to vote on the shares held by such executives.Withholding tax
Are there tax withholding requirements for equity-based awards?
Equity-based awards in the form of stock options are taxable as perquisites in the hand of the employee under Indian income tax law. Accordingly, companies are required to withhold tax deducted at source at the time that such stock options are exercised by an employee and deposit this with the applicable tax authorities.Inter-company chargeback
Are inter-company chargeback agreements between a non-local parent company and local affiliate common? What issues arise?
Inter-company chargeback agreements in the form of guarantees or loans between a non-local parent company and its local affiliates are common in India. Issues that often arise while structuring these arrangements relate to valuation, taxation and compliance with the transfer pricing guidelines.Stock purchase plans
Are employee stock purchase plans prevalent or available? If so, are there any frequently encountered issues with such arrangements?
ESPPs are not very common in India. Nonetheless, certain issues that arise while structuring ESPPs pertain to ascertaining lookback provisions, discounts in purchase price and tax treatment at the time of purchase of shares by employees.
Employee benefitsMandatory and voluntary employee benefits
Are there any mandatory benefits? Are there limits on changing or discontinuing voluntary benefits that have been provided?
There are various mandatory benefits such as compulsory health insurance, a statutory bonuses, a provident fund and pensions, which are available to employees under Indian employment laws. However, most of these benefits – whether at the central or state level – are generally applicable only to employees earning up to a particular wage threshold. Given that these wage thresholds are typically very low, most of the above benefits are mandatorily applicable to non-executive employees only.
Mandatory benefits that are applicable to executive employees as well, regardless of their designation or wage threshold, include:
- a gratuity, payable to personnel who have completed at least five years of continuous service at an organisation under the Payment of Gratuity Act 1972;
- maternity benefit payable to women under the Maternity Benefit Amendment Act 2017; and
- mandatory leave (ranging from 24 to 36 days per year) granted under certain state-specific shops and commercial establishments legislation.
In addition to these mandatory benefits, organisations may also extend voluntary benefits, such as group or family health insurance and a subscription to private provident fund schemes, as a matter of good practice. Since these benefits are voluntary, they have no statutory restrictions.Typical employee benefits and incentives
What types of employee benefits are prevalent for executives? Are there tax or other financial incentives or disincentives for such employee benefit arrangements?
Apart from bonus and equity compensation, executives may be entitled to:
- contractual benefits, such as allowances (eg, house rent allowances, conveyance allowance and leave travel allowance);
- maternity benefits; and
- retirement benefits, such as gratuity.
Employers can obtain insurance policies or formulate trusts, which may be approved by the income tax authorities, in order to facilitate contingent gratuity payments. Approved gratuity trusts and policies exempt employers from tax requirements with respect to gratuity payments made to executives.
Termination of employmentRules for termination
Are there prohibitions on terminating executives? Are there required notice periods? May executives be dismissed without cause?
The concept of terminating an executive’s employment without assigning a reason or providing notice or salary in lieu of notice is not prevalent in India, other than terminations effectuated on account of cause (eg, misconduct, gross negligence or fraud). Under certain state-specific shops and commercial establishments legislation, which regulate the terms of executive employment, mandate the provision of a minimum notice or salary in lieu of such notice before effectuating non-cause-related or non-performance-related termination of an executive’s employment. Further, the removal of certain executives (ie, directors appointed under the Companies Act) requires the approval of the board of directors.
Employers may incorporate provisions relating to convenience-based terminations in executive employment contracts, entitling employers to terminate the employment of executives without assigning any reason or providing any notice thereof, provided that the employer pays salary in lieu of the minimum notice requirements (if any) under the state-specific shops and commercial establishments legislation.Mandatory severance pay
Are there statutory or mandatory minimum severance requirements? Are there any other mandatory, post-employment benefits?
Apart from termination dues (eg, payment of accrued salary and provident fund contributions up to the date of termination), the only post-employment statutory benefit available to executives who have completed at least five years of continuous service in an establishment is the gratuity payable in accordance with the Payment of Gratuity Act.Typical severance pay
What executive severance payment level is typical?
Employers commonly provide severance benefits to their mid to senior-level executives on resignations for good reason or terminations without cause. Severance benefits typically range from two to four months of the executive’s base salary, depending on seniority. In addition to cash-based severance pay-outs, the vesting schedule with respect to stock options granted to executives may be accelerated on a resignation for good reason or a change in control (eg, a merger or an acquisition). Further, executives may be entitled to earn-outs post-termination, based on the company achieving certain predetermined targets at the time of the executives’ exit. Such earn-outs may be structured as a part of the transitionary services to be provided by the executive after a change in control.Reasons for dismissal
Are there limits on dismissal for ‘cause’? Are there any statutory limits on ‘constructive dismissal’ or ‘good reason’? How are ‘cause’ or ‘constructive dismissal’ defined? Are there legal or customary rules relating to effecting a termination for ‘cause’ or ‘constructive dismissal’?
Termination or resignation for good reason is generally triggered by an executive for matters such as non-payment of salary or the company’s non-compliance with the law, whereas cause-related terminations are effectuated by the employer on account of reasons such as fraud, gross negligence or misappropriation by the executive. There are no statutory or customary limits affecting the termination of an executive’s employment for cause or good reason, provided that the option to terminate employment on such grounds is included in the employment agreement and terminations are ultimately effectuated in accordance with the provisions in such agreements.Gardening leave
Are ‘gardening leave’ provisions typically used in employment terminations? Do they have any special effect on benefits?
While it is fairly common to structure a non-cause-based termination of mid or senior-level executives through gardening leave, such structures will not affect the benefits available to executives in connection with the termination.Waiver of claims
Is a general waiver or release of claims on termination of an executive’s employment normally permitted? Are there any restrictions or requirements for the waiver or release to be enforceable?
With executive employment relationships being contractual in nature, both the employer and the executive are permitted to waive contractual claims against each other on cessation of the employment relationship. In fact, it is customary for an executive to furnish a release and no-claims letter to the employer on receipt of full and final termination dues. Having said that, statutory claims under the Payment of Gratuity Act 1972 and the Maternity Benefit Act 2017 cannot be contractually waived.
Post-employment restrictive covenantsTypical covenants
What post-employment restrictive covenants are prevalent? What are the typical restricted periods?
The most prevalent forms of post-employment restrictive covenants are:
- non-solicitation; and
- restrictions on the disclosure of confidential information.
Typically, the timelines of such restrictive covenants depend on the expertise of the executive and the industry or sector in which the employer operates. In practice, these contractual restrictive covenants tend to survive for a period ranging from 24 to 48 months from the date of termination.Enforceability
Are there limits on, or requirements for, post-employment restrictive covenants to be enforceable? Will a court typically modify a covenant to make it enforceable?
The Indian Contract Act 1972 restricts non-compete obligations on an employee post-employment on the grounds of this being a restraint of trade. While the courts generally refrain from enforcing non-compete restrictions post-employment, they can be upheld, provided that they are not unconscionable, excessively harsh or unreasonable. One customary mechanism to ensure that a non-compete covenant is not very restrictive is to limit its scope of obligations to:
- a definite period;
- a fixed territorial limit; and
- a specified business.
On the other hand, the courts have been seen to be more lenient when enforcing non-solicitation or confidentiality obligations post-employment.Remedies for breach
What remedies can the employer seek for breach of post-employment restrictive covenants?
Breach of post-employment restrictive covenants can be construed as a material breach of an employment contract, enabling an employer to seek compensation or damages. However, the most effective remedy that is generally sought by employers in such situations is the initiation of a suit for specific performance (ie, claiming an injunction in a civil court against the former employee breaching the relevant restrictive covenant).
Pension and other retirement benefitsRequired retirement benefits and incentives
Are there any required pension or other retirement benefits? Are there limits on discontinuing or modifying voluntary benefits that have been provided?
There are no mandatory or state-linked pension schemes applicable to executives earning more than Rs. 15,000 (approximately $212) per month in India. Therefore, an employer may choose to voluntarily contribute to the National Pension Scheme or any private provident fund scheme with respect to its executives earning above the above threshold. However, there would be no restrictions on modifying or contracting out such benefits schemes, given that they are purely voluntary.
With respect to retirement benefits, executives who have rendered at least five years of continuous service in an establishment engaging 10 or more employees in a calendar year are eligible to a gratuity under the Payment of Gratuity Act 1972. Parties are not allowed to enter into contracts that violate the Gratuity Act.Typical retirement benefits and incentives
What types of pension or other retirement benefits are prevalent for executives? Are there tax or other financial incentives or disincentives for such employee benefit arrangements?
Although state-linked provident funds and pension schemes are not mandatory for executives, it is customary for employers to voluntarily contribute towards provident funds and pensions with respect to executives earning more than Rs 15,000 (approximately $212) per month under the Employees’ Provident Fund and Miscellaneous Provisions Act 1952. Alternatively, employers may opt to voluntarily contribute to the National Pension Scheme with respect to such executives.
In terms of other retirement benefits, executives are entitled to gratuity if they have rendered at least five years of continuous service in an establishment, under the Payment of Gratuity Act, or may avail themselves of benefits under any voluntary retirement scheme floated by the employer.
Contributions to the National Pension Scheme and a gratuity paid to an executive under the Payment of Gratuity Act are entitled to tax exemptions under the Income Tax Act 1961.Supplemental retirement benefits
May executives receive supplemental retirement benefits?
There are no supplemental retirement benefits available to executives in addition to the gratuity and voluntary retirement benefits. However, an employer may, on retirement, accelerate the vesting schedule of stock options, if any, granted to an executive, enabling the executive to gain liquidity by exercising stock options vested in their name, immediately before or after retirement.
IndemnificationDirectors and officers
May an executive be indemnified or insured for claims related to actions taken as an executive, officer or director?
Companies maintain director and officer liability and key person insurance to protect executives against any personal liability that may arise on account of actions undertaken on behalf of the company. It is also common for companies to execute indemnity bonds with non-executive directors to address any liabilities which may arise for actions undertaken by them in good faith. While the erstwhile Companies Act 1956 imposed restrictions with respect to companies indemnifying their directors, there are no similar restrictions under the current legal framework.
Change in controlTransfer of benefits
Under what circumstances will an asset sale in your jurisdiction result in an automatic transfer of benefit obligations to the acquirer?
An asset sale or a business transfer will result in the automatic transfer of the rights and obligations of employees of the transferor entity to the acquirer only if such employees are the subject matter of the transfer and are being transferred “on terms no less favourable than those offered by the transferor”. In such cases, the employment agreement of the acquirer must state that the transferred employee is being employed on the same terms and is being afforded continuity of service (ie, the duration of employment with the transferor to be reckoned while determining the total duration of employment of the transferred employee).Executive retention
Is it customary to provide for executive retention or related arrangements in connection with a change in control?
Yes, it is common to provide for executive retention or to have executives render transitionary services to the acquired entity on a change in control. Executives may be paid a retention bonus or provided with earn-outs based on their expertise and designation, the acquirer entity’s performance or the executive achieving certain pre-determined targets, after a change in control.Expedited vesting of compensation
Are there limits or prohibitions on the acceleration of vesting or exercisability of compensation in a change in control? Are there restrictions on ‘cashing-out’ equity awards?
Apart from the mandatory lock-in of one year between the granting and vesting of stock options under the Companies Act, there are no limits on accelerating the vesting or exercise of stock options on a change in control. Further, while there is no legal framework for cashing-out equity awards, companies (through promoters or investors) may offer to purchase the shares held by employees on a change in control, either to provide liquidity to employee shareholders or to consolidate the shareholding of the company.
Are there adverse tax consequences for the employer or the executive relating to benefits or payments provided pursuant to a change in control?
Payments made to an executive – whether on a change of control or otherwise – are taxable in the hands of the executive either as salary or as a perquisite. Hence, there are no adverse tax consequences with respect to any benefits or payments received by executives on a change in control.
Multi-jurisdictional mattersExchange controls
Do foreign exchange controls rules apply to the remittance of funds, or the transfer of employer equity or equity-based awards to executives?
Foreign exchange controls are applicable with respect to:
- Indian companies providing stock options to non-resident employees (subject to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations 2017); and
- foreign companies providing stock options to Indian employees (subject to the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations 2004).
Restrictions applicable to foreign direct investment (ie, sector-wise restrictions) are applicable to the granting of stock options to a foreign employee. Further, while the granting of cashless stock options to resident Indian employees by foreign companies is permitted, the granting of any other form of stock options would require prior approval from the Reserve Bank of India. In any event, the granting of any stock options or transfer of equity shares between a resident employee and a non-resident entity must be reported to the Reserve Bank of India.Local language requirement
Must employment agreements, employee compensation or benefit plans, or award agreements be translated into the local language?
There is no legal requirement to translate employment-related documents into local languages.Net salary arrangements
Are there prohibitions on tax gross-up, tax indemnity or tax equalisation payments?
Employers compulsorily deduct tax at source at predetermined rates under the Income Tax Act 1961 from the salaries payable to employees. However, tax gross-up or indemnity-related payments in the context of employment agreements are not typical in India.Choice of law
Are choice-of-law provisions in executive employment contracts generally respected?
Provisions on the choice of law have not been specifically examined by Indian courts in the context of employment agreements, as in the case with commercial contracts. However, from an enforceability perspective, it is not advisable to choose foreign law or a foreign jurisdiction when the parties to an employment agreement are based in India. The practice is to restrict the agreement to the applicable local laws.
Update and trendsKey developments of the past year
What were the key cases, decisions, judgments and policy and legislative developments of the past year?
The most significant employment law reform in 2019 was the promulgation of the Code on Wages 2019. The Wages Code is the first in the series of four labour codes that have been proposed by the Indian government to streamline existing employment legislations on the basis of functionality. The Wages Code seeks to universalise the payment of minimum wages and consolidate provisions relating to the payment of wages, gender equality and a statutory bonus into a single statute. While the Wages Code has been notified, the Central Government is yet to notify the date of its effectiveness.
In a landmark judgment, the Supreme Court of India upheld that any allowance that is universally paid to all employees in an organisation, irrespective of designation or wage threshold, would form part of their basic wages under the Employees’ Provident Funds and Miscellaneous Provisions Act 1952, and employers would need to contribute provident funds on such basic wages. In another judgment, the Supreme Court of India upheld that an employer and employee can contribute towards the Employees’ Pension Scheme based on the actual salary drawn by an employee rather than the capped amount of Rs15,000 (approximately $212) per month.
Law stated dateCorrect on
Give the date on which the information above is accurate.
31 October 2019.