The Reserve Bank of India (RBI) on Friday released broad guidelines on compensation of key managerial personnel (KMP) and senior management in non-banking finance companies (NBFCs).

The norms gave freedom to these entities to formulate a representative set of situations wherein they can invoke the “malus” and “clawback clauses’’ that may be applicable on entire variable pay of these personnel.

While the malus arrangement permits the NBFC to prevent vesting of all or part of the amount of a deferred remuneration, a clawback is a contractual agreement between the employee and the NBFC in which the employee agrees to return previously paid or vested remuneration to the NBFC under certain circumstances.

RBI added that the deferred compensation may be subject to such malus or clawback arrangements in the event of subdued or negative financial performance of the company, or the relevant line of business or employee misconduct in any year.

It ruled that while setting criteria for the application of malus and clawback, NBFCs may also specify a period during which they can be applied.

According to the guidelines, the boards of all applicable NBFCs will have to constitute a Nomination and Remuneration Committee (NRC).

The NRC will have the mandate to oversee the framing, review and implementation of compensation policy of the company which should have the approval of the board.

The RBI said that the compensation of KMPs and senior management needs to be reasonable, recognising all relevant factors including adherence to statutory requirements and industry practices.

The fixed and variable pay should be aligned with prudent risk taking.