Private Banks must recognize share linked compensation to executives as expenses of the relevant year: RBI

The Reserve Bank of India asked all banks, including local area banks, small finance banks, and foreign banks to comply with its directions for all share-linked instruments granted after the accounting period ending March 31, 2021.

The fair value of the share-linked incentives paid to chief executive officers, whole-time directors, and other key functionaries by the private banks should be recognised as an expense during the relevant accounting period.

Issuing a clarification in this regard, the Reserve Bank of India said, “the fair value (of share-linked incentives) …should be recognised as expense beginning with the accounting period for which approval has been granted”.

The central bank had issued guidelines on the compensation of whole-time directors/ chief executive officers/ material risk takers and control function staff in November 2019. In terms of the above guidelines, share-linked instruments are required to be fairly valued on the date of grant using the Black-Scholes Merton (BSM) model. For the purpose of inclusion of such share-linked instruments in the bank’s compensation policy, they should be fair valued on the date of grant by the bank using the BSM model, the central bank had then said.

RBI further said that “it has been observed” that banks do not recognise grants of the share-linked compensation as an expense in their books of account concurrently.