FROM KOTAK TO CLAWBACK: REASSESSING RBI’S 2026 REMUNERATION DISCLOSURE RULE

This post is authored by Rajbeer Singh Saluja and Keshav Agarwal, third-year B.A. LL.B (Hons.) students at Gujarat National Law University, Gandhinagar.

INTRODUCTION

The Reserve Bank of India (Commercial Banks – Governance) Third Amendment Directions, 2026 marks a significant change in the private banks’ executive remuneration policy. Now share-linked instruments will be included under variable remuneration. Moreover, banks have to report the remuneration of Whole-Time Directors such as MD & CEO and Material Risk Takers on a yearly basis in their financial statements.

The new amendments came in the wake of the Supreme Court (SC) rulings on the nature of regulatory compliance. For instance, in the case of Kotak Mahindra AMC v. SEBI, the Court described the Indian securities regulatory regime as “consequence-neutral” and thus rejected the claim that the breach is exempt since no harm was caused to investors. In Reliance Industries Ltd. v. SEBI, the Court acknowledged that disclosure breach exists independently of any fraud.

Against this backdrop, this piece examines how RBI’s new remuneration disclosure duty should be understood and whether its consequences for non-compliance are adequately defined, drawing on the US Dodd-Frank framework.

REGULATORY BREACH WITHOUT INVESTOR HARM: WHAT KOTAK AND RELIANCE ESTABLISH

The SC in Kotak Mahindra AMC v. SEBI refused to accept the contention that a violation of regulation should be overlooked when there was no harm to any investor or even where the regulatory violation produced some benefits to the investors. The SC referred to the regulatory regime as “consequence neutral” meaning that having established the regulatory violation, any subsequent benefit or harm arising out of such conduct would not make the violation any less. According to the Court, overlooking the violation because of the resulting benefit will create encouragement for future violations. Thus, it means that compliance with the rules is measured not only by the consequences but also by the compliance with regulatory requirements.

While Kotak case refers to SEBI Act, the same “consequence neutral” principle fits perfectly well into banking context, the power of SEBI to make regulations and the RBI powers under section 35A of the Banking Regulation Act, 1949 is a compliance-oriented public interest provision and not a contingent one and thus, a violation of such provisions takes place in non-compliance and not in proving the loss. The said principle is important in connection with RBI’s recent remuneration disclosure obligation.

It is important to note that the bank would not be able to justify the delay in or the incompleteness of the disclosure in terms of strong performance, no losses for the shareholders or lack of any complaints from investors. If disclosure itself is the regulatory requirement, the lack of the harm is not to be considered to take away the violation.

The SC in Reliance Industries Ltd. v. SEBI made another crucial distinction: a regulatory violation, by itself does not amount to fraud. For fraud to be established, additional elements such as inducement, must also be proved. On the other hand, a violation of regulation could be proved independently from establishing fraud.

The two decisions therefore draw an important distinction. A finding of fraud or manipulation may require proof of intent and other additional elements. A freestanding disclosure obligation, however, can operate independently of those questions. RBI’s remuneration disclosure requirement appears to fall into the latter category. The obligation is to make the required disclosure; it does not itself require the proof that the non-disclosure caused investor harm or induced anyone to act. On this basis, the requirement should be enforced independently of the eventual outcome, while questions of fraud or deliberate manipulation should remain subject to their own higher evidentiary requirements.

WHERE DISCLOSURE STOPS SHORT

Both the gaps above share a common root: the amendment treats disclosure as an endpoint rather than a mechanism. For Kotak’s consequence-neutral rationale to apply, the fact that is disclosed must also be verifiable through results.

(a) Clawback silence

The amendment requires share-linked instruments to be fair-valued at the date of grant using the Black-Scholes model, but this valuation exercise does not itself establish whether the performance or conduct criteria underlying the grant of variable remuneration were accurately assessed.  The concern, therefore, is not a subsequent decline in the market value of the instrument, but the discovery of deliberate misstatement or fraudulent manipulation of the financial or performance information underlying the grant by a WTD, MD&CEO, or MRT after the relevant instrument is granted. Where the financial or performance figures underlying the grant are later found to have been deliberately misstated or fraudulently inflated, paragraph 63(3)(ii)(g)  of the RBI (Commercial Banks – Governance) Directions, 2025 leaves it to each bank’s compensation policy to define the situations that trigger malus and clawback.

This is the sharper reading of Kotak’s logic as consequence-neutrality has implications in both directions. A bank can no longer justify a failure to disclose on the ground that the omission caused no harm to shareholders. Conversely, disclosure of payment does not by itself establish that the payment was legitimately earned or justified. For example, a bank may disclose that its MD&CEO received share-linked remuneration and thereby satisfy the applicable disclosure requirement. If that remuneration was granted on the basis of deliberately overstated performance figures, however, the fact of disclosure would not by itself validate the underlying payment.

RBI’s 2019 Compensation Guidelines already build malus and clawback into variable pay. Malus allows a bank to reduce or withhold deferred variable compensation before it vests, whereas clawback allows the bank to recover variable compensation that has already vested or been paid in specified circumstances. For example, if an executive’s performance-based remuneration is deferred and misconduct is discovered before the share-linked instruments vest, the bank may invoke malus to reduce or withhold the unvested remuneration. If the same misconduct is discovered after the remuneration has already vested or been paid, clawback may permit the bank to recover it. The amendment brings share-linked instruments within that same ‘variable pay’ definition under paragraph 63(3)(ii)(f), but does not clarify whether the malus/clawback principles shall apply with the same force to such instruments which have been already vested or exercised.

The solution can choose between two options: either the fault independent trigger, on the Dodd-Frank §954 principles, where a qualifying accounting restatement would trigger recovery regardless of misconduct, closing the “we did not know” defence; or a fault-linked malus, closer to RBI’s existing 2019 framework, where recovery is tied to established misconduct or NPA-divergence triggers rather than the restatement alone.

The former is easier to enforce and leaves no room for a bank to plead ignorance, but sits uneasily with a supervisory regime built around graded, fault-based responses; the latter preserves consistency with RBI’s existing architecture, but keeps the enforcement gap partly open in precisely the cases an undetected restatement with no clear misconduct finding where clawback is needed most.

Given RBI’s supervisory rather than adjudicative posture, where lengthy intent-based investigations sit uneasily with its cadence, a middle ground is preferable: fault independent clawback restricted to only financial restatements with the trigger being objective and the dispute on intent not being able to hinder recovery.

(b) Absolute-figure-only disclosure

Paragraph 63(7), read together with the cross-referenced Financial Statements Presentation and Disclosures Directions, 2025, requires annual disclosure of executive remuneration and provides for comparison of each WTD’s pay with the bank-wide mean pay. It does not, however, mandate a CEO-to-median-employee pay ratio or a direct quantitative comparison between executive compensation and the bank’s performance. An absolute remuneration figure may therefore remain difficult to assess on its own: stating that a CEO earned ₹15 crore does not, without a further comparative measure, show how that amount relates to employee pay or to the bank’s financial performance.

This is precisely where the Kotak’s consequence-neutral principle is put to the test, the doctrine exists to let third parties test claims against real data including a bank’s own “no harm” defence not merely to confirm that a number was filed. A figure without sufficient context cannot serve the purpose of a meaningful disclosure. Basel Committee on Banking Supervision states disclosures should provide enough information for the market participants to understand and analyse the figures reported and, in the context of remuneration, assess the bank’s compensation practices and risk-taking incentives. Thus, a bare remuneration figure may satisfy the formal disclosure requirement without enabling meaningful assessment of the payment.

The amendment therefore leaves the disclosure of the share-linked remuneration to the separate RBI disclosure framework, namely Reserve Bank of India (Payments Banks – Prudential Norms on Capital Adequacy) Directions, 2025. It does not expressly require disclosure of the specific performance metrics or other basis underlying each individual share-linked grant. This may limit the ability of shareholders to assess why a particular payment was made.  

A useful comparative model is provided by the Dodd-Frank framework. Section 953(b) requires disclosure of the ratio between the CEO’s annual total compensation and the median employee’s compensation, providing a relative measure of executive pay. Section 953(a), by contrast, requires disclosure of the relationship between executive compensation actually paid and the company’s financial performance. These disclosures are useful because they give investors a basis against which to assess an otherwise standalone remuneration figure and its relationship with company performance. The same principle could strengthen remuneration disclosure for banks by requiring shareholders to assess both the scale of executive pay and its relationship with the performance that justified it.

Granularity should be resolved rather than deferred, individual-named disclosure for the small, high-visibility WTD/MD&CEO/CEO category, where public interest is highest and the group too small for aggregation to add real protection, and banded disclosure for the wider MRT pool, where individual naming risks compensation-poaching without a proportionate gain in transparency.

The same anchoring principle, also extends to hedging, although the RBI framework already prohibits employees from insuring or hedging their compensation structure to offset the risk-alignment effects embedded in their remuneration. The existing prohibition could nevertheless be made more verifiable through disclosure of compliance, including any material breach and the remedial action taken. This would allow investors to determine whether the exposure created by share-linked compensation is being preserved in practice, rather than merely assumed from the existence of the instrument on paper. The approach is comparable to Section 955 of Dodd-Frank, under which companies disclose their policies concerning employees’ and directors’ ability to hedge equity compensation.

CONCLUSION                     

Kotak and Reliance together show that a disclosure obligation can exist independently of investor harm or fraud. RBI’s new remuneration disclosure requirement should therefore be treated as an independent duty: a bank cannot avoid a violation merely because no investor suffered loss.

But paragraph 63(7) largely stops at requiring disclosure. It does not clearly address what happens if a later restatement affects the basis of remuneration, or provide enough context to assess whether the disclosed pay was justified. The US framework offers useful solutions through restatement-linked clawback and contextual remuneration disclosures such as pay-versus-performance and the CEO-to-employee pay ratio.

RBI need not copy the US approach. However, adopting similar mechanisms could give the new disclosure requirement greater practical force. The amendment creates the duty to disclose; the next step is to ensure that disclosure also leads to meaningful accountability.