Grey areas of using corporate funds for personal luxury

Shriram Subramanian

These days, executive compensation of promoters and professional executive directors of listed companies are closely scrutinised by shareholders. The compensation awards by the company are put to vote by shareholders. But being ordinary resolutions where even the promoters get to vote almost all compensation proposals pass through easily. There is a reason for regulators to considering barring promoters from voting on compensations awarded to themselves.

However, what is usually not very transparent are the perquisites, the perks and benefits that don’t always show up in the main compensation package. In many Indian companies, top executives enjoy a range of benefits beyond their salary. These include:

Fully furnished houses

Electricity, gas, water bills

Club memberships

Medical reimbursements

Company cars with drivers

Telephone, internet at home

Leave travel for executive sand their family

Some of these perks are allowed and even tax-exempt. For example, if a car or a phone is used strictly for company work, it doesn’t count as a perk. But how can one prove that? Things start to blur. One company even had put out detailed explanation stating “eligible for leave travel concession, for self and family once in a year for any destination in India, which shall not be included in the computation of the ceiling on perquisites.

The provision of a car for

use on company’s business

and phone at residence will not be considered as perquisites. Personal long distance calls and use of car for private

purposes shall be billed by

the company”.

When It Crosses the Line

The bigger problem is when promoters and directors go beyond just taking perks. In many cases, companies buy expensive items like luxury cars, houses, or even furniture in the company’s name — but the real benefit goes to the promoter’s personal life. These could outrightly be flagged as “embezzlement”. This is a clever way to enjoy a rich lifestyle without showing a high salary. And because it is not listed as income, it avoids taxes too. This is unfair to shareholders, employees, and tax payers.

The Gensol Case

In the case of Gensol Engineering, Sebi found that the company had taken loans worth

`978 crore, out of which `664 crore were meant for buying 6,400 electric vehicles (EVs). But only 4,704 EVs were actually bought. Sebi investigation showed that a lot of this money was used for personal luxuries by the promoters, including:

A luxury flat in DLF Camellias worth `42.94 crore

An investment of `50 lakh in a startup Third Unicorn

Lavish travel, including bookings on MakeMyTrip

A golf set worth `26 lakh

Funds transferred to family members

Diverting company funds for personal use can be considered a “criminal breach of trust” under Indian law (IPC Sections 405 and 406), and can lead to jail time of up to 3 years. When a company hides

personal expenses under business accounts:

It gives a false picture of the financials of the company

It misleads investors & shareholders

It can lead to tax penalties

It increases audit,

compliance costs

SEBI needs to crack down harder on such misuse. They should:

Make disclosure rules more transparent

Ensure independent audits of executive perks

Bar promoters from voting on compensations awarded to promoters themselves

Enforce strict penalties

While shareholders vote they decide on the merit of the

executive compensation. However, promoters need to make sure that company money is used for business growth, not for luxury flats, golf kits, or personal travel.

Promoters have every right to earn well, but it should be fair, and justified. At the end of the day, corporate funds are not a personal piggy bank.

- Shriram Subramanian is managing director at InGovern Research Services. Views expressed are personal