India’s top companies are getting into informal no-poach pacts

According to senior search executives, several large Indian businesses advised them against hiring candidates from direct competitors, especially for CXO-level recruitments, a departure from the past when they were actively poaching top executives from rivals.

“There is a talent crunch at the CXO-level, forcing some conglomerates to agree on no-poach pacts. Typically, these agreements are not broken," said Navnit Singh, chairman and regional managing director, Korn Ferry, India.

These no-poaching pacts have now become common in the energy, digital, retail, and manufacturing sectors.

According to senior recruiters, companies often resort to these informal pacts when they are at the final stages of mergers and acquisitions and do not want critical talent poached, which can create hurdles for the transaction. While there are no signed agreements, search firms are told not to hire from specific companies.

“Hiring companies may provide informal guidance on employers they prefer not to hire from—reasons are rarely articulated or sought. More often than not, hirers abide by these, notwithstanding the temptation to be creative, especially for special or differentiated talent," said Sachin Rajan, country manager India for search firm Russell Reynolds Associates.

Indian companies witnessed the ‘great resignation’ trend since they resumed hiring after a two-year pandemic-driven lull.

Attrition levels surged to around 21% last year, and business houses have informed executive search firms that they do not want their CXOs shifting loyalties.

“Given the impact of attrition and competition for senior executives whose average pay hike increased to 8.9% this year, it may be a good time for some organizations to enter into non-poaching agreements where there is considerable movement and churn in a sector," said Roopank Chaudhary, partner, human capital solutions for consulting firm Aon India.

The non-compete clause, mainly signed in promoter-led companies, is typically restricted to senior talent and does not cover those in the junior and middle rungs.

However, these clauses are not enforceable in the courts and are more of a gentleman’s agreement. This is because Section 27 of the Indian Contract Act, 1872, forbids any agreement that restrains anyone from practising a lawful profession or trade and such clauses in employment contracts are not legally enforceable.

However, there are ways to circumvent these informal deals if the talent is critical. “Large companies can recruit the CXO in a different business unit that does not fall under the ambit of the non-compete agreement. They are also sending top hires for a few months on a paid sabbatical," said Soubhik Dasgupta, a partner at law firm Pioneer Legal.

Clauses that forbid a top executive from joining rivals are not added in the contract letters of CXOs and are different from the no-compete clauses used in IT firms to protect client data. Three months ago, a Pune-based labour union appealed to the central labour ministry seeking the removal of Infosys’s non-compete clause. The software services company defended the no-compete rule in offer letters, saying it is “common and standard business practice" in the sector and done to protect customer information that is “critical and sensitive" and is only applicable for a limited period.