Severance Pay

Severance pay — also known as separation pay or retrenchment compensation — is a financial payment made by an employer to an employee upon the involuntary termination of employment, typically in situations involving layoffs, retrenchment, organisational restructuring, or redundancy. Severance pay serves as a financial bridge for the employee during the period of unemployment between jobs. In India, the payment of severance or retrenchment compensation is governed by the Industrial Disputes Act, 1947, which mandates compensation of 15 days' wages for every completed year of continuous service for workers in establishments covered by the Act. In corporate finance, severance pay obligations — particularly during large-scale restructurings, mergers, or workforce reductions — represent a significant one-time cash outflow and contingent liability. For equity analysts and investors on Ventura Securities evaluating companies undergoing major restructuring, M&A transactions, or workforce rationalisation, accurately estimating the severance pay liability is important for modelling the true cash cost of restructuring and assessing its impact on earnings and free cash flow.