Till now, there was no provision in the Companies Act, 2013 that allowed a remuneration for the non-executive director if the company was in loss or had inadequate profits. Only the executive director was entitled for a remuneration in the event of a loss. Public companies can now remunerate their non-executive directors, including independent directors, even if they are in red (making losses) or have inadequate profits with the Ministry of Corporate Affairs (MCA) specifying the maximum yearly remuneration that could be paid to them by such companies.
This MCA move came handy for many start-ups and unicorns to pay fair compensation to their independent directors and help retain talent at board level.
Role of non-executives (NEDs) and independent directors (IDs) in an organization
The role of non-executives (NEDs) and independent directors (IDs) in an organization in bringing their unbiased views, transparency and good governance in the corporate culture has already been recognized globally. The NEDs including IDs are not typically engaged in the day-to-day management but their responsibilities inter-alia include monitoring of the functioning of executive directors. This is quite essential in order to ensure that the decision making in the company is not dominated by individual choices.
Need of remuneration to non-executives (NEDs) and independent directors (IDs)
Whilr the role if NEDS/IDs demands them to bring independence to the board, the performance/profit based remuneration for non-executive directors has significant potential to conflict with their primary role in the organization. Accordingly, considering various stakeholder representations received by the Government regarding this inconsistency, the Company Law Committee (“CLC/Committee”) which was set up under the Chairmanship of Shri Injeti Srinivas in November, 2019 considered the need to have adequate compensation for such directors.
Legal position prior to Companies (Amendment) Act, 2020
Prior to the 2020 Amendment, Section 197(3) read with Schedule V covered only Managing Directors, Whole-time Directors and Managers – as defined in the 2013 Act. NEDs and IDs had been excluded from the ambit of Section 197(3). This meant that when the going was good and the company had made adequate net profits, (calculated as per the methodology prescribed under Section 198 of the Act), companies could pay up to 11 % of the net profits of the company, if there is a managing or whole-time director or manager and 3% of net profits in any other case.
In a situation where a company has not made any profits or made inadequate profits, Managing Directors, Whole-time Directors and managers could be paid sitting fees for attending board meetings in accordance with Section 197(5), and minimum remuneration in accordance with Section 197(3), read with Schedule V. But, in the same situation, NEDs and IDs could only be paid sitting fees for attending board meetings in accordance with Section 197(5) – and were not entitled to anything else.
Remuneration to Non-Executive Director under Companies Act, 2013
MCA has made amendment and cover non-executive directors also in Part II of Schedule V. As per this amendment, even if a company is in loss or having inadequate profit, they can pay remuneration to Non-Executive Directors up to following limits:
In the case of firms with an effective capital that is either ‘negative’ or less than ₹5 crore, the maximum annual remuneration has been pegged at ₹12 lakh per non-executive director; for firms with an effective capital of ₹5-100 crore, the limit has been set at ₹16 lakh; for companies with ₹100-250 crore, the limit is ₹24 lakh and for companies with effective capital higher than ₹250 crore and above, the limit will be ₹24 lakh plus 0.01 per cent of the effective capital in excess of ₹250 crore.
The above-mentioned limits can be extended to any amount by passing of Share Holder special resolution in General Meeting.
Remuneration to Independent Director under Companies Act, 2013
MCA has made amendment and cover Independent Director also in Part II of Schedule V.
As due to increase in responsibilities of independent directors, it was important that they were appropriately remunerated.
However, as per Rule 4 of the company’s appointment and remuneration of managerial personnel 2014 say that the sitting fees to an independent director or a director would not exceed for a sum of Rs 100,000 per meeting. At the lowest slab of Rs 12 lakh a year independent directors (in amended rules) could still draw thrice the amount that would have been payable for four board meetings in a year.
The limit of remuneration for ID shall be same as mentioned above for non-executive directors.
The 2020 Amendment and the revised Schedule V have further liberalised the regime by allowing NEDs and IDs to draw minimum guaranteed remuneration irrespective of the net profits of companies. This amendment is a step in the right direction. It is expected that this change may lead to more professionals joining the corporate boards. However, such professionals will be willing to join the board provided that such change in the remuneration is also accompanied by suitable changes to the provisions relating to criminal liability of non-executive directors, for violations of law by the companies – which has led to avoidable harassment and mental stress to such directors
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