Buy-back of shares during Covid-19 Pandemic

CS Vinita Nair, Senior Partner| Vinod Kothari & Company

corplaw@vinodkothari.com

With the entire world locked down due to widespread of CoVID-19 Pandemic, regulators in India have been granting exemptions, extensions and relaxations in relation to various compliance requirements under applicable law.

Buy-back of securities

With the share price of all listed entities touching an all-time low, several companies have considered this as an opportune time to buy-back the shares. Several public announcements have been filed in last 10 days for buy-back of shares by way of tender offer as well as from open market through market purchase.

The companies are intending to achieve following objectives through Buy-back[1]:

  • Fairer valuation of the Company’s stock price;
  • Improve key return ratios like return on net worth, return on assets etc. over a period of time;
  • Create long term value for shareholders;
  • Return cash to its shareholders holding Equity Shares broadly in proportion to their shareholding, thereby, enhancing the overall return for them;

SEBI relaxes operational procedure

SEBI vide Circular dated March 26, 2020[2] has relaxed operating procedure in relation to buyback by requesting the Merchant Bankers and other market intermediaries to submit the PDF copies  of reports under Regulation  10(7)of  SEBI  (SAST)  Regulations,  2011, exemption applications,  Public Announcements,  Detailed Public Statements,  Draft Letter of  Offer and other relevant documents at cfddcr@sebi.gov.in .

Earlier, companies were required to submit hard copies and soft copies to SEBI through the merchant banker and were also required to upload through SEBI Intermediary Portal at https://siportal.sebi.gov.in

Prohibition on tendering of physical shares

The listed entities continue to include following paragraph in their public announcement while dealing with procedure for buy-back of physical shares:

“All Shareholders of the Company holding Equity Shares in physical form should note that pursuant to provisions of the proviso to Regulation 40(1) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended from time to time (“SEBI Listing Regulations”) read with press release no. 12/2019 dated March 27, 2019 issued by SEBI, with effect from April 1, 2019, the request for transfer of securities shall not be processed unless the securities are held in dematerialised form with a depository. Accordingly, the Company shall not accept the Equity Shares tendered under the Buy-Back unless such Equity Shares are in dematerialised form.”

This is indeed surprising that listed entities regard buy-back equivalent to transfer of shares, while this actually results in extinguishment of shares. I have discussed the same at length in my previous article titled ‘Can Physical Shares Be Offered For Buyback?’[3].

During the period of lockdown, why would a shareholder consider to go and open a demat account simply to tender shares for buyback. There is an urgent need for SEBI to intervene and clarify soonest.

Tax on buyback

While Section 115 QA introduced in Budget 2013 applied to buy-back of shares by unlisted companies; Final Budget – 2019 extended applicability of Section 115QA of Income Tax Act, 1961 to the buy-back of shares listed on a recognised stock exchange for all public announcement made after July 5, 2019.

Accordingly, any amount of distributed income by the Company on buy-back of shares  from a shareholder shall be charged to tax and such company shall be liable to pay additional income-tax at the rate of twenty per cent on the distributed income.

Trading window

With the end of financial year closely approaching, time is ticking towards closure of trading window from the end of quarter till forty-eight hours after the information becomes generally available. While, SEBI has granted an extension for convening of Board meetings for submission of financial results for the quarter and financial year ended March 31, 2020 there is no extension for commencement of trading window closure. Accordingly, all listed entities will be required to close trading window for the listed securities w.e.f. April 1, 2020.

Buy-back during trading window closure

All recent public announcements filed with SEBI in relation to buyback[4], indicate the buy-back period to commence in the month of April, 2020.

SEBI vide Securities and Exchange Board of India (Prohibition of Insider Trading) (Second Amendment) Regulations, 2019 inserted Para 4 (3) (b) in Schedule B[5] w.e.f. July 25, 2019 to the following effect:

(3) The trading window restrictions mentioned in sub-clause (1) shall not apply in respect of –

(b) transactions which are undertaken in accordance with respective regulations made by the Board such as acquisition by conversion of warrants or debentures, subscribing to rights issue, further public issue, preferential allotment or tendering of shares in a buy-back offer, open offer, delisting offer.

Accordingly, all designated persons can also tender their shares held in the buy-back undertaken by the listed entity.

Conclusion

While the issue relating to filing of offer documents with SEBI and tendering shares during window closure stands addressed, it is not clear how the companies will be able to send the letter of offer to shareholders whose details for furnishing details in electronic mode is not available with the listed entity. Additionally, the hardship faced by shareholders holding shares in physical form remains unresolved. With market prices crashing and prohibition of physical transfers, neither they will be able to transfer the shares nor participate in buyback.

[1] As per the rationale disclosed by listed entities.

[2] https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/attachdocs/mar-2020/1585224846997.pdf#page=1&zoom=page-width,-15,842

[3] https://www.moneylife.in/article/can-physical-shares-be-offered-for-buyback/57265.html

[4] https://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListing=yes&sid=3&ssid=22&smid=18

[5] Minimum Standards for Code of Conduct for Listed Companies to Regulate, Monitor and Report Trading by Designated Persons.

Board meetings during Shutdown : How Companies may care less for video-conferencing rules

Vinod Kothari

corplaw@vinodkothari.com

We are in a shut-down mode, but companies still need to work, as business, and of course, life, has to move on. There are lots and lots of matters in the corporate world where board decisions are required. There are matters which mandatorily require board resolutions to be passed in a meeting of the board, and these matters may be quite frequent, for example, borrowing, lending, investing of funds, issue of securities, etc.. Additionally, there may be lots of other matters where approval of boards/ audit committee meetings or other committee meetings may be required.

If the matter requires board concurrence, not necessarily at a meeting, then resolution-by-circulation (RBC) is a good thought. But a bit of reflection may reveal that RBC is not a good solution in the age of technology. RBC is non-interactive. It is almost like sending postal letters for communicating with distant friends and relatives in the bygone age – we would send a letter, sealing in nicely into an envelope, and then drop it into a red box, and then wait. And then, we will receive an answer 15 days later, and eagerly open the envelope in reply. If technology permits today to communicate instantly with many at a time, why rely on the archaic RBC technique?

It is unfortunate that in an age where most business decisions are being taken momentarily using video and voice conferencing, and even major financial transactions are embracing blockchain technology which may replace currency as we know today, there must be a detailed set of rules for use of video conferencing in board meetings. The rules, in MCA’s Companies (Meeting of Board and its Powers) Rules, were actually drafted in the pre-2013 era,  by way of a so-called Green Initiatives of the MCA in 2011[1]. . Thereafter, the rules have been tweaked from time to time, but their stance still remains rather bureaucratically antiquated. Ironically, 2011 was the time for pagers and first generation cellphones. In 2020, in the age of smartphones and what not, the 2011 stance still continues to prevail.

For example, the thought that the chairman will take a roll call – even though the chairman can easily see face to face the persons who are connected on the video call! Or the fact that the proceedings of VC will be recorded. These antiquated rules have deterred companies from using the full potential of VC for board meetings. In fact, the requirement of recording itself is a major deterrent, as most boards do not want all the noise, side comments and off-the-record discussions in a board meeting to be formally recorded.

Right now, from 22nd March, 2020, the entire country is into a shut-down, at least for 3 weeks. Much before this, most companies had gone into a work-from-home mode. There is no option at all of a physical board meeting.

Hence, VC is the only way for board meetings.

In this scenario, we urge companies to come out of the traditional mindset of physical board meetings and allow board proceedings to embrace technology – this is hardly an option today; it is necessity.

There are several questions that arise in the mind of the compliance professional – most of these questions are the by-product of a thinking anchored into the days of physical board meetings. If compliance professionals were a little more avant-garde, we may have far smoother board proceedings through VC.

Some common questions

  1. Considering the crisis situation, if the Company intends to seek Board approval for matters including matters under Section 179, what are the options available?

In our view, the only option is to do board meeting by video conferencing. The old-fashioned way of doing a resolution by circulation, and later have the decision ratified in a proper meeting (as and when the same may be called) may also work, but as we mentioned above, if the entire world of business is working on VC mode, why not board meetings?

  1. In case of BM considered through VC, is there a need to have a physical quorum?

The thought of a “physical quorum” is completely weird in case of a board meeting by VC. Of course, every person who is participating in the board meeting from remote locations are all “physically” there. Quorum is the minimum number required for a collective decision-making in a board meeting. Every person hooked on to the VC participates in the collective decision-making, with their full sensibility. Neither is the attentivity, or no participation, any less in a VC meeting than in a board meeting.

In this regard Section 174 of the Act prescribes that the quorum in case of board meetings shall be 1/3rd of its total strength or 2 directors, whichever is higher, and the participation of the directors by VC or by other audio visual means shall also be counted for the purposes of quorum  However, in the present scenario, while we encourage companies to traverse the old mindset and go for board meetings entirely on VC mode , MCA has also provided relaxation vide its notification dated 19th March, 2020[2] on the requirement of the physical presence of the directors while reckoning the quorum on regular matters requiring board approval,.

  1. Whether all directors, including Chairman, participate through VC?

Of course. If the meeting is happening on VC mode, everyone, including the chairperson, is connected by VC.

  1. What will be the place of meeting?

As per SS, notice of the eeting shall clearly mention a venue, whether registered office or otherwise, to be the venue of the Meeting and all the recordings of the proceedings of the Meeting, if conducted through Electronic Mode, shall be deemed to be made at such place.

As we mentioned before, compliance professionals need to be a bit avant-garde. There is no question of a “place” of a board meeting in case of a meeting by VC. No one is meeting physically at any place. The cloud is the place.

However, if the meeting has to have a place, it is chairperson who is the anchor for the meeting – hence, the chairperson’s place will be the place.

However, to reiterate – the notice for such a meeting will not say – meeting shall be held at XYZ place. It wil say, meeting will take place on VC, and share log-in or call-ins, as it is commonly done in case of meetings on Webex, Zoom or other meeting facilitators.

  1. Whether prohibited items can also be done through VC?

 Yes, in view of exemption by MCA on 19th March, 2020[3], an amendment in the Companies (MBP) Rules has been made. It provides that a meeting on the restricted items specified in Rule 4, including certain items such as approval financials and board’s report etc. which require an immediate consideration in the present time, can be held through video-conferencing till the period ending on 30th June, 2020 and shall not require mandatory physical quorum.

  1. Suppose a Director did not indicate his intention to participate through VC at the beginning of the year, can a Company still send them notice to participate through VC?

As per SS, the director may intimate his intention of participation through Electronic Mode at the beginning of the Calendar Year also, which shall be valid for such Calendar Year.

In the present scenario, the intent of the director does not matter at all. It is a clear case of compulsion, rather than intent. Hence, irrespective of whether the director has intimated his intent of attending through VC or not, every director may hook on

  1. If the director in interested on any agenda item, and participating through VC, how should he abstain from participation?

Not participating does not necessarily mean getting blacked out.

However, if the other directors want to discuss something in incognito mode, that is, by excluding a particular interested director, every VC facility includes an option to disconnect a particular director. So the so-called interested director may be disconnected while discussing the impugned item.

  1. If all directors are participating through VC, how will minutes or other documents requiring signature of Chairman or Directors will be considered?

The minutes will be captured by the company secretary and circulated as usual.

Assuming that it is not possible to get the physical signatures of the chairperson within 30days as required, the minutes will be entered in the minute book and signed as and when possible. The present situation being a force majeure, there cannot be any breach of law for what is anyways an impossibility.

  1. How will the attendance register be maintained in case of directors participating through VC?
  • As per SS, the attendance register shall be deemed to have been signed by the Directors participating through Electronic Mode, if their attendance is recorded in the attendance register and authenticated by the Company Secretary or where there is no Company Secretary, by the Chairman or by any other Director present at the Meeting, if so authorised by the Chairman and the fact of such participation is also recorded in the Minutes.
  • In case of Directors participating through Electronic Mode, the Chairman shall confirm the attendance of such Directors. For this purpose, at the commencement of the Meeting, the Chairman shall take a roll call. Roll call is an antiquated, almost ridiculous requirement.

However, the company secretary may record attendance, which may later be entered into the attendance register. And most of the VC meeting software provide the option of recording as well.

  1. How will the documents required to be placed at the meeting considered in case of VC meetings?

Since there is no question of having physical documents in VC meetings, all such documents which require the approval or consideration of the board at its meeting may be circulated along with the agenda. As regards, the consideration of unsigned documents which require the initials of the CS or chairman, as per clause 7.3.3 of SS-1, the ‘sd/-’ signed copies of the same may suffice.

Further, as per the demand of the situation, BSE/NSE have sent one on one mails to the listed entities stating that ‘sd/-’ signed copies of the submissions to be made to the stock exchange shall be treated as sufficient compliance.

  1. The directors are required to place their disclosures at the first meeting of the board in every FY. How will the same be considered in VC meetings?

Form MBP-1 required to be obtained from each of the directors can be prepared by them and them and any changes therein may be announced during the meeting which will be recorded alongwith the other proceedings.

  1. How will the updation and signing of registers maintained physically, be done?

In the present scenario, where most of the registers of the companies are maintained in electronic mode, the udpation of those will not be an issue. However, in case of registers which were being physically placed before the meeting and signed by the board will now require the entries to be recorded in electronically, with a record of the date and time and can be entered in the physical registers and signed thereafter.

[1]  https://www.mca.gov.in/Ministry/pdf/Circular_28-2011_20may2011.pdf

[2] http://ebook.mca.gov.in/notificationdetail.aspx?acturl=6CoJDC4uKVUR7C9Fl4rZdatyDbeJTqg3L9EJ8UoBYN3JmTfp0IhEpBLz442oQa9O

[3] http://ebook.mca.gov.in/notificationdetail.aspx?acturl=6CoJDC4uKVUR7C9Fl4rZdatyDbeJTqg3L9EJ8UoBYN3JmTfp0IhEpBLz442oQa9O

RPTs and related exemptions in the context of Government companies

Munmi Phukon and Tanvi Rastogi

corplaw@vinodkothari.com

Introduction

Ministry vide its Notification[1] dated 5th June, 2015 issued certain modifications/ exemptions/ exceptions for Government Companies on certain provisions of the Companies Act, 2013. One such exemption was with respect to the provisions pertaining to related party transactions (RPTs). Vide the said Notification, Government Companies were provided relaxation from obtaining the prior shareholders’ approval as required under the first proviso to section 188(1) and consequently, from the restriction on the affirmative voting by the related parties for (a) contracts/ arrangements with other Government Company(ies) and (b) where the Government Company is not a listed company, contracts/ arrangements with related parties other Government companies as mentioned above, if prior approval of the Ministry/ Department of the Central Government (CG) or State Government (SG) administrative in charge of the Company is obtained.

The aforesaid Notification has been revisited by the Ministry by issuing a further Notification[2] dated 2nd March, 2020 (2020 Notification) whereby the said exemptions have been extended to the contracts/ arrangements by the Government Companies with CG/ SG/ any combination thereof.

Before analysing the relevance of the 2020 Notification, one has to understand the related parties from a Government Company’s perspective. This article analyses the provisions of the Companies Act, 2013 (Act) only, considering the Notification has been brought in by the Ministry of Corporate Affairs.

Related parties for a Government Company

As per clause (76) of section 2 of the Act following shall be a related party with reference to a company:

  1. a director or his relative;
  2. a key managerial personnel or his relative;
  3. a firm, in which a director, manager or his relative is a partner;
  4. a private company in which a director or manager or his relative is a member or director;
  5. a public company in which a director or manager is a director and holds along with his relatives, more than two per cent of its paid-up share capital;
  6. any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;
  7. any person on whose advice, directions or instructions a director or manager is accustomed to act:                                                            Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity;
  8. any body corporate which is—
    • a holding, subsidiary or an associate company of such company;
    • a subsidiary of a holding company to which it is also a subsidiary; or
    • an investing company or the venturer of the company
  9. a director other than an independent director or key managerial personnel of the holding company or his relative as prescribed under Rules

Accordingly, to consider someone as related party, he/ she/ it shall have to strictly fall under any of the aforesaid sub-clauses. Seemingly, the Government of India or any State Government having controlling stake in the company does not get fit in any of the said clauses as the CG/ SG is neither considered as a person nor an entity/ body corporate. Accordingly, CG/ SG is not a related party to a Government Company as per the aforesaid definition.

Similarly, to consider another Government Company as a related party for a Government Company, the former shall also be required to fall under the definition. Accordingly, one will have to determine whether the former Government Company is a related party or not, based on its structure i.e. private company, public company, body corporate, and also based on its relationship with the subject Government company i.e. holding company, subsidiary company, associate company etc.

Position before and after 2020 Notification

 Transaction between Government companies and CG / SG

 The position with respect to transactions between the Government Company and the CG/ SG before and after the 2020 Notification remains same as CG/ SG, as discussed above, does not get covered under the purview of the definition of related party provided under the Act. Therefore, until and unless there is a related party on the other side, any transactions with any other party cannot be considered as RPT. Accordingly, where the transaction itself is not an RPT, exemption from the provisions pertaining to RPTs does not arise.

Transaction between two Government Companies

As discussed above, for considering another Government Company as related party one has to consider the status of such company. Accordingly, for a Government Company, the following Government Companies may be considered as related party:

  1. A Government Company which is a private company in which a director, manager or relative thereof of the first mentioned Government Company is a member or director;
  2. A Government Company which is a public company in which a director or manager of the first mentioned Government Company is a director and holds along with his relatives, more than two per cent. of its paid-up share capital;
  3. A Government Company which is either the holding company or subsidiary or associate company of the first mentioned Government Company;
  4. A Government Company which is a fellow subsidiary of the first mentioned Government Company;
  5. A Government Company to which first mentioned Government Company is an associate company

Considering the structure of the Government Companies, it is very unlikely to have related parties covered under point (a) and (b) above. Coming to the position before or after the 2020 Notification, there is no change, as the 2015 Notification already covered transactions between two Government Companies.

Transactions between the Government Companies and other related parties including non- Government Companies

From the definition provided in the Act, the following persons/ entities may also be considered as related parties for a Government Company:

  1. Individuals who are director, key managerial personnel (KMP), relatives of director/ KMP (s), a director other than an independent director or KMP of the holding company or his relative;
  2. Firm in which a director or manager or relative thereof is a partner;
  3. Non- Government Companies such as:
    • Private companies in which a director or manager or relative thereof is member or director;
    • Public companies in which a director or manager is a director and holds > 2% of its paid-up share capital, singly or jointly with his relatives;
  4. Body corporate whose Board/ managing director/ manager accustomed to act in accordance with the advice, directions or instructions of a director or manager;
  5. Any person on whose advice, directions or instructions a director or manager is accustomed to act.

While the parties mentioned in point (d) and (e) above, cannot be determined without analysing the proper facts and considering these are purely circumstantial in nature, it is very unlikely to have such related parties. As regards the position before and after the 2020 Notification, the transactions between these related parties will still require the prior approval of the administrative Ministry in charge, if the company is not obtaining prior shareholders’ approval. Accordingly, there is no change in the position after 2020 Notification.

Conclusion

While the 2020 Notification is an extended version of the 2015 Notification, however, it seems that it does not carry any relevance at all. The reason for the same is that CG/ SG, as discussed above, does not get covered under the purview of the definition of related party provided under the Act. Therefore, until and unless there is a related party on the other side, any transactions with any other party cannot be considered as RPT. Accordingly, where the transaction itself is not an RPT, exemption from the provisions pertaining to RPTs does not arise.

[1]http://ebook.mca.gov.in/notificationdetail.aspx?acturl=6CoJDC4uKVUR7C9Fl4rZdatyDbeJTqg3XHmN4i4mFb+v2wWhMvQoFsXKgJTHtRr9VmNjj/XQUFc9vZ6tRKIi2gIhxfNI2SOK

[2]http://www.mca.gov.in/Ministry/pdf/Notification_02032020.pdf

 

Our other articles on related party transactions:

http://vinodkothari.com/2020/02/proposed-changes-in-rpts-ppt/

http://vinodkothari.com/2019/11/mca-revisits-the-existing-cap-of-materiality-of-related-party-transactions-u-s-188/

http://vinodkothari.com/2017/09/presentation-on-related-party-transactionrpts-an-overview/

Relaxations by SEBI and MCA under disruption scenario: Some FAQs

SEBI relaxes timelines at the time of disruption caused by COVID-19

Vinod Kothari & Company

corplaw@vinodkothari.com

Below is a short snippet of the relaxed timelines issued by the securities market regulator in the wake of the disruption caused by COVID-19.

CSR funds may be used for COVID-19 relief, clarifies MCA

Team Vinod Kothari & Company | corplaw@vinodkothari.com

Updated on 24th March, 2020

Like all other public agencies, MCA has been taking a series of steps in the wake of the rapidly spreading COVID-19 and issued clarification[1] on spending of CSR funds for COVID 19 stating that the amount spent on COVID-19 by companies will count towards CSR spending. The activities falling under item nos. (i) & (xii) of Schedule VII of Companies Act,  2013 undertaken due to COVID 19 shall qualify as CSR activity which covers the following:

  • Eradicating hunger, poverty and malnutrition, promoting health care including preventive health care and sanitation including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation and making available safe drinking water.
  • Disaster management, including relief, rehabilitation and reconstruction activities.

Notably, substantial CSR money remains unspent, very often for want of appropriate CSR projects. Many companies have to explain the same by finding some reason or the other. Currently the country is passing through an epidemic that has affected the whole world. Hence, companies may come forward and spend their unspent CSR budgets. Indeed companies are also welcome to over-spend this year’s budget pursuant to a proposal in the Companies Amendment Bill which permits carry forward of excess spending as well.

Hence, this is the right occasion, and unarguably, one of the noblest causes, to use CSR funds in whatever way, one may think of.

Questions are often being asked – can the company include the expenditure incurred for COVID-19 preparedness for its own employees and workmen – say, giving of masks, sanitizers, or similar expense, as a part of its CSR spending?

Our answer to this question is the same as what we have continuously answered as a part of our FAQs[2] on CSR that CSR is spending on a social cause. An employer spending for the well being, safety or welfare of employees is performing the employer’s legal or moral obligation. That cannot be regarded as CSR. However, if the company spends on COVID-19 preparedness, either by itself or through implementing agencies, for a wider section of public, and its employees or their families are also the beneficiaries of such an exercise, there is no denial as to eligibility of the same as CSR spending.

 

Our related write ups on CSR may be viewed here:

Proposed changes in CSR Rules

Draft CSR Rules Make CSR More Prescriptive

CAB, 2020: Bunch of Proposals for revamping CSR Framework

[1] http://www.mca.gov.in/Ministry/pdf/Covid_23032020.pdf

[2] http://vinodkothari.com/2019/11/faqs-on-corporate-social-responsibility/

Remunerating NEDs and IDs in low-profit or no-profit years

Ambika Mehrotra

corplaw@vinodkothari.com

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.

As stated by Sir Vincent Powell-Smith in his book ‘Law and Practice Relating to Company Directors’, “apart from the working or executive directors, that is persons who are full-time executives, it is sometimes desirable to take in ” outside ” directors who have no association with the company other than as a director.”

It is to be noted that the unique role of such directors is evaluated by their ‘positive contribution’, in the board, as stated in the Report by Cadbury Committee[1], which is irrespective of the profits generated by the day to day business and working, However, the compensation for their contribution has always been linked to the profitability of the company by virtue of the provisions of Section 309 of the Companies Act, 1956 or corresponding Section 197 in the Companies Act, 2013.

Herein, it is pertinent to note that, while 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[2] considered the need to have adequate compensation for such directors.

In line with same, the Central Government (CG) has recently laid down another set of amendments before the Lok Sabha on 17th March, 2020 by way of Companies (Amendment) Bill, 2020[3] (“CAB, 2020”). In this article we intend to discuss the said amendment along with the rationale behind the same.

Analysis of the amendments

The board is a mix of executives and non- executives, while the executives are being paid remuneration, the non- executives are only eligible for sitting fee and commission out of profits. Where the difference between the work domain is only as regards the day to day management of the company. Here, it is to be noted that although the non-executives do not involve in the everyday working of any organization, they carry the vintage of their experience in the company. It is interesting to note that while both the kind of directors bring in their bit of value in the company, however during a financial disrupt in a company, maybe through losses or inadequacy of profits, when there is a conflict in the minimum remuneration being paid, where the executive still receive the prescribed remuneration, the non-executives get to sacrifice their commission, which they were otherwise entitled to and they have to satisfy themselves with the sitting fee only.

In order to curb the said conflict, the CAB, 2020 has introduced provisions for allowing payment of adequate remuneration to NEDs in case of inadequacy of profits, by aligning the same with the provisions for remuneration to executive directors in such cases. This is backdrop of the discussion in the CLC Report which considered that the existing provisions in the CA, 2013, do not recognise payment of remuneration to non-executive directors, in case of losses or inadequate profits as it does for the managerial personnels in terms of Section 197 read with Schedule V.

Notably, the concept of minimum compensation to independent directors had also been incorporated in the Uday Kotak Committee report on Corporate Governance issued on October 5, 2017[4]. However, the above requirement of minimum remuneration did not extend to the case of inadequacy of profits.

While the Calcutta High Court in the matter of Hind Ceramics Ltd. vs Company Law Board And Ors[5] discussed that the minimum remuneration paid to the executives and non executives equally might severely impact the financial strength of the loss making entity in recovering the same for an uncertain term. However, on taking a close look at the active involvement of the non-executives in the company by virtue of their enhanced role and liabilities, it is required to re-consider the fact that the inconsistency in the payment of such non-executives as compared to the executives would not only de-incentivise the latter but also affect the retention of talented resources in a company.

Global Precedents

Considering the above, it may also be inferred that the limitation in the provisions of CA, 2013 w.r.t the payment of remuneration to IDs in case of losses or inadequacy of profits frustrates the whole intent of their unique role on the board. Even globally, various  countries have recognised that the level of remuneration for non-executive directors should reflect their time commitment and responsibilities of the role and not be linked to the performance of the company.

UK Corporate Governance Code

As per the UK Corporate Governance Code dated July 2018[6], which clearly provides that,

“Remuneration for all non-executive directors should not include share options or other performance-related element.”

The remuneration of non-executive directors is determined in accordance with the Articles of Association of the company or, alternatively, by the board.

OECD Report on Corporate Governance 

Similar provisions have been recommended in the Portuguese code of corporate governance, as referred in the report of the Organisation for Economic Co-operation and Development (OECD) based on Corporate Governance on Board Practices[7], which provides that the remuneration of the NEDs on the Board should not include a part depending on the performance or the value of the company.

ICGN’s Guidance on NED Remuneration

In addition to the above, the International Corporate Governance Network (ICGN) in its Guidance on Non-executive Director Remuneration[8] explains that the performance-based remuneration in any organisation has significant potential to conflict with a non-executive director’s primary role as an independent representative of shareholders. Although, ICGN is a strong advocate of performance-based concepts in executive remuneration, they do not uphold the same in case of remuneration to non- executives.

Conclusion

In view of the global stand in determining the remuneration to non-executives on  the basis of their value in the organisation without linking the same to the profits of the company, the amendments to be introduced vide the CAB, 2020 appear to be a boon for the IDs. At the same time, we cannot disregard the fact that, the concept of adequate compensation mentioned above applies to the companies facing losses or inadequacy of profits and it may be possible that this might increase the financial distress of the loss making company.  However, the positive aspect of the same still appears to be beneficial as regards the retention of experienced resources who shall remain motivated by being adequately remunerated.

Our other write- ups on similar topics may be viewed at:

  1. http://vinodkothari.com/2019/11/the-injeti-srinivas-committee-report-18-11-2019/
  2. http://vinodkothari.com/2019/11/clc-report-moving-company-law-a-step-closer-to-ease-and-peace/
  3. https://www.moneylife.in/article/norms-for-disqualification-of-directors-may-undergo-change/58842.html
  4. http://vinodkothari.com/category/corporate-laws/

[1] https://ecgi.global/sites/default/files/codes/documents/cadbury.pdf

[2] http://mca.gov.in/Ministry/pdf/CLCReport_18112019.pdf

[3] http://164.100.47.4/BillsTexts/LSBillTexts/Asintroduced/88_2020_LS_Eng.pdf

[4] https://www.sebi.gov.in/reports/reports/oct-2017/report-of-the-committee-on-corporate-governance_36177.html

[5] https://indiankanoon.org/doc/445116/

[6] https://www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-Corporate-Governance-Code-FINAL.pdf

[7] https://www.oecd.org/daf/ca/49081438.pdf

[8] https://www.top1000funds.com/pdf/ICGN_NED_Rem_Guidelines.pdf