Payal Agarwal | Executive (email@example.com)
Independent directors (IDs) are a crucial part of corporate governance structure; however, their remuneration is currently solely by way of sitting fees and a “profit-linked” commission. Profit is something which is completely dependent on business models, a whole matrix of internal and external factors, and something like a Covid-crisis will evidently leave a whole lot of companies in India and elsewhere into the red. In these circumstances, how do companies remunerate independent directors, to reward them for the time they spend and the responsibilities they shoulder.
To resolve this difficulty, amendments were made vide the Companies (Amendment) Act, 2020.While most of the sections of the Amendment Act were made effective on 28th September 2020, the sections relating to remuneration of NEDs and IDs were not been made applicable since the same was required to be adequately supplemented by corresponding amendments in Schedule V of the Act as well. However, just before the Covid-ravished FY 2021 was to end, MCA has put into effect the amended sections 149(9) and Section 197(3) and simultaneously brought amendments in Schedule V of the Act.
Effects of the amendments
These amendments will enable companies to adequately remunerate their NEDs and IDs for their efforts. Contrary to the rigidity in the erstwhile provisions, which had a complete bar on payment of remuneration to NEDs and IDs in absence of profits, these amendments enable companies to pay minimum remuneration to NEDs and IDs even at times of losses/ inadequate profits. Note that there always was a provision for minimum remuneration in case of EDs.
- Private companies are not covered by the ceilings of managerial remuneration. Hence, private companies are completely outside the purview of the restriction.
- Public companies, both listed and unlisted, will be covered by the amendment.
- The amendment is of enabling nature. It does not mandate companies to remunerate their NEDs and IDs. So, companies may, if they so desire, remunerate their IDs and NEDs in the year of inadequate profits, or losses.
- The amendment applies to all NEDs and IDs.
- The amendment pertains to the “profit-linked” commission. That does not mean the commission as originally proposed had to be profit-linked. Even if the commission was a fixed amount, it will still be covered by the ceiling given in second proviso to sec. 197 (1). Hence, any commission is necessarily profit-linked.
- The amendment is effective immediately. That means companies may make use of the amended provisions for FY 2020-21.
- The amendment does not lead to an automatic variation in the remuneration policy or shareholders’ resolution. In essence, the amendments are of enabling nature: within the ambit of the amended provisions, companies may take corporate action to remunerate their NEDs and IDs. The actions have to be taken by the companies in question, which may include remuneration policy, appropriate shareholder resolutions, etc.
Amendments to Schedule V – maximum limits on remuneration of “other directors” specified
Part II of Schedule V of the Act deals with the remuneration of “managerial personnel”. In this connection, please note that “managerial personnel” refers to managing director, manager and whole-time director of the company. Now, with the present amendment to the Schedule, part II has become applicable on the “other directors” as well. The term “other directors” has been clarified in the amendment notification itself by way of an explanation which states,
“For the purposes of Section I, II and III (relevant parts that have been amended) the term “or other director” shall mean a non-executive director or an independent director.”
Section II of Part II of the Schedule specifies maximum remuneration that can be paid to a director, be it a managerial personnel or otherwise. For directors other than the managerial personnel, the remuneration has been specified at an amount almost 1/5th of that permissible to the managerial personnel.
The result of bringing IDs within the scope of Schedule V is that whereas the IDs would have been receiving very low remuneration in comparison to their roles and responsibilities in an organisation due to inadequacy of profits, the IDs will have a chance of getting a fair remuneration.
Questions relevant to the amendments
Various questions arise out of the amendments, such as –
- Will the amendments require modification in existing remuneration policy?
- Can the NEDs and IDs be paid remuneration in excess of those specified in Schedule V?
- Whether a single approval can suffice for the remuneration of all NEDs and IDs or such resolutions will have to be approved separately for the individual directors?
- Whether NRC will be eligible to recommend remuneration payable to IDs?
- Whether a prior approval of shareholders will be required or whether post facto approval may be obtained?
Answers to these and other relevant questions revolving around the aforesaid amendments has been dealt with in our detailed FAQs and can be accessed here.
The role of non-executive and IDs is very crucial to a company. The professional expertise of NEDs in their specific fields brings requisite value to a company. Considering the role played by IDs in effectively balancing the conflicting interest of the company and its stakeholders and bringing independent judgement to the Board’s decisions, it would be unfair if they are not paid adequately for the efforts put by them in the effective conduct of business.
Further, in the present scenario, amidst the economic breakdown worldwide, many companies may not be able to earn the profits as expected, or might be facing losses as well. In such circumstances, the aforesaid amendments were a necessity.
However, the erstwhile provisions had no scope of payment of remuneration to them in case of loss. With the aforesaid amendments coming into force, the companies will be able to compensate their non-executive and IDs well, even in case of no/inadequate profits.
Our other articles on the related topics can be read here –
 SEBI has recently in its consultation paper on review of regulatory framework applicable to IDs suggested that profit-linked commissions should be barred and shall be substituted by higher sitting fees or issue of stock options. Please refer to our article for broader understanding of the same.