Remuneration to Non-executive Directors and Independent Directors in Case of Absence or Inadequacy of Profits
Remuneration to Non-executive Directors and Independent Directors in Case of Absence or Inadequacy
of Profits
One of the major amendment
proposed by the Companies (Amendment) Bill, 2020 is
with regard to remuneration to independent director and non-executive directors
in Case of Absence or Inadequacy of Profits. In this write-up, author has analysed
the impact of such amendment.
Proposed changes has been
made in section 149 and 197 so that non-executive directors including
independent directors may receive remuneration, if a company has no profits or
inadequate profits in accordance with Schedule V of the Companies Act, 2013.
Section 2 (10) of the
Companies Act, 2013 defines the term “Board of Directors” or “Board” in
relation to company as collective body of directors of the Company. Companies
Act does not talk about Board structure; however SEBI (LODR) Regulations, 2015
provides that Board of directors shall have an optimum combination of executive
and non-executive directors (Refer regulation 17). Independent directors are always included in
the category of non-executive directors.
Non-executive Director is
nowhere described under Companies Act, 2013. However, meaning of non- executive
Director can be taken from the definition of Executive Director. As
per Rule 2(1)(k) of the Companies (Specification of definitions details) Rules,
2014 “Executive Director” means a Whole Time Director as defined in clause (94)
of section 2 of the Act”. A person who is not satisfying conditions of
definition of ‘Executive Director’ shall be considered as ‘Non-Executive
Director’. Therefore, one can opine that all the Directors except ‘Whole Time
Director’ and “Managing Director’ may be considered as Non- Executive Director.
Section 2(47) of the
Companies Act 2013 provides that “independent director” means an independent
director referred to in sub-section (6) of section 149. Section 149(6) of the
Companies Act, 2013 sets out the criteria of independence for a director.
As far as duties are
concerned, we have to refer Section 166 of the Companies Act, 2013 which deals
with duties of directors. The fundamental duty of a director of a company lies
in acting in a bonafide manner for protecting the interest of the Company
steering clear of conflicts of interest if any.
A director is “bound to
take such precautions and show such diligence in their office as a prudent man
of business would exercise in the management of his own affairs.” – Trustees of the Orange River Land &
Asbestos Company vs King (1892)
Existing Provisions
Non-executive director
including independent directors are entitled to sitting fee. However, they may
receive commission based profits.
Section 197(5) of the
Companies Act, 2013 states that a director may receive remuneration by way of
fee for attending meeting of the Board or Committee thereof or for any other
purpose whatsoever as may be decided by the Board. At the same time Rule 4 of
the Companies (Appointment and Remuneration of Managerial Personnel) Rules,
2014 provides that such fee shall not exceed for a sum of Rs 1,00,000/- (One
Lakh Rupees) per meeting. While the words “for attending meeting of the Board
or Committee thereof or for any other
purpose” appearing in this sub-section indicate that apart from what are
popularly known as “Sitting fees”, directors may be entitled to receive
remuneration by way of fees for any other purpose too.
Section 149 (9) of the
Companies Act, 2013 states that independent director may receive remuneration
by way of fee provided under sub-section (5) of section 197, reimbursement of expenses for
participation in the Board and other meetings and profit related commission subject
to resolution of the shareholders duly passed at a general meeting.
Analysis of the Amendment
At present in terms of
Section 197(3) of the Companies Act, 2013 only managerial personnel are
entitled to remuneration in Case of Absence or Inadequacy of Profits subject to
compliance of Schedule V.
The expression ‘Managerial
Personnel’ refers to Whole-time Directors and Managing Directors or Managers.
Section 2 (78) defines the term
remuneration as any money or its equivalent given or passed to any
person for services rendered by him and includes perquisites as defined under
the Income-tax Act, 1961.
Since, non-executive
directors, including independent directors, devote their valuable time and have
experience to give critical advice to the company. Therefore, they should be
appropriately compensated for the same even in case of inadequacy of profits or
losses as is permissible for executive directors. In case of losses or
inadequacy of profits, the executive directors managed to receive the
prescribed remuneration while the non-executive directors have to sacrifice
their commission, which they were otherwise entitled to and they have to
satisfy themselves with the sitting fee only.
Accordingly, it is
proposed to insert a new proviso in section 149(9), which provides that an
independent director may receive remuneration, if a company has no profits or
inadequate profits in accordance with Schedule V of the Act. Currently since
Independent Directors can be given remuneration in form of commission,
companies were finding it difficult to pay the same in case of loss or
inadequacy of profits. This will come as a major relief. At the same time, it
is proposed to amend section 197(3) to provide that if a company fails to make
profits or makes inadequate profits in a financial year, any non-executive director
of such company, including an independent director, may be paid remuneration in
accordance with Schedule V of the Act.
Conclusion
As discussed above,
non-executive director including independent director does not engage in
the day-to-day management of the organization but is involved in policymaking
and planning exercises, accordingly it is justified and a welcome step to give
remuneration to them in case of Absence or Inadequacy of Profits.
CS SANDEEP SINGH CHAUHAN - Linkedin Profile
(Any query and suggestion kindly contact the author at:
sandy673711@gmail.com or +918077133617)
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