One of the major amendment proposed by the Companies (Amendment) Act, 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.
Relevant 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.
Board Structure and duties
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 amended by inserting 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.
The Companies Amendment Act, 2020 (CAA 2020) amended this Section 149 and 197 for payment of remuneration to NED and ID as per schedule V in case of inadequate or no profit.
On 18th March 2021 two amendments were notified (1) As per CAA 2020 section 149 and 197 were made effective amending payment of remuneration to NED and ID and (2) Amended Part II of Schedule V under the heading REMUNERATION, to include not just Managerial person but other Directors also including NED and ID.
Now NED and ID can be remunerated annually from Rs.12 lakhs (in case of negative effective capital) to 24 lakhs plus 0.01% of the effective capital in excess of Rs.250 Crores.
Recently on 1st March, 2021 SEBI has issued Consultation Paper on “Review of Regulatory Provisions related to ID” and proposed to remunerate ID with Employees Stock Options Plan with a long vesting period of 5 years in place of profit linked commission.
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 policy making and planning exercises, accordingly it is justified and a welcome step to give remuneration to them in case of Absence or Inadequacy of Profits.
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Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, I assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not professional advice and is subject to change without notice. I assume no responsibility for the consequences of the use of such information.
(Republished with Amendments)
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