Mahima Jhawar

‘‘Independent Directors serve as an important Institution of corporate governance contributing significantly at the boards by bringing a diverse set of skills with an independent judgment on the significant issues.’’

– Indian Institute of Corporate Affairs

INTRODUCTION

Since the time immemorial, the independent directors have been acting as a catalyst in ensuring highest level of corporate governance in the corporate sector. The enormous responsibility bestowed upon the independent directors is to maintain an ethical code of conduct and uphold the integrity in the organization in these exigent times. However, no one can dissent to the fact that these directors have to perform actions with reasonable care and due diligence and have to undertake huge liability in case of any contraventions and negligence.

The Government’s persistent endeavor to impose stringent norms on the companies to maintain transparency and fairness has been bearing fruits. But in spite of all the initiatives, the Government is still facing hindrance in implementing the governance standards. One of the barriers in this process has been the unavailability of independent directors who are required on the board to not only monitor the governance framework but also take care of the inadequacies and deficiency in the corporate structure.

PROVISIONS OF COMPANIES ACT, 2013

SITTING FEES

In accordance with section 197(5) of the Companies Act, 2013 read with Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, a company can pay sitting fees to a director for attending meetings of the Board or committees, and such sum is to be decided by the Board of directors which should not exceed one lakh rupees per meeting of the Board or committees. In addition, this aforesaid provision also asserts that sitting fees payable to independent Directors and women directors should be at par to the sitting fees payable to other directors.

MANAGERIAL REMUNERATION PAYABLE IN CASE OF ABSENCE OR INADEQUACY OF PROFITS

Section 197 of the Companies Act, 2013 prescribes the maximum managerial remuneration payable in case of absence or inadequacy of profits. Only managing directors, whole-time directors and managers as defined in the Companies Act had been eligible to obtain remuneration in accordance with the threshold limits as specified under the stipulated section. However, non-executive directors and independent directors had been precluded from receiving the remuneration if any circumstances led to loss or inadequacy of profits in the company.

As a consequence of this disparity in the remuneration structure in the event of loss or inadequate profits, between executive and independent directors, there is a lacuna in the process of development of the corporate industry. One of the prerequisites for laying a strong foundation of robust corporate governance in the economy is to build up the confidence and trust of investors and other stakeholders and that is only feasible if the company’s operations are being undertaken in just and equitable manner.

The Government understands that mere delegation of the responsibility to the independent directors of overseeing the management to perform actions in legitimate and unbiased way shall not suffice. Hence, Ministry of Corporate Affairs vide its notification dated 18th March, 2021 has amended Section 197(3) and Schedule V of the Act and permitted the companies to pay any sum which shall be exclusive of any fees payable to the independent directors in case there is  absence of profits or inadequacy of profits.

AMENDMENT

In accordance with the MCA notification with effect from 18th March, 2021, the limits for annual remuneration as stated hereinafter can be paid to Independent directors under Section II of Part II of Schedule V subject to the conditions as prescribed in the Act:

Where the effective capital is (in INR): Limit of yearly remuneration payable to NEDs and IDs in case of losses or inadequate profits (in INR).
Negative or less than 5 crore. 12 Lakh.
5 crore and above but less than 100 crore. 17 Lakh.
100 crore and above but less than 250 crore. 24 Lakh.
250 crore and above. 24 Lakh plus 0.01% of the effective capital in excess of 250 crore.

CONCLUSION

Considering the prominence of independent directors, the Government’s implementation of the proposal to provide for yearly remuneration to the independent directors even in cases of loss or inadequate profits shall result in generating not only more job opportunities in the corporate sector but also create a sense of greater and belongingness and accountability on the part of independent directors to deeply understand the seriousness of their role.

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