Independent directors of loss-making firms must be paid: Govt

Till now, there was no provision in the Companies Act that allowed a remuneration for the non-executive director if the company was in loss or had inadequate profits. Only the executive director was entitled for a remuneration in the event of a loss.

Illustration: Uttam Ghosh/Rediff.com.

Government has created a way to compensate non-executive or independent directors of companies, which are loss-making or have inadequate profits.

The corporate affairs ministry issued a notification late on Thursday, which limits the remuneration that a non-executive director can be given depending upon the effective capital of the company.

Till now, there was no provision in the Companies Act that allowed a remuneration for the non-executive director if the company was in loss or had inadequate profits. Only the executive director was entitled for a remuneration in the event of a loss.

While these limits have been introduced under Schedule V of the Companies Act, an additional provision allows the board of directors to pass a special resolution if they want to further increase the remuneration beyond the upper limit. This provision is applicable to both non-executive and executive directors.

Several experts felt that given the increase in responsibilities of independent directors, it was important that they were appropriately remunerated.

The notification states for instance, that a company with a negative or below Rs 5 crore effective capital can pay up to Rs 12 lakh to the independent directors.

“The remuneration cap fixed under revised Schedule V is quite less given the ever increasing responsibilities bestowed upon independent directors who otherwise play a vital role in business decisions,” said Harish Kumar, Partner, L&L Partners.

However, company law experts also point out that the Rule 4 of the company's appointment and remuneration of managerial personnel 2014 say that the sitting fees to an independent director or a director would not exceed for a sum of Rs 100,000 per meeting.  At the lowest slab of Rs 12 lakh a year independent directors could still draw thrice the amount that would have been payable for four board meetings in a year.

Legal experts said that companies have been finding it hard to find independent directors for many reasons including inadequate fees.  “This change appears to be made with the hope that more people would be willing to step up to being independent directors as they will be more fairly compensated.  With more presence and diligence of independent directors, it is hoped that the standards of corporate governance would rise as well,” Kartik Ganapathy, Founding Partner, IndusLaw said.

“With the provision of special resolution for increasing compensation to non-executive directors, the upper limits could get diluted,” said Ankit Singhi, partner, Corporate Professionals.

The move, industry expects, would also enable companies in attracting better talent especially start-ups and many unicorns, which may not have adequate profits. “The government decision would eliminate consultancy and advisory agreements with independent directors or their related parties to compensate them indirectly when the company does not have adequate profits to pay them directly,” said Kalpana Unadkat, Partner, Khaitan & Co.

Some corporate lawyers also said that independent directors should not be treated as full time employees and be entitled to a remuneration other than the sitting fees. “The fees paid to independent directors for attending board meetings is fair compensation. Anything other than that means you are treating executive and non-executive in the same way,” a legal expert said.