Remuneration to executive and non-executive directors has always one of the most deliberated and debated topics in corporate governance. The topic gains importance as there it involves outflow of money from the company, calculation of net profits, disclosures to its shareholders, approval of directors, shareholders and remuneration Committee. Remuneration to directors of loss-making company or company which is very sensitive to the economy or sector performance is always in the limelight. This article is an analysis of the important and relevant provisions of the Companies Act and the Securities and Exchange Board of India (SEBI) (Listing Obligations and Disclosure Requirements) Regulations, 2015 w.r.t. remuneration to non-executive directors. There is also a reference to the recent amendment introduced to Schedule V of the Companies Act.
Limits on the remuneration to directors
According to the provisions of Section 197 of the Act, the total managerial remuneration payable by a public company, to its directors (including managing director, whole-time director, non-executive directors whether independent or not), and its manager in respect of any financial year shall not exceed 11% of the net profits of that company for that financial year. The net profits shall be computed in the manner laid down in Section 198 of the Act.
The company in general meeting may, authorise the payment of remuneration 11% of the net profit of the company. Earlier this required the approval of the Central Government. But now, the approval of Central Government is not required by the amendment introduced by Companies (Amendment) Act, 2017. By this provision, the company can take an approval of the shareholders in general meeting and authorise payment of remuneration up to 30% (an example) of the net profit of the company.
Limits on the remuneration to non-executive directors under the Companies Act
According to Section 197 of the Act, except with the approval of the company in general meeting by passing a special resolution, the company can pay remuneration to its non-executive directors as follows:
(a) 1% of the net profit of the company, if there is an existing managing or whole-time director or manager. Here “1% of the net profit” means for all non-executive directors of the company (whether independent or not).
(b) 3% of the net profit in any other case i.e. where there is no managing or whole-time director or manager. In situation is very rare, where all the directors are non-executive directors. Here “3% of the net profit” means for all non-executive directors of the company (whether independent or not).
With the amendments introduced by the Companies (Amendment) Act, 2017, with the approval of shareholders in general meeting by special resolution, the above percentages can be changed. However, in such case, the company would be required to obtain few more approvals. Where the company has defaulted in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, the prior approval of the bank or public financial institution concerned or the non-convertible debenture holders or other secured creditor, as the case may be, shall be obtained by the company before obtaining the approval in the general meeting.
The above percentages do not include sitting fees. Such payment is excluded from the calculation of the remuneration to directors.
Section 197(6) of the Act provides that a director (i.e. any director–executive director or non-executive director) or manager may be paid remuneration either by way of a monthly payment (i.e. salary) or at a specified percentage of the net profit of the company (i.e. commission) or partly by one way and partly by the other (i.e. combination of both).
Remuneration to non-executive directors in a loss-making company
Till the Companies (Amendment) Bill, 2020 [now, Companies (Amendment) Act, 2020], there was no specific provision in the Act to pay non-executive directors by way of commission, in the event of loss or inadequate profits of the public company. Section 197(3) of the Act was amended by the Companies (Amendment) Act, 2020, wherein a company having no profits or inadequate profits, can pay to all its directors (executive and non-executive directors) by way of remuneration any sum in accordance with the provisions of Schedule V to the Act.
It is important to note here that even in the case of inadequate profits or losses, the sitting fees paid by the company is not a part of the remuneration to directors.
The Ministry of Corporate Affairs (MCA) has amended[1] Schedule V of the Companies Act, 2013, in Part II, under the heading—“Remuneration” and allowed companies to pay remuneration to non-executive directors or independent directors. The limit of yearly remuneration payable to such directors shall not exceed prescribed amount. The maximum amount of remuneration depends upon the effective capital of the company. Where in any financial year during the currency of tenure of non-executive directors or independent directors, a company has no profits or its profits are inadequate, it may, pay remuneration to such director not exceeding, the limits given below:
| Sl. No. | Where the effective capital
(in rupees) is |
Limit of yearly remuneration payable shall not exceed (in rupees) in case of non-executive directors or independent directors |
| 1 | Negative or less than 5 crores. | 12 lakhs |
| 2 | 5 crores and above but less
than 100 crores. |
17 lakhs |
| 3 | 100 crores and above but less
than 250 crores. |
24 lakhs |
| 4 | 250 crores and above. | 24 lakhs plus 0.01% of the effective capital in excess of Rs 250 crores. |
Relevant provisions of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI Listing Regulations)
Regulation 17 of the SEBI Listing Regulations relates to “Board of Directors”. It provides for composition, Board meetings, appointment of non-executive directors, succession planning, code of conduct, remuneration, Board evaluation, etc.
Following are the key points relating to the remuneration to directors under SEBI Listing Regulations:
(a) The Board of Directors shall recommend all fees or compensation, if any, paid to non-executive directors, including independent directors and shall require approval of shareholders in general meeting. Therefore, approval of shareholders in mandatory for remuneration to non-executive directors, irrespective of the provisions of the Companies Act.
(b) The requirement of obtaining approval of shareholders in general meeting shall not apply to payment of sitting fees to non-executive directors, if made within the limits prescribed under the Companies Act, 2013 for payment of sitting fees without approval of the Central Government. Therefore, shareholders approval is not required for payment of sitting fees to non-executive directors. Similar provisions are provided in the Companies Act. According to Rule 4 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, a company may pay a sitting fee to a director for attending meetings of the Board or Committees thereof, such sum as may be decided by the Board of Directors thereof which shall not exceed Rs 1 lakh per meeting of the Board of Directors or Committee thereof. However, for independent directors and women directors, the sitting fee shall not be less than the sitting fee payable to other directors.
(c) The approval of shareholders shall specify the limits for the maximum number of stock options that may be granted to non-executive directors, in any financial year and in aggregate. However, independent directors shall not be entitled to any stock option;
(d) The SEBI Listing Regulations introduce a very interesting provision for payment of remuneration to non-executive directors. According to the relevant provisions approval of shareholders by special resolution shall be obtained every year, in which the annual remuneration payable to a single non-executive director exceeds 50% of the total annual remuneration payable to all non-executive directors, giving details of the remuneration thereof. It is necessary to understand this provision in light of 2 situations:
(i) Company having adequate profits: In this case, a company can pay up to 1% or 3% of the net profit for that financial year. Here, it would be necessary to calculate the profits of the company and then confirm the share of any specific non-executive director(s) in the profit in the form of remuneration.
(ii) Company having inadequate profits: In this case, to calculate the effective capital and the remuneration paid to any non-executive director of the company. It is important to note here that specific approval would be rarely applicable as the remuneration of a non-executive director is compared to the remuneration of all non-executive directors and not all executive directors (under SEBI Listing Regulations).
In both the above cases, the remuneration shall not include sitting fees paid to the directors in accordance with the provisions of the Companies Act.
In these challenging times of Covid-19, its impact on the economy and companies, the amendment to Schedule V of the Companies Act will be very helpful for companies to pay all its directors.
† Practising Company Secretary, Pune
[1] MCA Notification dated 18-3-2021, S.O. 1256(E) [F. No. 1/5/2013-CL-V].
