Remuneration To Non-executive And Independent Director After 18-03-2021

Who are Non-executive Director and Independent Director?

Let us first understand the term Non-executive Director and Independent Director.

Non-executive Director- A Non-executive director is the one who doesn’t participate in day to day functioning of the company but is involved in policy making and planning process. Though he is a part of the management but he doesn’t possess the management responsibilities. He is required to act in the best interest of the corporation. However their legal liabilities and responsibilities are same as that of the executive director.

Independent Director- Independent Director is that director of the Board of the company who doesn’t have any direct pecuniary or material relationship with the Board Of Company or related parties except the sitting fees. He helps in improving credibility and governance. He shall be liable only in respect of such acts or deeds which are done under his knowledge, with his consent or where he had not acted diligently. He should not be a partner or executive director of the auditors/lawyers/consultants of the company in preceding three years or should not hold 2% or more of shares of the company.

These directors thus bring transparency, improves credibility and increases independent and fair view of the board.

However despite their so much of contribution it was realised that they weren’t at the time of loss or insufficient profits.  This imbalance was identified by Company Law Committee. They recognised that Non-executive Directors including Independent Directors devote a lot of time and knowledge to the company and thus are liable to get appropriate remuneration even at the time the company has incurred losses or is having inadequate profits just like the executive directors.

Company Law Committee also identified the vital role played by the Non-executive Directors and Independent directors in enhancing credibility and bringing out objectivity. Thus they felt that such imbalance shall create resentment among the qualified personnel and then it would be difficult to retain the talented ones in the company. Therefore Company Law Committee suggested the idea to amend the provisions of Section 149 and 197 before any amendment is made to schedule V in this regard.

Sec-197 Remuneration of managerial Person-

Overall managerial remuneration Shall not exceed 11℅ of net profit of F.Y. except Special Resolution is passed.

• In case there is 1MD/WTD/Manager – Maximum5℅ of net profit
• More than one MD/WTD/Manager – Maximum 10℅ of Net profit
• In case of Non-executive Director/Ordinary
• If there is MD/WTD/Manager – 1℅ of net profit
• Other case- 3℅ of net profit.

Remuneration in case having no profit or inadequate profit-

The Non-executive Directors are not paid any remuneration except sitting fees. However remuneration for services rendered in professional capacity is not included in managerial remuneration.

Sitting fees-

Board may decide different sitting fees up to Rs 1 lakh per board meeting or a committee meeting thereof payable to independent director or Non-executive Director. However the sitting fees payable to women Director shall and

Remuneration To Non-executive And Independent Director After 18-03-2021

• Section 197 of the Companies Act 2013 provides that Non-executive Directors and Independent Directors can get remuneration by way of sitting fees or on percentage basis based on net profit as per section 198 of the Companies Act 2013 or reimbursement of travelling expenses for attending board or committee meetings. There was no provision to pay remuneration to Non-executive Director Or Independent Director in case of inadequacy of profits. Thus at the time of losses the company could not remunerate them.
• However as per Schedule V of the Companies Act 2013 the company can remunerate it’s Managerial personnel in case of no profit or inadequate profit.
• However with regard to this imbalance the Company Law Committee decided that they are liable to get appropriate remuneration even at the time the company has incurred losses or is having inadequate profits just like the executive directors.
• Thus Company Law Committee felt that such imbalance shall create disappointment among the qualified personnel and then it would be difficult to retain the talented ones in the company. Therefore they came up with the idea to amend the provisions of Section 149 and 197 before any amendment is made to schedule V in this regard.
• Therefore an amendment was made in Sec 149 and 197 of Schedule V to cover independent director as their responsibility was increasing.
• On 18^th March 2021 two amendments were notified (1) As per CAA 2020 section 149 and 197 were made effective by amending payment of remuneration to Non-executive Director and Independent Director.(2) Amendment was also made to Part II of Schedule V under the heading REMUNERATION, to include Non-executive and Independent director and not just managerial personnel. Now Non-executive and Independent Director 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.
• On 1^st March, 2021 SEBI has issued Consultation Paper on “Review of Regulatory Provisions related to Independent Director” and proposed to remunerate Independent Director with Employees Stock Options Plan with a long vesting period of 5 years in place of profit linked commission.

Managerial Remuneration under Schedule V (Part III)

Sec 1- Company having profits in a F.Y. may pay remuneration in accordance with Sec197.

Sec2- Company having no profits or it’s profits are inadequate it may without approval of CG pay remuneration to managerial personnel and other director not exceeding higher of the limits.-

Conclusion-

Thus the overall purpose behind making such amendment was to recognize the efforts and hard work of Non-executive and Independent Directors and to provide them with remuneration even in case of insufficient profits or losses. However the major drawback is that they should not be treated equivalent to executive directors. They should only be liable to withdraw sitting fees and travelling allowance for attending meeting. No other payment should be made to them which shall make them equivalent to Executive Directors.

Although best efforts have been made to clarify the topic as much as possible, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions or laws as amended from time to time .In case of further clarification you can visit our cagmc portal where you shall find all the answers to your queries by our expert professionals in the best possible way.