Remuneration of Independent Directors.

Subsection (9) of section 149 of the Companies Act 2013, expressly prohibits independent directors from gaining any stock options ( ESOP)

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.  

Existing Provisions Non-executive director including independent directors are entitled to sitting fee. 

However, they may receive commission based profits. 

Special case : Absence or Inadequacy of Profits

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.

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. 

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. 

  • Company with negative capital or with capital less than 5 crore – remuneration for up to Rs 12 lakh can be portioned for independent directors.
  • Company with capital above 5 crores and below 100 crores – remuneration permissible up to Rs 17 lakhs.
  • Company with capital above 100 crores and below 250 crores – permitted up to Rs 24 lakhs
  • Company with capital 250 crores or above – permitted up to 24 lakhs + 0.01% of the capital in excess of 250 crores.

The limits permitted can be further extended if the board of directors wants to do so. This can be done by the issue of a special resolution in a board meeting.

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.

New amendments

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.