New Delhi: The government has introduced limits on the remuneration that companies with losses or insufficient profits can pay to independent or non-executive directors, as part of efforts to improve corporate governance standards. The new monetary limits and a provision in the Companies Act to prescribe such ceiling had been notified late on Thursday.
The notification sets the limits on remuneration other than board meeting sitting fee of non-executive or independent directors of companies with no or insufficient profits from ₹12 lakh to a little more than ₹24 lakh a year depending on what is defined as the effective capital of the company.
Effective capital is determined by making certain adjustments to the paid up capital. Where effective capital is less than ₹5 crore, the remuneration to independent director is capped at ₹12 lakh a year and where it is between ₹5 crore to ₹100 crore, the ceiling is ₹17 lakh. Companies with effective capital between ₹100 crore to ₹250 crore, the remuneration ceiling is ₹24 lakh and larger companies are free to pay a small fraction of their effective capital over and above ₹24 lakh annual pay.
The move is significant as many listed companies prefer non-executive directors as the chairman of their board of directors due to a clause in their listing agreements with stock exchanges. That is, companies need to reserve only a third of the board seats to independent directorships if the chairman is independent or non-executive. If the board chairman of a listed company is an executive director, then the requirement is to reserve half of the board of directors to independent directors.
Loss making companies or those without adequate profits can breach these limits only if they secure shareholder permission in a special resolution, that is votes favouring such pay should be three times those opposing the move. The idea is that while the government prefers to take care of the interests of small shareholders so that the management does not draw huge pay packets while the company makes losses, shareholders collectively preferring to make a conscious decision against that cautious approach are free to do so. (ends)
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