21 March 2008
FOR the corporate management, the Companies (Amendment) Bill 2003 is significant in that it seeks it to liberalise, deregulate and simplify the Companies Act, 1956 governing companies incorporated in India.
The proposed substitution of Section 252 makes it mandatory that every public company having paid-up capital and free reserves of Rs 5 crore or more or a turnover of Rs 50 crore or more shall have a minimum of seven directors, the majority of whom shall be independent and include women directors.
To qualify to be an independent director, an individual shall have to pass a crucial test of disqualifications embodied in new Section 252A proposed to be inserted in the Act.
A whole-time/managing director cannot be an independent director. Hence, the independent director is a non-executive one.
Besides, every independent director, even requisitely qualified and experienced in corporate management, would need training in an institute approved by the Central Government, without any exception, else, he/she would cease from holding such directorship.
The term "sitting fees" has not been defined anywhere in the Act. However, a reference is made in Section 198(2) of the Act, which provides that the overall limit of 11 per cent of the net profits of a company for payment of managerial remuneration shall be exclusive of any fees payable to directors under sub-section 2 of Section 309 of the Act. This section provides that a director may receive remuneration by way of a fee for each meeting of the board or committee thereof attended by him.
The payment of sitting fees on monthly basis was continued till the expiry of two years from the date of commencement of the Companies (Amendment) Act, 1960.
Under the first proviso to Section 310 of the Act, Rule 10B of the Companies (Central Government's) General Rules and Forms, 1956, as Amended by the Amendment Rules 2000 with effect from April 1, 2000, provides that the amount of sitting fees for each meeting of the board of directors or a committee thereof shall not exceed Rs 5,000.
It has been noticed that the articles of association (AoA) of almost all companies contain articles which authorise payment of sitting fees to directors who attend board meetings or committees thereof.
Sitting fee is not included within the limits of managerial remuneration, as it is not a remuneration but a compensation and/or price to the directors for their spending time and energy in attending meetings of the board or a committee thereof.
On the contrary, the Bill also proposes to delete sub-section (2) of Section 309 of the Act enabling a director to receive remuneration by way of a fee for each meeting of the board or a committee thereof attended by him/her.
The Bill also omits the proviso to sub-section (1) of Section 309 enabling a company to remunerate a director for rendering services of a professional nature.
In the absence of any method proposed in the Bill to remunerate independent directors being professionals generally, the suggested amendments in Section 309 would (under its sub-section (4)) mean that any non-executive director of a public/private company which a subsidiary company of a public company may be paid any remuneration by way of a monthly, quarterly or annual payment with prior approval of the Central Government.
For payment of commission to any non-executive director, further approval of the shareholders by special resolution in a general meeting is required. The rate of commission shall not exceed one per cent of the net profits of the company where there is a managing/whole-time director or manager and 3 per cent where the company has a managing/whole-time director or manager.
The limit is applicable for payment of commission to all or any non-executive director. Further, the special resolution shall be valid for three years (at present it is five years). These do not smack of either liberalisation or simplification.
It is not clear how a company, after enactment of the Bill as proposed, would be able to pay sitting fee to its non-executive directors, including independent directors.
If reports about the DCA raising the sitting fees for independent directors are true, then the proposed deletion of sub-section (2) is not rightly conceived.
The requirement of prior approvals of the shareholders in a general meeting by special resolution and also that of the Central Government would be a spoke in the wheel the corporate management and would affect flexibility in deciding remuneration of independent directors.
To attract professionals to join the boards of companies as independent directors, simple and flexible norms for deciding their remuneration by the board or the remuneration committee, as the case may be, would be imperative, without requiring either prior approval of the shareholders or the Central Government.
For proper disclosure and transparency in corporate management, a mention of the remuneration paid to non-executive, including independent directors, should be made mandatory in the directors' report.
21 March 2008
SITTING FEES IN COMPANY'S ACT IS PAYABLE TO A DIRECTOR FOR ATTENDING A BOARD OR COMMITTEE MEETING OF THE BOARD TOWARDS HIS CONTRIBUTION TO THE COMPANY'S POLICIES AND DEVELOPMENT ETC. AS STSTED IN THE COMPANY'S ARTICLES OF ASSOCIATION . SITTING FEES IS PAYABLE TO ONLY TO A DIRECTOR WHO IS NOT A WHOLE TIME DIRECTOR(WTD) OR M.D. SITTING FEES PAID TO WTD OR MD IS CONSIDERED AS REMUNERATION AND APPLICABLE SECTIONS ON MANAGERIAL REMUNERATION ARE TRIGGERED. NOTIFICATION NO GSR 580(E)DT 24-7-2003 PRESCRIBES SITTING FEES AS FOLLOWS 1.RS. 20000/- IF THE AGGREGATE PAIDUP CAPITAL AND FREE RESERVES ARE RS. 10 CRORES OR MORE OR TURNOVER IS RS. 50 CR. OR MORE. 2.RS. 10000/ IN ANY OTHER CASE ANY EXCESS OF THE ABOVE CAN BE PAID WITH CENTRAL GOVT. APPROVAL. R.V.RAO
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