Remuneration paid to Non-Executive Directors of Public Company - Part 2

Non-executive Directors are directors who are not in whole time employment of the company. These directors are remunerated by payment of sitting fees, commission on profits and fees for rendering professional services.

How much sitting fees can be paid to non-executive directors?

With respect to payment of sitting fees Companies Act, 2013 states the that maximum sitting fee that can be paid to non-executive directors is Rs 100,000 per meeting. Meetings here include all types of committee meetings wherein non-executive directors are comprised of. 

What is the maximum amount of remuneration that can be paid to non-executive directors of the Company?

According to Section 197 of the Act, except with the approval of the company in a general meeting by passing a special resolution, the company can pay remuneration to its non-executive directors as follows:

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).

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). The above percentages do not include sitting fees. Such payment is excluded from the calculation of the remuneration to directors.

Can the percentage of above-referred remuneration be changed?

With the amendments introduced by the Companies (Amendment) Act, 2017, with the approval of shareholders in a general meeting by special resolution, the above percentages can be changed.

What are various approvals required for payment of remuneration to non-executive directors?

For payment of remuneration in the form of commission as a percentage of profits special resolution is required to be passed by the Company. 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 creditors, as the case may be, shall be obtained by the company before obtaining the approval in the general meeting.

Whether remuneration can be paid to non-executive directors on monthly basis or only on yearly basis after net profits are calculated?

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).

Whether remuneration payable to non-executive directors is subject to some conditions?

Public limited companies are required to do performance evaluations of the entire board of directors. Board of Directors shall do an evaluation of individual directors, by ensuring that the director being evaluated being absent. The above referred remuneration in terms of percentage of net profit is to be given based on the result of evaluation of board of directors.

Whether Remuneration is payable 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 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:

Whether remuneration in terms of percentage of net profit is required to be given at the end of the financial year or can be given during the financial year too?

Remuneration that is based on net profits is made once the accounts are adopted at the annual general meeting. Special Resolutions approving payment of remuneration once passed are valid till they are rescinded.

Whether a single approval can be obtained for payment of commission to all NEDs/IDs or separate approval for every director is required?

A single approval can be obtained for payment of commission to NEDs/ IDs as the remuneration is paid in accordance with the remuneration policy of the company which is framed in general for all the directors. There is no need to take separate approval for payment of remuneration to each director. The remuneration policy may have a general formula or matrix for distinguishing between the directors based on their contributions.

Whether prior approval of shareholders is required for payment of remuneration to IDs?

It is not necessary to take prior approval of shareholders for payment of remuneration to IDs. Post facto approval may be taken and the accounts may carry a note specifying that the shareholders’ approval is pending, and if the same is not approved, the directors will be liable to refund the amount not so approved.  

General Practice

MCA vide it's amendment in 2021 to schedule V made it applicable to non executive directors. The amended version of schedule V now allows companies to pay remuneration to non executive directors in case of inadequate profits or losses. Even if the law allows such payment, serious questions are raised on the payment of remuneration to directors in such cases. 

Nowadays Companies have to disclose the median remuneration of directors as compared to it's employees in the directors’ report. With this matrix of disclosure, it becomes easy to identify imparity in the remuneration policy of the Company.

It is more difficult to pay remuneration in listed entities under the above scenarios. 

Allowing payment of remuneration to non executive directors in case of losses or inadequate profits can be helpful to bring in new talented directors to help grow the business. But if a profit making company goes into losses and then management proposes to pay remuneration to non executive directors who are basically not in full-time employment would raise questions on companies’ sustainability.

Remuneration packages for directors are framed by management. Companies need to keep in mind that remuneration packages shall sufficiently provide justification as to why they want to remunerate directors including non-executive directors in such difficult times. 

Suppose this is not clearly stated then the proposal of remuneration might be strongly assailed by members. This would be considered disrespect or defaming the image of directors.

So companies need to be careful while drafting remuneration packages. 

Also Read: Remuneration payment to Whole Time Directors of Public unlisted Companies - Part 1

P.S: To follow …. Series 3: Remuneration paid to Directors of the Listed Entity.

Disclaimer: This article provides general information existing at the time of preparation and we take no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement