Apart from how the company complies (and deals) with Related Party Transactions (RPTs), another critical test of good Corporate Governance is the modes and manner in which a company remunerates it’s directors for their services. Section 197 and Section I of Part II of Schedule V to the Companies Act, 2013 provides remuneration payable to its directors (executive directors and non-executive directors) by companies having profits. Section II of Part II of Schedule V to the Companies Act, 2013 provides for remuneration payable by the companies to its directors having no profit or inadequate profit.
SEBI’s Listing Regulations also covers provisions relating to compliances and disclosures w.r.t. remuneration to directors. The Kotak Committee has made certain recommendations relating to remuneration to directors. This article is an analysis of the recommendations relating to remuneration vis-à-vis the extant provisions of the Companies Act, 2013.
Presently, there is no specific provision in SEBI’s Listing Regulations on maximum remuneration payable to executive promoter directors. However, there are detailed provisions in Companies Act, 2013 w.r.t. the remuneration to executive directors. But, the Companies Act, does not distinguish between ‘executive promoter director’ and ‘executive non-promoter director’. Under the Companies Act, 2013, except with the approval of the company in general meeting, remuneration payable to any one Managing Director or Whole-Time Director or Manager shall not exceed 5% of the net profits of the company and if there is more than one such director remuneration shall not exceed 10% of net profits to all such directors and manager taken together. The Committee recommends internal bifurcation between executive directors – promoters / non-promoters. In my view, this recommendation is in shareholders’ interest and other directors, whereby promoter executive director may either accept limit on its remuneration (as suggested) or the proposal would be sanctioned by shareholders. In conflict with the Companies Act, 2013 (which permits 10%, in aggregate), the Committee suggests remuneration of up to 5% of the net profits to executive promoter-directors. Also, it is interesting to note that the remuneration to such promoter executive directors, as per Kotak Committee Recommendation, is valid only till the expiry of the term of the director.
Though not explicitly mentioned in the Report, but the phrase “Pool being distributed to the non-executive directors” would mean either 3% or 1% of the net profits, as provided in Section 197 of the Companies Act, 2013. If the recommendation is accepted by the SEBI, then it is desirable that such clarification is provided in the SEBI’s Listing Regulation.
While the Panel acknowledged the importance of all board committees, it observed that the workload and obligations on Audit Committee are significantly higher and therefore merit higher sitting fees.
Conclusion: Taking into consideration the recommendations, in my view, there are now four types of directors for the purpose of managerial remuneration, i.e. Promoter Executive Director, Non-Promoter Executive Director, Promoter Non-Executive Director, Non-Promoter non-Executive Director. If the recommendations are accepted by SEBI, the monitoring, compliance and disclosures of the managerial remuneration will significantly increase. Also, if the recommendations are accepted, then SEBI ought to provide transition time to comply with the proposed amendments. It is also noteworthy that Kotak Panel has not made any recommendation on the payment of remuneration to directors in ‘any other capacity’ [Proviso to Section 197(4) of Companies Act, 2013].
Gaurav N. Pingle is a Practising Company Secretary from Pune. He handles various assignments of Secretarial Audits, Due Diligence, Quarterly compliance audit of listed companies, routine compliance (under Companies Act & FEMA) for private companies, wholly owned subsidiaries, joint venture companies. As an Author, he religiously writes articles and columns on the current case laws, latest happenings in Corporate Laws and articulates his views, which are published in leading business and professional journals. Many of his articles have bagged the “Best Article” award. He is visiting faculty for the Company Law & Securities Laws at ILS Law College, Pune, Pune Chapter of ICSI, Thane Chapter of ICSI and also at various colleges in Pune, Mangalore, Udipi. (E): firstname.lastname@example.org , (W): www.csgauravpingle.com .