On March 18, 2021, the Ministry of Corporate Affairs (“MCA”) has notified the amendments made to Sections 149(9) and 197(3) of the Companies Act, 2013 (“Act”) by the Companies (Amendment) Act, 2020, to enable loss making companies to pay certain remuneration to its Non-Executive Directors (“NEDs”) and Independent Directors (“IDs”), as may be prescribed.
On the same day, the MCA also issued a Notification to amend Schedule V of the Act to prescribe the scale of remuneration which can be paid to NEDs and IDs, depending on the effective capital of the company.
Remuneration to NEDs and IDs is solely by way of sitting fees and profit linked commissions as the stock options are still not under the purview. In Companies where there is no profit or its profits are inadequate, in the recent scenario may be due to outbreak of COVID-19, there is no question of such payment based on profit commissions creating a leap in payment of remuneration which would impact the motivation of these Directors. Further, under Rule 4 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the sitting fees payable to any director for attending a Board or Committee meeting cannot exceed INR 1.00 Lakh per meeting leading to inadequate remuneration framework in loss making Companies.
On the contrary, in the similar situation of no profits or inadequate profits, the Executive Directors (“EDs”) such as Managing Director, Whole-time Director or Manager can be paid by way of remuneration within the scale of remuneration prescribed under Schedule V of the Act.
Earlier in a major move, Ministry of Corporate Affairs (“MCA”) on September 12, 2018 notified the provisions of the Companies (Amendment) Act, 2017, relating to managerial remuneration wherein, the requirement of seeking approval of the Central Government for the payment of managerial remuneration in excess of limits stipulated for public companies has been removed. The MCA has also made appropriate changes to the Companies (Appointment and Remuneration of Managerial Personnel) Amendment Rules, 2018.
Position prior to the Amendment
Prior to March amendment, NEDs and IDs had been excluded from the ambit of Section 197(3). It can be understood as, if in any financial year, a company has no profits or its profits are inadequate, the company shall not pay by way of remuneration any sum exclusive of any fees payable to directors i.e., sitting fee for attending Board or committee meetings and reimbursement of expenses.
However, when the companies are doing well in terms of profits, Companies could pay total managerial remuneration of 11% of the net profits of that company for that financial year computed in the manner laid down in section 198, to its Directors including Managing Director, Whole-time Director and Manager without the matter taking before the shareholders for their approval.
1. The remuneration payable to any one managing director; or whole-time director or manager shall not exceed 5% of the net profits of the company;
2. In case of more than one such director remuneration shall not exceed 10% of the net profits to all such directors and manager taken together;
3. In case of any other director, 1% of the total net profits of the company, if there is a managing or whole-time director or manager;
4. In any other case 3% of the net profits of the Company.
5. The provisions of managerial remuneration are not applicable to private companies.
Remuneration payable by companies having no profit or inadequate profit
I. The limits for remuneration payable to NEDs and IDs under Section II of Part II of Schedule V are as follows:
|Where the effective capital is (in INR)||Limit of yearly remuneration payable shall not exceed (in rupees) in case of ED and ID|
|Negative or less than 5 crore.||12 lakh|
|5 crore and above but less than 100 crore.||17 lakh|
|100 crore and above but less than 250 crore.||24 lakh|
|250 crore and above.||24 Lakh plus 0.01% of the effective capital in excess of Rs.250 crore|
II. The limits for remuneration payable to managerial personnel under Section II of Part II of Schedule V are as follows:
|Where the effective capital is (in INR)||Limit of yearly remuneration payable shall not exceed (in rupees) in case of managerial person|
|Negative or less than 5 crores.||60 lakhs|
|5 crores and above but less than 100 crores.||84 lakhs|
|100 crores and above but less than 250 crores.||120 lakhs|
|250 crores and above.||120 Lakhs plus 0.01% of the effective capital in excess of Rs.250 crores|
* The limits prescribed above can be exceeded by the company after obtaining shareholder approval through a special resolution. Hence, irrespective of net profits, companies can now pay any amount of remuneration to NEDs and IDs, after obtaining shareholder approval by way of special resolution i.e., approval of 3/4th of the members of the Company present in the meeting having voting rights.
Schedule V consists of the following four parts:
Part I – Conditions to be fulfilled for the appointment of a managing or whole-time director or a manager without the approval of the Central Government.
Part II – Remuneration
Part III – Provisions applicable to Parts I and II of this Schedule
Part IV – The Central Government may, by notification, exempt any class or classes of companies from any of the requirements contained in this Schedule.
Companies in Insolvency
The amendment to Schedule V has also liberalised the remuneration norms for NEDs and IDs of companies that have undergone the IBC resolution process.
Under the revised Schedule V, a company in relation to which a resolution plan has been approved by the NCLT under the IBC, 2016 can pay any amount of remuneration to its NEDs and IDs for a period of five years from the date on which the NCLT approves the resolution plan.
Ambiguous Section 199 of the Act
The provisions of the Section 199 of the Companies Act, 2013 provides for the recovery of remuneration in certain cases;
It provides that, where a company is required to re-state its financial statements due to fraud or non-compliance with any requirement under this Act and the rules made thereunder, the company shall recover from any past or present managing director or whole-time director or manager or Chief Executive Officer (by whatever name called) who, during the period for which the financial statements are required to be re-stated, received the remuneration (including stock option) in excess of what would have been payable to him as per restatement of financial statements.
The provision doesn’t include new members of the remuneration list which makes the provision unclear on part of recovery of remuneration from NEDs and IDs. Is it intentional or an act of ignorance to address the issue by the Ministry of Corporate Affairs?
The role of non-executive Directors and Independent Directors is very crucial to a company and the same has been recognized by the Ministry of Corporate Affairs through the amendment. It would have been unfair if they are not paid adequately for the efforts put by them in the conduct of business. A sense of equality can be observed.