Monthly Remuneration to Independent director

According to u/s 149(9) of companies act, an independent director shall not be entitled to any stock option and receive any remuneration by way of a fee provided under section 197(5), reimbursement of expenses for participation in a board and other meeting and profit related commission as may be approved by the members.

  • The independent directors do not actively participate in affairs of company but they are involved in the policy making and meetings of a company. Therefore, they are entitled to commission profit of a company as prescribed and sitting fees for the particular meeting.
  • Therefore, independent directors should not entitled to a monthly salary, except under section 149 subsection 9 of the act. But it needs to be highlighted here that Section 197(6) of Companies Act, 2013 states that a director or manager may be paid remuneration either by way of monthly payment or at a specified percentage of net profit of the company or partly by way of one and partly by way of another. Section 197(6) read with Section 2(34) of Companies Act 2013 states that a director means a director appointed to the board of the company.
  • So, if we read Section 197(6) with section 2(34) of Companies Act, 2013 it can be seen that all directors appointed to the board of the company including an independent director or non-executive director may be paid a monthly remuneration.
  • But as we have also seen above an independent director or non-executive director are not involved in day to day business of company. So how would it be logical to pay them monthly remuneration? Also, till now it is not seen wherein companies have paid monthly remuneration to non-executive or independent director using this provision.

Q2. Whether an independent director can be paid commission?

  • If yes, how much percentage of the commission can it be paid? Section 197 of Companies Act, 2013 provides overall maximum remuneration to be payable to directors. Total managerial remuneration payable to director as per Section 197(1) is maximum 11% of net profit of that financial year. Remuneration payable to non-executive directors in different scenarios as envisaged by Section 197(1) of Companies Act, 2013 is as follows:
  • In case the company is a profit-making then

i. Remuneration can be paid at 1% of net profit, if there is Managing Director or Whole Time Director or Manager

ii. Remuneration can be paid at 3% of net profit in case there is no Managing Director or Whole Time Director or Manager employed by the company.

  • In case there are inadequate profit then the managerial remuneration paid to the independent director or non-executive director would be governed as per Schedule V of the Companies Act, 2013. As per Schedule V, remuneration can be paid to non-executive directors or independent directors depending on effective capital of the company. This effective capital is calculated based on the balance sheet of the company for the financial year prior to the financial year in which the non-executive directors was appointed. E.g if non-executive director was appointed on November 12, 2020 then for calculating effective capital balance sheet for financial year ended March 31, 2020 will be taken.
  • Further, remuneration can be paid exceeding that limit if a special resolution is passed in this regard. Therefore, the independent director would be paid remuneration whether the company is making profits or not.
  • Further it has been seen that there are certain entities who have started passing resolutions for payment of remuneration to non-executive directors specifying both scenarios i.e. company is having adequate profits or company is having inadequate profits or losses.

Q3. Can sitting fees paid to independent directors differ based on experience or qualifications?

As per Section 197 (5), an director may receive remuneration by way of fee for attending meetings of a board or committee thereof or any other purpose whatsoever as may decide by boards. If an independent director provides service in other capacity such as if he or she provide services in professional nature and the director poses requisite qualification for practice of a profession then such a board of directors can get additional fees other than sitting fees or commission paid to him.

In this regard it needs to be highlighted that the board or nomination and remuneration committee may pay different fees for different classes of companies and fees in respect of independent directors. Sitting fees can differ based on qualification and experience but sitting fees cannot differ based on category of directors i.e. non-executive directors and independent directors will get the same fees if they have the same or similar qualification.

Q4. Can we fix remuneration to independent directors in perpetuity i.e. by passing resolution once and then paying remuneration in form of commission to all (present and future) independent directors every year without again going to shareholders?

As per Section 149(10) of the Companies Act, 2013, an independent director shall hold office for term upto 5 consecutive years on board of company, an independent director shall be eligible to reappoint on passing special resolution by company. Further, remuneration payable to directors other than MD or WTD is 1% or 3% (as the case may be) of net profit of the company. (I.e. to non executive director or independent director). If a company has approved remuneration to be paid to an independent director by passing a special resolution, then no separate resolution is required to all independent directors. Therefore, it is clear that we can fix remuneration to independent directors in perpetuity i.e. without again going to shareholders every year. So even if the law does not restrict passing of resolution to pay remuneration in perpetuity but there have been governance concerns regarding this.