New Delhi: A government panel has recommended capping the remuneration an independent director receives from a single company at a fifth of his or her overall income, in an attempt to preserve the independence of these executives hired to safeguard the interests of minority shareholders.
The proposed pay cap seeks to prevent independent directors from developing cosy relationships with company managements and prevent conflicts of interest. The cap excludes the fee they get for attending board meetings.
The recommendation was made by an eight-member committee led by corporate affairs secretary Injeti Srinivas after reviewing the Companies Act, 2013. The report was submitted to Union corporate affairs minister Arun Jaitley on Monday.
The ministry said in a statement that the panel has recommended “imposition of a cap on independent directors’ remuneration in terms of percentage of income in order to prevent any material pecuniary relationship, which could impair his independence on the board of the company”.
Two people aware of the panel’s discussions confirmed that the proposed cap is 20% of the total income of an independent director.
“The proposed cap is fair. If an independent director gets 60% of his income from one company, how can he be considered independent,” asked one of the two people cited before. The other person said the idea is to make sure the person is not substantially dependent on one company for his income.
Independent directors are tasked with protecting the interests of minority shareholders, who are not represented on company boards. The listing agreement that companies sign with stock exchanges says listed entities with a non-executive chairman should reserve a third of directorships for independent directors and half in case of companies with an executive chairman.
The panel sought to introduce a provision for companies to declare commencement of business in order to tackle the menace of shell companies. At present, many entrepreneurs do not do any business for various reasons after incorporating companies, making these entities defunct. Some of the non-functional companies were used to launder money during demonetization at the end of 2016. Putting the onus of declaring the commencement of operations on the company will help the authorities to track in a better way any misuse of the corporate structure.
The panel recommended greater disclosures by companies accepting public deposits, deregistration of entities for not maintaining a registered office and disqualification of directors, who are on more company boards than permitted. It also recommended that companies can transfer shares, the beneficial ownership of which are not determined, to the Investor Education and Protection Fund if their rightful owner does not claim ownership. Companies are required to maintain a record of their beneficial owners and file a return regarding that to the authorities under law.
The panel also recommended that 16 less serious offences, which are compliance lapses of technical or procedural nature, may be handled by registrars of companies, where a penalty could be levied in cases of default. This out-of-court adjudication and penalty payment system will ease the burden of less serious offences on courts. A transparent online platform for e-adjudication and e-publication of orders may also be set up, the panel said.
These measures, the panel noted, will “serve the twin purposes, promoting of ease of doing business and better corporate compliance”. Fewer prosecutions filed in special courts will lead to speedier disposal of serious offences, the ministry statement said. The panel also proposed to raise the monetary limit of fines that regional directors can levy to settle cases without having to go to court.