A committee formed by the Ministry of Corporate Affairs, has recommended a cap on independent director’s remuneration, to ensure ‘independence’ of such directors on the board of a company.
Committee suggests cap on independent directors’ compensation
The committee, which was formed to review penal provisions of Company Act 2013, has recommended in its report submitted to the Finance Minister Arun Jaitley, “imposition of a cap on independent director’s 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.”
The compensation that independent directors receive from companies has been cited by many as a big reason, which undermines the independence of independent directors.
The independent directors are paid by the companies in two ways — sitting fees and commission. The sitting fee can be up to Rs 1 lakh for every board meeting or committee meeting attended. While sitting fees is not a big issue, it is the commission that raises many eyebrows.
Currently, the commission paid to all independent directors can be up to 1 per cent of the net profit, in cases where the company has a managing director or whole-time director or manager. In case there is no managing director or whole-time director or manager, then a maximum of 3 per cent of net profit can be paid to the independent directors.
Because of the commission paid, some of the independent directors make crores in a year. For instance, Reliance Industries paid Rs 1.5 crore as commission to most of its independent directors in 2017-18, TCS paid more than Rs 1.5 crore in commission to all but two independent directors, with the highest commission being Rs 3 crore. Tata Steel also paid over Rs 1 crore to two of its independent directors.
Preeti Malhotra, who is a member of the committee, had told Business Today earlier that one way to ensure the independence of such independent directors is to fix a limit on their remuneration from independent directorship, which could be a percentage of their total gross annual income.
The other members of the committee included Uday Kotak, Managing Director, Kotak Mahindra Bank, Shardul S Shroff, Executive Chairman Shardul Amarchand Mangaldas & Co, Ajay Bahl, Founder Managing Partner, AZB & Partners, Amarjit Chopra, Senior Partner, GSA Associate, Sidharth Birla, Former President, FICCI, and K V R Murty, Joint Secretary, Ministry of Corporate Affairs (Member Secretary of the Committee).