Non-executive directors: MCA sets annual remuneration limits for firms in red

Public companies can now remunerate their non-executive directors, including independent directors, even if they are in red (making losses) or have inadequate profits with the Ministry of Corporate Affairs (MCA) specifying the maximum yearly remuneration that could be paid to them by such companies.

This MCA move will come in handy for many start-ups and unicorns to pay fair compensation to their independent directors and help retain talent at board level.

Annual limit

Under the latest MCA move, the annual limit of remuneration for a non executive director or an independent director has been linked to the effective capital of the firm. In the case of firms with an effective capital that is either ‘negative’ or less than ₹5 crore, the maximum annual remuneration has been pegged at ₹12 lakh per non executive director; for firms with an effective capital of ₹5-100 crore, the limit has been set at ₹16 lakh; for companies with ₹100-250 crore, the limit is ₹24 lakh and for companies with effective capital higher than ₹250 crore and above, the limit will be ₹24 lakh plus 0.01 per cent of the effective capital in excess of ₹250 crore.

MCA has now set out these remuneration limits in Schedule V of the Companies Act 2013 in continuation of the legislative change made in September 2020.

The Companies Act was amended last year to allow remuneration to be paid to non executive directors and independent directors of public companies even if there making losses or had inadequate profits. Harish Kumar, Partner, L&L Partners, said that the remuneration cap fixed under revised Schedule V is quite less given the ever increasing responsibilities bestowed upon independent directors who otherwise play a vital role in business decisions.

However, this partially gets settled, as unlike managerial personnel, the independent directors may simultaneously be appointed on the board of two/more such companies and receive remuneration from all such companies, he said.

Aseem Chawla, Managing Partner, ASC Legal, said that the MCA move paves the way in providing an enabling mechanism of remunerating all directors apart from executive/whole-time director.

Will it attract talent?

Kartik Ganapathy, Founding Partner, IndusLaw, expressed hope that the latest MCA move would hopefully result in more people willing to accept independent director positions as they will be more fairly compensated.

“This increased availability of independent directors should hopefully raise the standards of corporate governance within companies,” he said, adding that the remuneration limits prescribed are at least three times the amount that would have been payable for four board meetings in a year.

Kalpana Unadkat, Partner, Khaitan & Co, said that it will now be possible for companies that do not have profits, like start-ups and many unicorns, to pay fair compensation to independent directors thereby attracting better talent at the board level.

Directors having the ‘skin in the game’ and adequate compensation will make it easier to have their interests aligned to those of other stakeholders. This will also help independent directors to act objectively and independently from management and the company’s short-term performance and profits, she said.

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