Now companies in the red can pay their independent directors well

Companies may soon be allowed to remunerate their non-executive directors and independent directors handsomely even if they had earned inadequate profits or were reporting losses.

The Centre proposes to do away with an existing norm that prevented companies with net losses from handing out good pay packages to their independent directors.

For most independent directors, commissions (a percentage of net profit) are a big source of compensation besides the regular sitting fees and companies cannot now hand out commissions to directors if they are making net losses.

Companies with losses — especially the new age start-ups and fintechs that make losses in the initial years — find it difficult to attract top notch talent for the post of independent directors in their Boards without forking out good compensation for them.

The proposed Companies Bill will allow payment of adequate remuneration to non-executive directors in case of inadequacy of profits, by aligning with provisions for remuneration to executive directors (Sec 147 and Sec 197), a government official said

This will enable companies with inadequate profits to retain good talented non executive directors (including independent directors),” this official added.

However, the remuneration for independent directors will need the approval of the shareholders and creditors.

The overall cap of total managerial remuneration to directors including managing directors and whole-time directors will continue to be 11 per cent of net profit.

It was pointed out that companies find it difficult to attract good quality independent directors if these could not be adequately compensated due to regulatory restrictions in situations of losses.

Very few top notch individuals would like to associate with companies which are making losses or low profits, especially if they only get sitting fees and nothing beyond it because of regulatory restrictions.

G Ramaswamy, former President of the CA Institute, said that the proposed amendment to allow even loss making companies to pay adequate remuneration to independent directors will help attract top talent and help the Indian companies become globally competitive.

“If good experts are roped in, even loss making companies can be revived. If there is no proper compensation to such directors, it will be difficult for experts to stay in the company. With this proposed move, companies can look to get best of talent at a remunerative price,” he said.

Ashok Haldia, former Secretary of the CA Institute, said that the proposal would encourage such companies to attract persons with experience and expertise on the Board of directors, to help turnaround such companies. An alternative could have been to pay the additional amount once the company is turned around.