Now companies in the red can pay their independent directors well

KR Srivats New Delhi | Updated on March 05, 2020 Published on March 05, 2020

But any sweet deal to independent directors requires nod from shareholders and creditors

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.

Experts’ take

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.

Published on March 05, 2020

A letter from the Editor

Dear Readers,

The coronavirus crisis has changed the world completely in the last few months. All of us have been locked into our homes, economic activity has come to a near standstill. Everyone has been impacted.

Including your favourite business and financial newspaper. Our printing and distribution chains have been severely disrupted across the country, leaving readers without access to newspapers. Newspaper delivery agents have also been unable to service their customers because of multiple restrictions.

In these difficult times, we, at BusinessLine have been working continuously every day so that you are informed about all the developments – whether on the pandemic, on policy responses, or the impact on the world of business and finance. Our team has been working round the clock to keep track of developments so that you – the reader – gets accurate information and actionable insights so that you can protect your jobs, businesses, finances and investments.

We are trying our best to ensure the newspaper reaches your hands every day. We have also ensured that even if your paper is not delivered, you can access BusinessLine in the e-paper format – just as it appears in print. Our website and apps too, are updated every minute, so that you can access the information you want anywhere, anytime.

But all this comes at a heavy cost. As you are aware, the lockdowns have wiped out almost all our entire revenue stream. Sustaining our quality journalism has become extremely challenging. That we have managed so far is thanks to your support. I thank all our subscribers – print and digital – for your support.

I appeal to all or readers to help us navigate these challenging times and help sustain one of the truly independent and credible voices in the world of Indian journalism. Doing so is easy. You can help us enormously simply by subscribing to our digital or e-paper editions. We offer several affordable subscription plans for our website, which includes Portfolio, our investment advisory section that offers rich investment advice from our highly qualified, in-house Research Bureau, the only such team in the Indian newspaper industry.

A little help from you can make a huge difference to the cause of quality journalism!

Support Quality Journalism
This article is closed for comments.
Please Email the Editor
You have read 1 out of 3 free articles for this week. For full access, please subscribe and get unlimited access to all sections.