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The Confederation of Indian Industry (CII) has urged the government not to cap the remuneration paid to Independent Directors as it would discourage them from performing their duty to safeguard shareholders’ interest.
As per the proposed amendment to the Companies Act 2013, total pecuniary relationship of independent director with the company, its holding, subsidiary or associate company, or their promoters or directors, shall not exceed 25 per cent of his total income.
Of this, professional or any services rendered by him other than prescribed services shall not account for over ten per cent of his total income.
Cap on remuneration
According to CII, any cap on remuneration would be regressive to the current mechanism prescribed under the Companies Act, 2013 and SEBI regulations. Obtaining income details of independent directors would be difficult as directors may not be willing to share the income information. This is so especially in the light of Data Privacy Laws, it said.
The total remuneration of Non-Executive Directors, including Independent Directors, is capped by Section 197 of the Companies Act, 2013. CII believes that a second cap on the remuneration of Independent Directors is not required.
Independent directors also contribute to shareholder value creation through strategy evaluation, risk management and governance. Caps on remuneration may discourage him from fulfilling this role. In fact, such an approach carries the distinct risk of converting independent directors into auditors, thereby leading to conflict and dissension in Board processes, said the industry body.
There is already a dearth of quality independent directors and excessive regulations may result in qualified person hesitating to take up this role.
No fairness
The industry body feels the provision also does not pass the fairness test. In case a person does not have any source of income other than amount received as director’s remuneration or does not hold multiple directorships, he can still get disqualified from being appointed or continuing as an independent director.
Many independent directors are retired or senior corporate professionals who may be dependent on such remunerations from companies. There are also restrictions on the number of directorships an individual can have. Hence, CII felt, it would be difficult for companies to retain independent directors as the total pecuniary relationship from one company is likely to be higher than 25 per cent of his total income.
Across the world, boards of individual companies decide on fair remuneration for their boards. Prescribing such a requirement in India will dissuade foreign directors with considerable global expertise to join Indian companies, stated CII.
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