Remuneration to Independent Directors

Remuneration to Independent Directors of Companies permitted even in case of loss or inadequate profits to the Company.

Amending the Schedule V of the Companies Act, through official notification vide ‘Notification No. S.O. 1256 (E), dated 18-3-2021, the Ministry of Corporate Affairs has now given its assent to grant remuneration to non-executive directors or otherwise known as independent directors associated with any firm or company,  under the Companies Act . The notification permits the grant of remuneration even when the company or the firm has received inadequate profits or is incurring losses.

Earlier there was no such provision for grant of any remuneration to independent directors by companies that were loss-making or were having inadequate profits. The notification along with the permissible options for allowance of remuneration to independent directors also provided for certain guidelines and limits to be followed in accordance with rules for grant of the Remuneration to directors provided in the act.

The notification as read with the rules states the context for grant of remuneration to independent directors in case of loss-making companies as:

  1. For grant of remuneration, the word ‘Independent Directors’ shall be inserted in the act to all appropriate places as required where the word ‘ Managerial Persons ‘ occurs.
  2. The permissible limit for payment of remuneration to independent directors shall have to be made according to the following criteria:
  • Company with negative capital or with capital less than 5 crore – remuneration for up to Rs 12 lakh can be portioned for independent directors 
  • Company with capital above 5 crores and below 100 crores – remuneration permissible up to Rs 17 lakhs.
  • Company with capital above 100 crores and below 250 crores – permitted up to Rs 24 lakhs
  • Company with capital 250 crores or above – permitted up to 24 lakhs + 0.01% of the capital in excess of 250 crores.

The limits permitted can be further extended if the board of directors wants to do so. This can be done by the issue of a special resolution in a board meeting.

The step was initiated by the Ministry of Corporate Affairs to help companies raise competency in their management through hiring qualified independent directors.

Also before the said notification, it was difficult for companies to hire an independent director within a remuneration of Rs 1 lakh so as ruled by Rule 4 of the Companies Act, which was paid to them for a single sitting in a board meeting of the company.

With the said changes, the independent directors would now be able to gross about 3 times more remuneration which they use to receive by attending the 4 board meetings.

With the rise in the pay of the independent directors, it is being expected that now independent directors will be willing to associate with companies and will be fairly compensated.

 Also, it can be expected to bring improvements in the corporate governance of the firms as well.

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