CII Media Releases
Avoid Cap on Remuneration of Independent Director: CII
Dec 22, 2018

The Confederation of Indian Industry (CII) has requested that the amendments to the Companies Act 2013 should not cap the remuneration of Independent Directors. In a press release, CII stated that several issues need to be addressed in the amended Companies Act as passed in an ordinance earlier.

As per the proposed amendments, total pecuniary relationship of independent director with the company, its holding, subsidiary or associate company, or their promoters or directors, shall not exceed twenty-five per cent of his total income. Of this, professional or any services rendered by him other than prescribed services shall not account for more than ten per cent of his total income. 

CII stated that it appears from the ‘Report of the Committee to review offences under the Companies Act, 2013’ that the intent behind this amendment is to cover the remuneration received by the independent director within the meaning of ‘pecuniary relationship’ so that the independence of the concerned director does not get impacted. However, the proposed amendment seems at odds with this. 

According to CII, any cap 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, said CII.

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, governance and control. 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 CII press release.

CII is of the view that there is already a dearth of quality independent directors and excessive regulations may result in qualified person hesitating to take up this role.

CII is of the opinion that practically, this provision also does not seem to 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. In view of this, according to CII, it would be difficult for companies to appoint/retain independent directors as the total pecuniary relationship (including directorship remuneration) from one company is likely to be higher than 25% of his/her total income.

CII believes that the present law is adequate and proposed changes will impact the ease of doing business, including for global talent. Across the world, boards of individual companies decide on fair remuneration for their boards. Prescribing such a requirement in India will dissuade world-class foreign directors with considerable global expertise to join Indian companies which are increasingly global, stated CII.

The Ministry of Corporate Affairs recently issued a public notice stating that certain amendments of urgent nature would be required in the Companies Act to strengthen the corporate governance and enforcement framework. Some of the proposed amendments include mandatory transfer of unspent CSR funds to a special account (Unspent Corporate Social Responsibility Account) to be spent on CSR within next three financial years; onus of finding individual significant beneficial owner on company; compulsory dematerialization for prescribed classes of unlisted companies etc.

22 December 2018

New Delhi

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