Shareholders free to decide executive pay without government nod
The provisions were introduced in Companies Act, 2013 through an amendment last year, but notified only now
New Delhi: Shareholders are now free to decide the limit of executive pay a company can give above the statutory limit of 11% of net profits as per a key company law provision brought to effect from Wednesday.
A statement from the ministry of corporate affairs said that companies are free to take all pending requests before the government for paying managerial remuneration in excess of the statutory limit to their respective shareholders for their approval within one year. In the case of companies that have defaulted on loans, lenders’ approval is required before shareholder support is sought.
The statement said the decision is in line with the government’s policy of having minimum government, yet maximum governance and of providing ease of doing business to law-abiding corporate houses in the country. These provisions were introduced in the Companies Act, 2013, through an amendment last year but is notified only now.
Managerial remuneration has been a matter of concern for policy makers in the past fearing excessive remuneration paid out of funds raised from public or financial institutions for other purposes. But as part of giving shareholders more decision making rights and cutting down government role in operation of businesses backed by provisions to ensure transparency, the law was amended in 2017 to drop the requirement of government approval. Although state approval for raising total pay to directors above the specified level was a statutory requirement till now, successive governments never chose to meddle with company decisions on this front.
The amendments given effect now give freedom to businesses to raise individual executives’ pay too. In the case of individual managing directors, whole time directors or managers, companies can pay above the threshold specified in law—5% of net profits to one of these individuals or 10% to all of them together—with a special resolution of shareholders. Special resolutions require favourable votes not less than three times those voting against the proposal.
“Care has, however, been taken and it has been stipulated that where a company has defaulted in payment of dues to any bank/financial institution or non-convertible debenture holder or any other secured creditor, their prior approval shall be required before placing the matter for consideration and approval in the general meeting of the shareholders,” said the statement.
Experts said shareholders are well placed in assessing the financial situation of the company and in taking a call on issues of executive pay. “The move is aimed at unshackling the corporate sector,” said Ved Jain, former president of accounting rule maker Institute of Chartered Accountants of India (ICAI).
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