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Business News/ Companies / News/  Companies in loss can now pay directors within limits

Companies in loss can now pay directors within limits

For remuneration beyond the ceiling, shareholders’ permission is needed

Companies in loss can now pay directors within limitsPremium
Companies in loss can now pay directors within limits

New Delhi: Loss-making companies and those with insufficient profits can now pay independent and non-executive directors remuneration other than their sitting fee within the limits set by the government, according to an order issued by the government late on Thursday.

For any payment of remuneration beyond the ceiling set by the government, such companies have to seek the permission of shareholders in a special resolution where votes favouring such pay should be at least three times those opposing the move.

Till now, independent directors were not entitled to any remuneration in loss-making companies other than the sitting fee, which is capped at 1 lakh per sitting. The change allows loss-making companies to pay up to the government set ceiling without shareholder nod and retain talent at a time they need them most, explained a government official. The change, for which an enabling provision was introduced in the Companies Act through an amendment last year, is effective from Thursday.

“This is a change that has been sought by many companies for many years," said the official, who spoke on condition of anonymity.

The ceiling set by the corporate affairs ministry ranges from 12 lakh to a little more than 24 lakh a year depending on the effective capital of the company. Effective capital is determined by making certain adjustments to the paid-up capital. Where effective capital is less than 5 crore, the remuneration to an independent director is capped at 12 lakh a year, and where it is between 5 crore and 100 crore, the ceiling is 17 lakh. For companies with effective capital between 100 crore and 250 crore, the remuneration ceiling is 24 lakh and larger companies are free to pay a small fraction of their effective capital above the 24 lakh annual pay.

Experts said the move allows companies facing financial troubles to retain talent by paying what is fair remuneration. “Thanks to the notification, it will now be possible for companies that do not have profits, such as startups and many unicorns, to pay fair compensation to independent directors, thereby attracting better talent at the board level," said Kalpana Unadkat, partner, Khaitan & Co, a law firm. Directors having their “skin in the game" and adequate compensation will make it easier to have their interests aligned to those of other stakeholders. This will also help independent directors to act objectively and independently from management and the company’s short-term performance and profits, Unadkat explained.

The decision will benefit companies having non-executive or independent directors on their boards. In many listed companies, eminent personalities are appointed as non-executive chairpersons. This practice has gained currency as having non-executive chairpersons enables them to limit independent directorships on the board to a third of the board strength. If the board of a listed company is led by an executive chairman, half the directorships have to be reserved for independent directors.

The policy change will allow companies in losses to retain those eminent personalities and other independent directors with fair pay.

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Gireesh Chandra Prasad
Gireesh has over 22 years of experience in business journalism covering diverse aspects of the economy, including finance, taxation, energy, aviation, corporate and bankruptcy laws, accounting and auditing.
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Published: 19 Mar 2021, 11:35 PM IST
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