The Hindu Business Line : Listing Agreement versus company law

REMUNERATION package payable to non-executive directors on the board of a company has now become the focus of attention, what with Clause 49 of the Listing Agreement, which is applicable to all public limited listed companies, becoming effective from December 31.

Non-executive directors can be classified as "independent" members of statutory committees, such as audit, shareholders grievance, share transfer, remuneration and director simplicitor. The remuneration package has to be viewed in the context of such classification, as remuneration obviously is directly related to the nature, responsibility and accountability of each member of the committee and the time expended on such matters, and not necessarily for the attendance of board or committee meetings.

In a way, therefore, payment of fee for attending a board meeting is not sufficient compensation for the onerous responsibility shouldered by the director concerned. Non-executive directors receive remuneration not merely on the basis of attendance at the meeting but in relation to their contribution to the material handed over to them.

The hitch, the catch

There is no denying the fact that non-executive directors need to be paid a commensurate remuneration. However, Section 309 of the Companies Act and Clause 49 of the Listing Agreement do not make harmonious construction.

Clause 49 of the Listing Agreement reads thus: "All fees/compensation, if any, paid to non-executive directors, including independent directors, shall be fixed by the board of directors and shall require previous approval of shareholders in general meeting. The shareholders' resolution shall specify the limits for the maximum number of stock options that can be granted to non-executive directors, including independent directors, in any financial year and in aggregate."

The Listing Agreement looks at the remuneration package as a whole and requires shareholder sanction for payment of fees and compensation. It uses the term "fees" loosely, without spelling out its meaning, that is, whether it refers to sitting fees or any other fees as well. If the term "fee" used in the Listing Agreement were to include payment other than sitting fee — that is, for attendance at each meeting of the board or committee thereof — then it would be in direct conflict with the provision of the Companies Act.

The sitting fees payable is governed by Sections 309 and 310 of the Companies Act. The first proviso of the Act lays down that "any increase in remuneration by way of fee for each meeting of the board or a committee thereof attended by any such director and the amount of such fees after such increase does not exceed such sum as may be prescribed."

Sub-section 2 of Section 309 lays down that the directors may receive remuneration by way of fee for each meeting attended. Sub-section 4, which deals with the remuneration to non-executive directors, reads thus:

"A director who is neither in the whole-time employment of the company nor a managing director may be paid remuneration — either: a) by way of a monthly, quarterly or annual payment with the approval of the Central Government; or b) by way of commission if the company by special resolution authorises such payment:

Provided that the remuneration paid to such director, or where there is more than one such director, to all of them together, shall not exceed:

i) one per cent of the net profits of the company, if the company has a managing or whole-time director or a manager;

ii) three per cent of the net profits of the company, in any other case.

Provided further that the company in general meeting may, with the approval of the Central Government, authorise the payment of such remuneration at a rate exceeding one per cent or as the case may be, three per cent of its net profits."

Analysing both the above provisions it is clear that the non-executive directors can receive remuneration either by way of fee for attending a board/committee meeting thereof or otherwise as laid down in the Act subject to limitations set out therein.

The entire compass of the company law limits the remuneration payable by way of percentage of profit made by the company in each year subject to approval of shareholders and the Central Government. And this is where the problem arises.

The dilemma

For the purpose of corporate governance and compliance with Clause 49, shareholders' authority is required. Under company law, any payment, other than the sitting fees, within the limit permitted under the rules will require prior approval of the shareholders and the Central Government. On the other hand, there is already a regulatory mandate putting a ceiling on the remuneration.

Conversely, the Listing Agreement requirements are being misread by many companies as to include sitting fees payable even in cases where such fees are confined to limitations laid down under the rules. Such a resolution is totally unwarranted. Shareholders' approval is required only if they decide either to pay fees beyond the limits laid down under the rules or if they are desirous of compensating the non-executive directors in any other form for the extra services rendered.

If this is the intention of the shareholders, then mere shareholder resolution will not suffice and such a proposal will need Central Government approval. And this is where the dilemma is. No such further authority of shareholders is necessary because the law provides adequate safeguards. How can this stalemate be ended? There is no denying that there can be no uniformity in payment of sitting fee nor is the fee a compensation for additional time and expertise expended.

The solution will, therefore, lie in permitting companies to have the freedom to begin with paying remuneration within the ceiling prescribed in sub-section 4 of Section 309 with the approval of the shareholders, thus dispensing with the need to approach the Central Government for approval. This is what the J. J. Irani Committee has also recommended, that is, shareholders decide on directors' remuneration.

One hopes that the Ministry of Company Affairs will intervene and flag off corporate governance on a promising note. Let not company secretaries seek shareholders' approval merely for getting sitting fees okayed.

(The author is a Pune-based company secretary.)

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