Gaurav Pingle, Practising Company Secretary
Remuneration or compensation to the directors of the company is one of the crucial aspects of corporate governance. The amount of remuneration or increase in the remuneration to directors is usually based on the profitability of the company and its performance for the corresponding financial year. By the amendments introduced by the Companies (Amendment) Act, 2019 and the Companies (Amendment) Act, 2020, the provisions relating to remuneration to non-executive directors / independent directors have been amended. Remuneration to promoter directors (executive directors or managing directors) has always been a matter of discussion.
This article is an analysis of the Securities and Exchange Board of India’s (“SEBI”) recent Informal Guidance by way of Interpretive Letter under the SEBI (Informal Guidance) Scheme, 2003. The Interpretive Letter was issued to Manaksia Aluminum Company Limited on November 18, 2020. This article also analyses the relevant provisions of the Companies Act, 2013 (“Companies Act/Act”) and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI Listing Regulations”) with respect to. the remuneration to executive directors.
‘Remuneration’ under the Act
Section 2(78) of the Act defines ‘remuneration’ as any money or its equivalent given or passed to any person for services rendered by him and includes perquisites as defined under the Income Tax Act, 1961. The definition of ‘remuneration’ is an exhaustive definition. It will include salary, bonus, emoluments, benefits (monetary/non-monetary), and other perquisites as defined under the Income Tax Act. The phrase ‘any money or its equivalent given or passed to any person for services rendered by him’ is quite wide and covers all ways in which remuneration can be paid. Section 17(2) of the Income Tax Act defines ‘perquisites. The said definition is an inclusive definition.
Remuneration to Executive Directors under the Act
Section 197 of the Act provides for the remuneration of all the directors of the company i.e. executive directors and non-executive directors. According to the relevant provisions, a public company can pay total managerial remuneration up to 11% of the net profits of the company for that financial year. The net profits are re-calculated as prescribed under section 198 of the Act. With the approval of the shareholders, the company may pay remuneration exceeding 11% of the net profits. If the shareholders’ approval is not obtained, the provisions of section 197 of the Act prescribes internal limits for payment of remuneration: (i) Remuneration to 1 Managing Director or 1 whole-time director or Manager up to 5% of net profits, (ii) If there are more than 1 Managing Director or whole-time director of Manager up to 10% of net profits to all such directors taken together.
It is important to note that section 197 of the Act mentions ‘remuneration’ and the same has been defined in section 2(78) of the Act. There is no use of undefined words like fees or compensation. Also, there is no reference to promoter-executive directors or non-promoter executive director (i.e. not from the promoter group/family). There is a reference of managing directors, whole-time directors (which includes executive directors) and managers. Further, there are not internal monetary limits on the remuneration to such executive directors. If the company has losses or inadequate profits, the company can compensate executive directors in accordance with schedule V, part II, section II of the Act.
Remuneration of Executive Directors under SEBI Listing Regulations
Regulation 17 of the SEBI Listing Regulations relates to ‘Board of Directors’. According to the said provision, the fees or compensation payable to executive directors who are promoters or members of the promoter group, shall be subject to the approval of the shareholders by special resolution in general meeting, if: (i) The annual remuneration payable to such executive director exceeds Rupees 5 crore or 2.5% of the net profits of the listed entity, whichever is higher; or (ii) Where there is more than one such director, the aggregate annual remuneration to such directors exceeds 5% of the net profits of the listed entity. The said approval of the shareholders shall be valid only till the expiry of the term of such director.
Under the SEBI Listing Regulations, there is a reference of ‘fees or compensation’ and not ‘remuneration’ as defined under the Companies Act. The shareholders’ approval by special resolution under the SEBI Listing Regulations is required only for the executive directors who are promoters or members of the promoter group. Such approval is not required in other cases. For one promoter-executive director – SEBI has prescribed two limits – Rs. 5 crores or 2.5% of the net profits and in case of more than one promoter-executive director – SEBI has prescribed only one criterion – exceeding 5% of the net profits. Here, there is no reference to the monetary cap.
Query raised by the listed entity- Manaksia Aluminum Company Limited
The listed company had one executive promoter director and it was proposed to appoint one more executive promoter director in the company, with similar terms and conditions regarding remuneration. The company sought SEBI guidance on the following: (i) Manner of appointing second executive-promoter director, (ii) Calculation of upper limit of remuneration under SEBI Listing Regulations and the Act, (iii) Manner of obtaining approval of shareholders (i.e. by ordinary resolution or special resolution).
Views of SEBI
SEBI observed that the ‘remuneration’ defined under the Companies Act is an all-inclusive definition which encompasses any money or its equivalent given to any person for services rendered and also includes perquisites. SEBI observed that if there is no specific exclusion, then the remuneration includes salary, fees, commission, stock options, etc. or any money or its equivalent in whatever manner given to any person for the services rendered. SEBI further observed that listed entities are required to comply with the provisions of SEBI Listing Regulations in addition to the provisions of the Companies Act. If the remuneration paid to the directors exceeds the prescribed limits, then the company is required to take the approval of shareholders by special resolution in general meeting – notwithstanding the adherence with the applicable limit of ordinary resolution as specified in Schedule V of the Act. SEBI has further clarified that under SEBI Listing Regulations there is no prescribed absolute limit, where there is more than one promoter – executive director. It has also clarified that if the aggregate annual remuneration payable to all executive promoter directors exceeds 5% of the net profits, the company shall be required to pass a special resolution under Regulation 17(6)(e)(ii) of the SEBI Listing Regulations.
Analysis: The queries by the listed entity are quite pertinent as there is an apparent difference in the language used under section 197 of the Companies Act and the SEBI Listing Regulations.
The subject-matter provision of the Informal Guidance Letter was introduced by an amendment to SEBI Listing Regulations based on the recommendation of Kotak Committee Report on Corporate Governance. The Committee noted various cases of disproportionate payments made to executive promoter directors as compared to other executive directors and it observed that such payments should be subjected to greater shareholder scrutiny. The Committee recommended that shareholder approval by special resolution should be required if the total remuneration paid: (i) To a single executive promoter-director exceeds Rs. 5 crore or 2.5% of the net profit, whichever is higher; or (ii) To all executive promoter-directors exceeds 5% of the net profits. The amendments were introduced by the SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2018, w.e.f. April 1, 2019. It is noteworthy that the Committee had mentioned ‘total remuneration’ but the amendment to SEBI Listing Regulations mentions ‘fees or compensation’.
Through this Interpretive Letter, SEBI has clarified the scope and coverage of the term ‘remuneration’ under SEBI Listing Regulations. SEBI has also clarified the approval process of payment of remuneration to promoter – executive directors i.e. remuneration when a company is having profits or having losses/inadequate profits.
With respect to the managerial appointment (section 196) and remuneration to directors (section 197), the Companies Act is quite detailed as it covers almost all possibilities i.e. criteria for appointment, compliances pre/post compliances, payment of remuneration by companies with profit or inadequate profits/losses, manner of remuneration, applicability to the companies, approval process, payment and frequency of payments to non-executive directors, etc. With respect to managerial appointment and remuneration, Regulation 17 SEBI Listing Regulations either introduces a specific approval or disclosures to the shareholders. Considering the fact that SEBI Listing Regulations has aligned with certain provisions of the Companies Act, it would be desirable that the SEBI Listing Regulations also refers to the same terms and phrases in the Companies Act. This would avoid possible issues in interpreting several provisions of SEBI Listing Regulations and ultimately promote ‘ease of compliance’ for listed entities.