Experts oppose govt proposal to cap income of independent directors

The panel recommended the cap to ensure that excess pecuniary rewards do not compromise the independence of such directors

The government’s proposal to cap the income of independent directors has been opposed by experts. 

A government-appointed panel has recommended that an independent director should not derive more than 20 per cent of her/his total income from one company. The government is considering implementing this by amending the Company’s Act through an Ordinance. Experts say this will make it unattractive for people to take up directorship in companies.

Abhimanyu Bhandari, a Supreme Court advocate, says, “Such a cap would discourage the best and most talented from joining a company. Independence of directors cannot be secured by capping their income.”

Atul Pandey from Khaitan & Co says the move could be counterproductive. “In an already difficult business environment (where qualified personnel are reluctant to act as independent directors, in light of increasing legal compliance on them), it may ultimately prove to be a regressive move. Companies will find it difficult to attract qualified independent directors," he says. 

An expert on company law says that a retired person taking up directorship means it is his only income and even 20 per cent of a person’s total income may mean a lot in terms of absolute money.

Rashi Dhir, senior partner at DMD Advocates, says, “I feel that it should be defined not just in terms of the percentage of a director’s total income but should be subject to a reasonable absolute number as well.”

Although the remuneration from the company and its group may be less than 20 per cent of an individual director’s total income, in absolute terms an income of several crores could still be significant influence on the decision making of an individual.

The panel, headed by Corporate Affairs Secretary Injeti Srinivas, recommended the cap to ensure that excess pecuniary rewards do not compromise the independence of such directors.

The recommendation said the panel would prevent any material pecuniary relationship, which could impair his independence on the board of the company.

These directors are paid in two ways — through sitting fee and a commission. While the sitting fee is not a concern, it is the commission which raises eyebrows. Commission could range from 1 to 3 per cent of a company’s net profit, depending on whether the company has a managing director, a whole time director or not.