Govt panel recommends cap on remuneration of independent directors

A panel has recommended capping the remuneration of an independent director from a company to one-fifth of his gross annual income to ensure his independence.

The committee, headed by Corporate Affairs Secretary Injeti Srinivas, suggested a ceiling on independent director’s remuneration in terms of percentage of income in order to prevent any material pecuniary relationship, which could impair his independence on the board of the company.

The committee submitted its report to Finance Minister Arun Jaitley on Monday.

Experts said the high fees by any one company can compromise independent directors' independence.

These directors are paid in two ways — through sitting fee and commission. While the sitting fee is not a concern, it is 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, whole time director or not.

Atul Pandey, partner at Khaitan & Co., said the recommendation is in line with the Kotak committee report on corporate governance for listed companies.

National Company Law Tribunal (NCLT) and its appellate tribunal recently heard the Tata Sons-Cyrus Mistry case on conversion of the company into a private limited one. However, similar cases might not go to NCLT and could be decided by the government itself, if recommendations by the panel are accepted by the government.

This was part of the recommendations to declog NCLT by the committee on reviewing penal provisions of the Companies Act.

The committee also recommended shifting 16 of 81 compoundable offences from the jurisdiction of special courts to an in-house e-jurisdiction framework, where defaults could be penalised by adjudicating officer under the registrar of companies.

These offences relate to non-filing of annual returns, not providing permanent account numbers, not providing registered address in letter head, not giving director identification number, etc.

The remaining 65 offences of serious nature will continue to be under the jurisdiction of special courts due to their potential misuse, according to the recommendations.

However, the status of all non-compoundable offences would be retained since they are serious in nature. The panel also recommended shifting of the compoundable offences to regional directors under the ministry of corporate affairs (MCA). Regional directors would be empowered to enhance pecuniary limits.

Currently, the NCLT decides whether a company can alter its financial year. Recommendations have also been made to shift this power to the central government.

Pandey said, “The idea is to declog NCLT and special courts. The NCLT is already busy with insolvency and bankruptcy code, restructuring of companies, etc.” 

A total of 9,073 cases were under consideration in the NCLT as on January 31, 2018, including 1,630 cases of merger and amalgamation, 2,511 cases of insolvency, and 4,932 cases under other sections of the Companies Act, 2013, according to the government’s reply in Parliament.

Subsequently, in the months after that, the number of cases has doubled, sources said. Till the end of June, 6,326 companies had filed cases in the NCLT under the Insolvency and Bankruptcy Code. Of those, a majority has gone into liquidation.

The panel also recommended re-introducing the declaration of commencement of business provision. Under the old Companies Act, 1956, companies had to take certificate of incorporation and certificate of commencement. The new Companies Act, 2013 did away with the certificate of commencement.

Now, the panel wants to re-introduce it to better tackle the menace of shell companies.

The government has already struck off over 226,000 companies from registers after they did not file statutory returns. Notices to another 225,000 companies are also being sent for similar lapses. .

WHAT IT SUGGESTED

• Instituting a transparent online platform for e-adjudication and e-publication of orders
• Greater disclosures with respect to public deposits
• Shares should be transferred to the Investor Education and Protection Fund if rightful owner does not claim ownership
• Non-maintenance of registered office to trigger de-registration process