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Directors' powers: Many questions unanswered

Richa Mishra

Apart from the directors to whom no remuneration may be paid without the approval of shareholders, even the officers of the company will have to treat this amount as income in their hands and pay tax.

NEW DELHI, Feb. 17

THE recent Government decision to increase the Directors' responsibilities and accountability of directors in financial and other matters has become a cause for concern in the corporate sector.

"The result is that there is reluctance on the part of eminent persons to join the board of directors of companies unless protection is granted to pertaining to their liabilities - generally of a vicarious nature in this regard,'' industry sources said.

Sources in the Federation of Indian Chambers of Commerce & Industry told Business Line that in the West, particularly the US, a solution has been found to ward off fears of this nature.

No outsider normally joins the board of directors/ management of any company unless they are assured that adequate liability insurance has been taken out by the company, at its own cost, to protect the board/ management.

"It has, however, been brought to our notice that companies that have done so have now been advised of the possibility that the premium amount may actually amount to remuneration in the hands of the whole-time and non-executive directors, and may be deemed to be violative of Sections 198 and 309 of the Companies Act, 1956," the chamber said.

"Also, there may be a case whereby the law may require the directors to repay the company pro-rata amount of the premium falling to their share.''

Further, apart from the directors to whom no remuneration may be paid without the approval of shareholders, even the officers of the company would have to treat this amount as income in their hands and pay tax, FICCI said.

The companies appoint qualified officers to look after the legal requirements of the organisation and their compliance. The board of directors by and large is not involved in the routine matters and depends on certificates etc., filled by the respective officers.

"The idea behind insurance is to cover any default of the company committed inadvertently in the course of day-to-day work of the company and no mala fide act would in any case be covered by it for which the persons concerned have to individually responsible,'' FICCI said.

Moreover, to remove controversies and ensure good corporate management, it is necessary that the Central Board of Direct Taxes clarify certain issues.

These are: no disallowance in the companies assessments shall be made for such premiums and no portion of such premium shall be treated as income/ remuneration/ perquisites in the hands of the directors/ employees concerned, the chamber said.

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