The Hindu Business Line : Managerial remuneration, an obsession in the Concept Paper

THE term "remuneration" has always been an anachronism. In simple terms, remuneration is a reward for services. But by assigning different meanings under various corporate and fiscal laws, the term has become complex. And to add to this complexity is the inclusion of the word `perquisite'.

There is certain amount of clarity in these terms under the respective provisions of the Income-Tax Act. However, company law has not made any serious attempt to define the term `remuneration'; it did attempt to control the payment of remuneration to managerial personnel — directors and their relatives — through the operation of Sections 198, 269, 308, 309, and 310 read with Schedule XIII together.

The general clause of "definition" did not contain any specific meaning of the term "remuneration". Nevertheless, the explanation to sub-section 4 of Section 198 makes a reference to the meaning of remuneration for the purpose of operation of Sections 198, 310, 311, and 381 and 387. The explanation reads thus:

"For the purposes of this section and Sections 309, 310, 311, 381 and 387, "remuneration" shall include: any expenditure incurred by the company in providing any rent-free accommodation or any other benefit or amenity in respect of accommodation free of charge, to any of the of the persons specified in sub-section (1);

"any expenditure incurred by the company in providing any other benefit or amenity free of charge or at a concessional rate to any of the persons aforesaid;

"any expenditure incurred by the company in respect of any obligation or service which, but for such expenditure by the company, would have been incurred by any of the persons aforesaid; and

"any expenditure incurred by the company to effect any insurance on the life of, or to provide any pension, annuity or gratuity for, any of the persons aforesaid or his spouse or child."

The draft Companies Bill, 2004 under clause 2(77), as proposed by the Concept Paper, makes a detailed definition, which reads thus:

"Remuneration means any money or moneys worth incurred by the company for availing services rendered by the recipients and shall also include:

"any expenditure incurred by the company in providing any rent-free accommodation or any other benefit or amenity in respect of accommodation free of charge, any expenditure incurred by the company in providing any other benefit or amenity free of charge or at a concessional rate;

"any expenditure incurred by the company in respect of any obligation or service, which, but for such expenditure by the company, would have been incurred by such obligator; and

"any expenditure incurred by the company to effect any insurance on the life, or to provide any pension, annuity or gratuity for his spouse or child."

This definition is more or less in sync with the definition under Section 198 of the Companies Act, 1956 reproduced as above and also the definition of income under the Income-Tax Act.

Restrictive provisions

Remuneration under company law to certain categories of employees is brought within the ambit of the control regime. At present, there is a cap on the overall remuneration to managerial personnel and other directors, which is 11 per cent of the net profits of the respective financial year computed in the manner laid down under Section 349. This percentage shall be exclusive of any fees payable to directors for attendance at board meetings as stipulated under sub-section 2 of Section 309.

To whom payable

The meaning of the term remuneration becomes relevant in considering the payments to i) managing director, ii) whole-time director; iii) manager, collectively called managerial personnel; iv) non-executive director, simplicitor; and v) non-executive independent directors. Within the 11 per cent there is a sub-limit of 10 per cent for the remuneration payable to managerial personnel. The remuneration payable to non-executive directors is governed by sub-section 4 of Section 309, which permits different modes of payment to such categories of directors. Briefly, remuneration to such director other than managerial personnel is limited to 1 per cent of net profit of the company where there is a manger or a whole-time director or 3 per cent of net profit of the company where there is no such managerial personnel.

There is another class of employees that does not fit into any of these labels but whose remuneration nevertheless comes under regulatory restrictions on quantum. Such a regulatory provision refers to the office or place of profit held by a relative of a director or a partner of a firm of which such a director is a partner or a private company in which a director of the company if a director of a member as referred to in Section 314 of the Act. It is significant to note that the definition assigned to the term remuneration under Section 198 has no application to this section, as this section has, strangely, been excluded.

Provisions under the draft Bill

Chapter XII of the draft deals with the appointment and payment of managerial remuneration. Clause 83 more or less retains the existing provisions of the Act insofar as the overall ceiling limit to managerial personnel and non-executive directors are concerned. However, there is a significant omission: Unlike in Section 309, the overall percentage cap on remuneration payable to managerial personnel does not exclude the fees paid for attendance at board meetings. In other words, sub-section 2 of Section 309 has been queerly done away with.

On the other hand, the law envisages talented persons to be inducted on the board and yet does not make any specific provisions for payment of remuneration or, for that matter, does not even give the company the freedom to do so. All public companies are mandatorily required to appoint audit committees. This necessitates the appointment of an independent director. This is impossible except in companies where the margin of profit is huge to ensure the best available talent is hired and paid commensurate remuneration within 1 per cent of the net profit. A Herculean task, indeed.

While framing the draft Bill it appears that the payment of remuneration to independent directors in the context of corporate governance has been lost sight of.

There is also yet another anomaly: Non-executive directors are classified as independent and `not independent'. It would be in the fitness of things if their remuneration is left to the wisdom of the shareholders. After all, the deciding factor is the ability to pay and the viability of the project. A control regime will only retard progress and stem development.

Incidental expenses for attending meeting

It is customary for companies to include in the articles of association an article to the effect that where a director resides at a place other than the venue at which a board meeting is held, the incidental expenses incurred by that director — such as travel, lodging and food — is reimbursed to him. Where the company pays for the tickets, lodging and food directly, there is no problem of perquisite value or element of income.

However, there are occasions where a director either stays in a friend's or relative's place and claims an ad hoc allowance towards meeting expenses. It is not possible to evidence whether the payment made is actual reimbursement or includes an element of income giving rise to the question of tax.

Looking at the definition, it is a moot point whether such payment would come within the definition of remuneration for the purpose of computing the overall percentage. This aspect does not pose any difficulty under the existing provisions of the Act.

Sitting fees

The proviso to clause 83 in the draft does specifically provide for payment of sitting fees to a director other than a managing director or a director in whole-time employment for payment of sitting fees for attending each meeting of the board or committees thereof not exceeding the amount as may be prescribed.

An anomaly in Section 309(2) is that the fees payable to managerial personnel, subject to shareholders approval, in addition to substantive remuneration is permissible.

This grey area must be clarified. But this brings another difficulty for the management: As per Section 198(2), the aforesaid percentage shall be exclusive of any fees payable to directors under Section 309(2).

This gives a leverage to make payment of sitting fees to the non-executive directors without including such fees in the overall limit of remuneration payable to non-executive directors as provided under Section 309(4).

Since most of the listed companies are hit by Section 269 mandating the appointment of whole-time directors/managing director, the overall percentage of remuneration payable to non-executive directors is pegged at 1 per cent of net profit. Under the proposed clause 83, this ceiling has remained unchanged so much so that sitting fees payable will also come within the overall ceiling of 1 per cent.

At present, there is another advantage for non-executive directors simplicitor who are not independent directors can receive remuneration by way of sitting fees such an amount as may be prescribed; and non-executive directors who are independent directors may receive remuneration in the manner prescribed under sub-section 4 of the existing Act or sub-section 4 (4) of clause 83. Thus, by deleting Section 198(2), the sitting fees payable will also come under the definition of remuneration and the quantum crunch.

The Concept Paper, unfortunately, does not address the thorny issue of remuneration to directors, more particularly independent directors.

Clause 83 merely retains the existing provisions of Section 309 of the Companies Act, 1956. In the process of consolidation and grouping of different sections, Section 309(2), which exempts the sitting fees from the ceiling, has been deleted.

As a result, sitting fees payable to all non-executive part-time directors is limited to 1 per cent given that most listed companies are hit by the provisions of Section 269 mandating the appointment of managing and whole-time directors. And roping in persons with expertise and talent will be difficult unless commensurate remuneration is paid.

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