MCA plan to cap pay puts outside directors in a bind

The Ministry of Corporate Affairs (MCA) on 5 November 2018 called for public comments on a slew of proposed amendments to the Companies Act, 2013, with a view to strengthen the corporate governance framework in India. One of the proposed amendments, to section 149(6) of the act, seeks to cap the remuneration of independent directors (IDs). At a time when an increasing burden is placed on IDs, the move to cap their remuneration is curious, particularly given the practical difficulties in implementing a cap. In this article, we discuss some such practical difficulties and suggest alternatives to the MCA proposal.

The MCA proposes to cap the remuneration payable to an ID as an amendment to section 149(6)(c) of the act, provides that the total pecuniary relationship between the ID and the company (including its holdings, subsidiaries etc.) should not exceed 25% of the ID’s total income. The proposed amendment was suggested by the MCA committee set up earlier to review offences under the act. In addition to its recommendations on relevant offences (many of which have already been incorporated under the act by way of a recently promulgated ordinance), the committee suggested further amendments to strengthen the corporate governance framework.

Harish Kumar is a partner designate at L&L Partners.