INFORMAL GUIDANCE – FEES AND COMPENSATION IN SEBI LODR, 2015 IS REMUNERATION UNDER COMPANIES ACT, 2013 – Eshwars
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INFORMAL GUIDANCE – FEES AND COMPENSATION IN SEBI LODR, 2015 IS REMUNERATION UNDER COMPANIES ACT, 2013

Authored by Aishwarya Lakshmi VM

ApplicantManaksia Aluminium Company Limited.

Date of the guidance19.09.2020

Factual Background:

(i) The Applicant is a listed entity with a board composition of 8 directors of which there is 1 Managing Director (promoter) and 1 Executive Director (non-promoter). All the others are Non-Executive Directors. The Managing Director (hereinafter, MD) and the Executive Director (hereinafter, ED) are paid remuneration as per Schedule V of the Companies Act, 2013. The remuneration of the sole promoter executive director is within the ceiling of Rs. 5 crores or 2.5% of the net profit (whichever is higher) being the upper limit as per Regulation 17(6)(e)(i) of the SEBI (LODR) Regulations, 2015.

(ii) The Applicant proposes to induct an additional ED from the Promoter group in its Board, who will also be paid remuneration as per Schedule V of the Companies Act, 2013.

(iii) The Applicant taking a view that the limits of 5% of net profits under in clause (ii) of Regulation 17(6)(e), if the company has more than one promoter executive director would become applicable only if pays “fees or compensation” and not “customary salary”, sought guidance of SEBI, whether it would still be required to take approval of the shareholders by way of special resolution if the salary of the two promoter executive directors would be beyond 5% of its net profits.

Guidance sought:

(i) Whether Regulation 17(6)(e) will be applicable to the Applicant if another Executive director from the Promoter group is appointed by passing an Ordinary Resolution and receiving only customary monthly salary (and not any fees or compensation) in adherence with Schedule V of Companies Act, 2013?

(ii) Is upper limit of INR 5 Crore mentioned in clause (i) of Regulation 17(6)(e) also applicable to remuneration paid to more than one ED as per Clause (ii) of Regulation 17(6)(e)?

(iii) Whether company is required to pass a special resolution under Clause (ii) of Regulation 17(6)(e) of LODR Regulations for appointment of one or more executive promoter director if the aggregate remuneration payable to all executive promoter director exceeds 5% of the net profits or an absolute limit of INR 5 crore.

Provisions Involved

Regulations 17(6)(e) of SEBI (Listing Obligation and Disclosure Requirement) Regulations, 2015. [i]

Informal Guidance by SEBI

(i) Relying on the definition in Section 2(78) of Companies Act, 2013 SEBI provided that the term ‘remuneration’ being an all-inclusive term, unless otherwise expressly excluded, would include salary, fees, commission, stock option etc. or any money or its equivalent in whatever manner given to any person for the services rendered.

(ii) If the remuneration exceeds the limits of 5% of the net profits of the Applicant, even though as per the Companies Act, 2013 only an Ordinary Resolution is required, the Applicant should also pass a special resolution to comply with Regulation 17(6)(e) to comply with the SEBI (LODR) Regulations, 2015, which is valid only until the expiry of the term of such directors.

(iii) Unlike clause (i) of the said Regulation which has a ceiling limit of either INR 5 Crores or 2.5% of the net profits, whichever is higher, clause (ii) has only a doubled ceiling limit of 5% of the net profits. The limit of INR 5 Crores is not applicable to Clause (ii).

The letter of SEBI can be read at: https://www.sebi.gov.in/sebi_data/commondocs/nov-2020/SEBI%20IG%20letter%20MACL_p.pdf

As per the Informal Guidance [Scheme] 2003 of SEBI, the guidance provided is applicable only to the Applicant, and is should not be construed as a conclusive decision or determination of any question of law or fact by SEBI, and is also not an Order u/S 15T of SEBI Act, 1992.

[i] Regulation 17(6)(e), SEBI (LODR) Regulations, 2015: The fees or compensation payable to executive directors who are promoters or members of the promoter group, shall be subject to the approval of the shareholders by special resolution in general meeting, if –

(i) the annual remuneration payable to such executive director exceeds rupees 5 crore or 2.5 per cent of the net profits of the listed entity, whichever is higher; or

(ii) where there is more than one such director, the aggregate annual remuneration to such directors exceeds 5 per cent of the net profits of the listed entity: Provided that  the  approval  of  the  shareholders  under  this  provision  shall  be  valid  only till the expiry of the term of such director.

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