Originally published 18 December 2020
On November 18, 2020, the Securities and Exchange Board of India (SEBI) issued an informal guidance to Manaksia Aluminum Company Limited (Company) with regards to the application of Regulation 17(6)(e) of the SEBI (Listing Obligations and Disclosure Requirement) Regulations, 2015 (LODR Regulations) in relation to the Company's proposal to appoint an additional executive promoter director to its board.
As per Regulation 17(6)(e) of the LODR Regulations, payment of fees/compensation to executive directors, who are promoters or part of promoter group, is subject to the approval of shareholders through special resolution if:
- there is one such executive director and the annual remuneration of such director exceeds INR 5 crore or 2.5 percent of the net profit of the listed company, whichever is higher; or
- there is more than one director and their remuneration exceeds 5 percent of the net profit of the listed company.
The Company sought clarification on primarily two issues. First, whether the aforesaid regulation will be applicable if the Company appoints another executive promoter director, receiving an only monthly salary and not any fees or compensation, by ordinary resolution (as per schedule V, part II, section III of the Companies Act and rules). Second, whether the upper limit of INR 5 crore as mentioned under clause (i) of Regulation 17(6)(e) would also be applicable to clause (ii) of Regulation 17(6)(e) of the LODR Regulations, and whether a special resolution is required if the aggregate remuneration payable to all executive promoter directors exceeds INR 5 crore.
On the abovementioned issues, SEBI has clarified that a listed company is required to comply with the provisions of the LODR Regulations as well as the provisions of the Companies Act, 2013 (Companies Act). Therefore, Regulation 17(6)(e) of the LODR Regulations is squarely applicable to the facts and circumstances of the Company. SEBI further clarified that the definition of 'remuneration' under the Section 2(78) of Companies Act is an all-inclusive definition and includes salaries, fees, commission, stock option or any money or its equivalent in whatever manner given to any person for services rendered. Thus, even if the promoter director is receiving a monthly salary, instead of 'fees/compensation', the limits specified in Regulation 17(6)(e) have to be adhered to. Furthermore, SEBI clarified that Clause (ii) of Regulation 17(6)(e) only provides a percentage limit (5 per cent) and no absolute limit similar to clause (i). Therefore, if the aggregate remuneration payable to all executive promoters exceeds 5 percent of the net profits of the company, then as per the provisions of clause (ii) of Regulation 17(6)(e), the Company would be required to pass a special resolution for the same.
It is appropriate to not create any distinction between 'remuneration/salary' and 'fees/compensation', and SEBI has rightly treated both as the same for the purpose of Regulation 17(6)(e) of the LODR Regulations.
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