Check out our E-Book on Metaverse and Smart Contracts: Challenges and Key Considerations

Non-Executive Director’s Pay

Author: Gaurav Shanker, Managing Partner And Garv Dhyani, Associate |

Article by Business Law Chamber

A company’s activities and direction are headed and managed by its directors. These directors are directly responsible for the growth of the company and better management, including formulating long-term plans and managing day-to-day activities. The Companies Act, 2013 (“Act”) recognises various classes/categories of directors, however, such classes can be classified under two broad categories, i.e., ‘executive director’ and ‘non-executive director’.

An executive director means a whole-time director. The Act defines a whole-time director as a director in the employment of the company. This goes to follow that every director in the employment of the company is an executive director. Whereas, considering that the law does not define the term non- executive director, the antithesis of the above definition would unfold that a non-executive director is someone who holds the position of a director but he isn’t in the employment of the company, such as an independent director. Apart from being not in the employment of the company, customarily it is construed that a non-executive director means a director who does not participate in the day-to-day management activities but is an essential part of the key decisions, and who draws remuneration by way of commission, sitting fees, professional fees and/or reimbursement.

Another key difference between an executive director and a non-executive director pertains to the kind of remuneration that they can draw. Being in the employment of a company embraces various advantages, such as an executive director can draw monthly salary apart from other forms of remuneration. Whereas, the remuneration options for a non- executive director are limited. As stated above, a non-executive director usually draws commission, sitting fees, professional fees and/or reimbursement of expenses. The customary definition attached to the directorship of a non-executive director does not touch upon monthly remuneration such as salaries.

It can be argued that since the Act neither draws a distinction between a non-executive director and an executive director while discussing the intervals at which the remuneration may be drawn from the company nor does it draw a distinction while discussing the type of remuneration that the two can draw, therefore, a non-executive director can draw monthly remuneration in the form of salary. However, it is general knowledge that one of the fundamental features of an employment is salary. Thus, a non-executive director drawing a monthly remuneration would create a paradoxical situation since monthly remuneration indicates employment and every employed director is an executive director.

Indian courts are yet to clarify on what and what not a non-executive director can draw as part of its remuneration. In the light of such lack of clarification and above stated law and customary practices, it is generally advised that non-executive directors must refrain from drawing any monthly remuneration or any other remuneration attributable to ‘employment’.