What is the Sitting Fee with respect to the Companies Act, 2013?

Sitting fee is one of the forms of Remuneration which is mainly paid to Non-Executive Directors & Independent Directors. Since Independent Directors are not entitled to monthly or regular remuneration in the company are compensated with a Sitting Fee for each Meeting they attend in a financial year.

Apart from sitting, Non-Executive & Independent Director is entitled to receive reimbursement of expenses incurred to attend the meeting. For example Travelling fee, Food or Accommodation charges, etc. if incurred.

They also get commission over profits earned by the company which requires prior approval from the shareholders of the company. Everything stated above is driven by Section 197(5) of the Companies Act, 2013 reading with Rule 4 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014.

Sitting Fee

An Introduction to Directors as per the Companies Act, 2013

As per the Company Law there, multiple forms of directorships are defined in the Companies Act, 2013 including Executive Directors, Non-Executive Directors, Whole-time Directors, Nominee Directors, Additional Directors, Alternate Directors, Managing Director, Women Directors, Independent Directors, and Small Shareholder’s Director. Make sure to comment or mail if I did not mention any category of Director.

All the aforementioned categories of directors can be Resident or Non- Resident in India whereas the Companies Act also states that every company must have a Resident Director who stayed in India for more than 182 days.

Different categories draw different remuneration or sitting fee as per their designation in the company which is decided with the help of Board resolution and further approved by the members of the company in the Annual General Meeting.

What is the Maximum Amount of Sitting Fee with respect to the Companies Act, 2013?

A Non-Executive Director or An Independent director is entitled to receive up to 1 lac each Board Meeting they attend. For more than One Lac, the approval of shareholders is required. Furthermore, the Sitting Fee paid to Independent Director/Woman Director should not be less than the sitting fee paid to the other Directors of the company.

Withholding to the Companies Act, 2013 Board has the power to finalize the amount of Sitting Fee of Non-Executive directors or Independent Directors. That amount should be within the purview of the 1 lac limit as prescribed in the act.

Limit of Rupees One Lac is also applicable to the participation in Committee meetings also. Where Non-Executive Directors or Independent Directors attend Audit Committee meetings or Nomination & Remuneration Committee meetings etc. they may receive sitting fees up to rupees One Lac per meeting only.

Sitting Fee

Stock Option (ESOS or ESOP) to Director in Place of Remuneration

Companies can offer ESOP or ESOS to their Director in place of remuneration or sitting, also in addition to the sitting fee or remuneration. But this option is not applicable in the case of Independent Directors.  But a Non-executive director can receive stock options issued by the company.

Stock Options are usually offered to the employees of the company for their work appreciation. Likewise, Sweat Equity shares are issued for the hard work of the employees.

Can We Pay Sitting Fee to Executive Directors or Managing Directors?

There is no specific prohibition under the Indian Companies Act on payment of Sitting Fee to Executive Directors therefore a Company can make payment of Sitting Fee to its Managing Directors, Whole-Time Directors, and Executive Directors. Again the limit of Rupees One Lac per meeting is applicable to them as well.

Also, the payment of the Sitting Fee to other directors in the company cannot exceed the amount payable to women directors and Independent Directors.

Sitting Fee Update

Is Sitting Fee payable in case of loss or inadequacy of profits?

With the recent amendment held in the year 2021, the payment of the sitting fee to the Non-Executive Director and Independent Directors cannot be denied by the company.  The Notified amendment on 18th March 2021 states that in case of inadequate or no profits in the company, the Non–Executive Directors and Independent Directors are entitled to their Sitting Fee.

The minimum annual payment in case of inadequacy of profits in the company is Rupees 12 lacs and a Maximum of Rs. 24 lacs and 0.01% of the capital in excess of 250 Crores. The same can be understood effectively with the help of the below table.

Where the effective capital is (in INR):Limit for yearly remuneration payable to NEDs and IDs in case of losses Or inadequate profits (in INR).
Negative or less than 5 Crore.12 Lakh.
5 Crore and above but less than 100 Crore.17 Lakh.
100 Crore and above but less than 250 Crore.24 Lakh.
250 Crore and above.24 Lakh plus 0.01% of the effective capital in excess of 250 Crore.

What is Effective Capital for Payment Calculation of Sitting Fee?

For the purpose of Schedule V, the Effective Capital for Payment Calculation of Sitting Fee following illustration would be a great help for you all.

The first thing to note in advance is that figures are to be taken from the end date of the preceding financial year.

S.NO.PARTICULARSAMOUNT (IN RS.)
 Paid-up Capital (except Share Application Money and Advance Received against shares)1,00,000
 Share premium account1,000
 Reserve & Surplus (except revaluation reserve)5,000
 Loans & Advances Long terms and Deposits repayable after a year (except working capital loans, overdrafts, bank guarantee, interest due on loans unless funded, & other short-term loans)3,000
 TOTAL OF 1+2+3+41,09,000/-
 Investment (not for investment by an Investment Company )7,000
 Accumulated Losses00
 Preliminary Expenses not Written off2,000
 TOTAL OF 5+6+79,000
   
 Effective Capital for Sitting Fee is ( A-B)1,00,000/-

Taxability of Sitting Fee

Unlike Salary or Remuneration, the Sitting Fee received by the directors of the company is taxable under the head of Income from other sources in taxation matters.  But if the sitting fee is received by any Executive Director in the company like Managing Director, the same shall be included in the amount of salary and taxable under the head of “Salary”.

Do We Need to Alter AOA for Payment of Sitting Fee?

Yes, In case the amount of sitting fee payable to each director is exceeding Rupees One Lac per meeting. For payment of Sitting Fee above 1lac rupees, the company needs to alter their remuneration clause in AOA (Article of Association) by passing Special Resolution in duly convened General Meeting.

Also, E-for MGT 14 is required to be filed within 30 days of the general meeting for intimation of Special Resolution to MCA/ROC.

End Notes about Sitting Fee

Every topic related to outflow or inflow of funds in the company is usually very debated in terms of corporate governance and sitting fee is one of them as funds are outflowing from the company. This write-up might give you ease with the term “Sitting Fee”. On payment of Sitting Fee to directors, Company must obtain receiving of the same in writing for good corporate practice.

The Payment and Dues of Sitting Fees to directors are recommended in the Committee Meetings held by the Board of Directors. It is primarily proposed in the Nomination and Remuneration Committee at the time of appointment of Directors.

References

  1. https://onlinelibrary.wiley.com/doi/full/10.1002/smj.2421
  2. https://www.sciencedirect.com/science/article/abs/pii/S0165410108000347

By csannusharma

Annu Sharma is a qualified Company Secretary as well as a Certified CSR Professional and a Law graduate with rich experience of 4 years in secretarial, corporate legal affairs, management and corporate governance; in different industry sectors. Featured on Tax Guru.In, Compliance Calendar LLP and Blogger.com.

One thought on “Essential Payment of Sitting Fee in Losses (1Lac)”

Comments are closed.