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Permit Grant of Stock Options to Independent Directors: CII
Mar 31, 2021

The current regulatory framework permits payment of remuneration to independent directors only by way of sitting fees for attending meetings and commission, which is  restricted at 1% of the net profits for all the non-executive directors (if there is a managing/whole-time director). The Companies Act, 2013 specifically prescribes that an independent director shall not be entitled to any stock option. “Law may permit grant of stock options to independent directors. Independent directors devote their valuable time to address strategic issues in corporate Boards and use their expertise while guiding the management of the company from time to time. Over the years, average time commitment for board service has augmented”, said Mr Chandrajit Banerjee, Director General, CII.

Generally, the objective of issuing stock options is to provide incentive to attract, retain and reward employees of the company. “Motivating independent directors to contribute to the long term and sustainable growth of the company, needs to be reflected in their rewards. Stock Options enable a reward mechanism that is linked to the long-term goals of an organisation”, stated Mr Chandrajit Banerjee.

Mr Banerjee further mentioned that this is evident from the reduction in number of companies, wherein a person can be appointed as an independent director, from 10 listed companies to now 7 listed companies. “This restriction is also leading to a dearth in the number of persons willing to and being eligible to be appointed as independent directors. Apart from the time commitment, the independent director’s role has become more challenging also due to intense scrutiny from stakeholders, greater demands imposed by regulatory requirements and an increase in overall complexity of the business environment” said Mr Banerjee.

Globally, USA, UK, Canada, Australia, Singapore, Hong Kong, to name a few, do not expressly prohibit stock options for independent directors. Considering all of the aforesaid, there is merit for the Regulators including Ministry of Corporate Affairs and SEBI to consider permitting grant of stock options to independent directors with such checks and balances in place as may be deemed fit and appropriate and with the prior specific approval of shareholders.

CII has made a submission to the regulators for a blanket approval to grant any number of stock options to independent directors may not be appropriate; with conditions to be imposed as safeguards whilst granting stock options to independent directors. Some of these may include:

Prior approval from shareholders of the company by way of a special resolution

Grant of stock options may be based on the outcome of the annual evaluation of the concerned independent director(s)

Audit reports issued by the statutory and secretarial auditors for the last 3 financial years may be unqualified 

Aggregate of the stock options to all independent directors may not exceed 1% of the paid-up capital of the company at the time of institution of the scheme

Minimum vesting period of the stock options granted to independent directors may be 3 years as against 1 year for whole-time directors. Unvested options, if any as on the date of retirement of such independent director may vest on completion of 3 years from the date of grant.

Stock options granted to independent directors may be at the market price as defined under the SEBI (Share Based Employee Benefits) Regulations, 2014 (in case of listed companies) and at a fair value based on applicable accounting standards (in case of unlisted companies);

Companies may be required to disclose separately the stock options granted to each of its independent director in the annual report

These can be brought into the statute book by carrying out necessary amendments to Section 149 of the Companies Act, 2013. This can be supplemented by corresponding amendments in SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and SEBI (Share Based Employee Benefits) Regulations, 2014.

Mr Banerjee further mentioned that “it is encouraging to see that the SEBI Consultation Paper for Review  of  Regulatory  Provisions  related  to Independent  Directors (currently open for public comments) has touched upon the issue of whether there is a need for reviewing the remuneration structure for IDs”. It seeks views on whether ESOPs with a long vesting period of 5 years, be permitted for IDs, in place of profit linked commission and the maximum limit of remuneration through ESOPs.

31 March 2021

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