Some work & some pay

A question that has been raging in the board rooms of the Indian corporate sector is whether non-working directors could be rewarded with stock options without having such actions suffer the restrictions on managerial remuneration under the Companies Act, ’56 (the Act). The answer seems to be an emphatic yes.
Under the SEBI (Employee Stock Option Scheme and Employees Stock Purchase Scheme) Guidelines, ’99 (Esop guidelines) in Sub-clause (1) of Clause 2, an employee has been exhaustively defined to include a director of the company, whether a whole-time director or not.
In view of Clause 4 of the Esop guidelines, as long as the non – whole-time director is not a promoter or does not belong to the promoter group or who, by himself, or through his relative or through any body corporate, directly or indirectly, does not hold more than 10% of the equity shares of the company, such a non whole-time director being an employee within the meaning of the Esop guidelines

shall be eligible to participate in the stock option scheme of the company.
The next question that arises is whether granting of options under the Esop guidelines would amount to remuneration to such non whole-time directors within the meaning of the Companies Act, ’56 (the Act). Under the Explanation to Section 198 of the Act, remuneration to directors is determined on the basis of expenditure incurred by the company for and in connection with the director.
The word `expenditure’ was judicially interpreted by the Supreme Court in the case of Indian Molasses vs Commissioner of Income Tax, (AIR ’59 SC 1049).
In this case, the Supreme Court held as follows: “`Expenditure’ is equal to `expense’ and `expense’ is money laid out by calculation and intention though in many uses of the word this element may not be present, as when we speak of a joke at another’s expense. But the idea of `spending’ in the sense of `paying out or away’ money is the primary meaning and it is with that meaning that we are concerned. `Expenditure’ is thus what is `paid out or away’ and is something which is gone irretrievably.”
The Supreme Court of India in the case of VM Salgaocar & Bros vs CIT, quoted with approval the judgement in the case of CIT vs Vazir Sultan Tobacco (’88) (173 ITR 290) (AP), on the question whether the difference between the concessional rate of interest and the prevailing market rate of interest on loans advanced to the employees was not a perquisite under Section 40-A (5) of the Income-Tax Act, ’61 (I-T Act), where it was held as follows:.
“This question has to be answered with reference to language employed in Sub-section (5) of Section 40-A of the I-T Act. Insofar as it is relevant, the provision reads thus: “Section 40-A (5) whether the assessee-incurs any expenditure which results directly or indirectly in the payment of any salary to an employee or a former employee, or incurs any expenditure which results directly or indirectly in the provision of any perquisite (whether convertible into money or not) to an employee or incurs, directly or indirectly, any expenditure or is entitled to any allowance in respect of any assets of the assessee used by an employee, either wholly or partly, for his own purposes or benefit, then subject to the provisions of Clause (b), so much of such expenditure or allowance as is in excess of the limit specified in respect thereof in Clause (c) shall not be allowed as deduction.”



Some work & some pay