Why are it not allowed independent directors for ESOP?

Suvant Kesharwani

Under section 149 (1) (c) of the Business Law, 2013Independent directors in India cannot receive options on employee actions (ESOP) to preserve their impartiality and guarantee an impartial corporate governance. ESOP granting can create a pecuniary relationship with the company, which can compromise its independence. However, independent directors can obtain commissions based on earnings together with rates in the session, provided the shareholders. This raises questions about the consistency of these financial incentives. Profit -based commissions, when linked to operational profits, are considered less risky than ESOP, which are driven by the market and susceptible to short -term manipulation. Unlike the ESOP, the commissions are auditable and they are less likely to influence immediate decision making for personal gains. Worldwide, developed countries such as the United States, the United Kingdom and Singapore allow independent directors to receive ESOP with safeguards, as longer adjudication periods, to align their interests with the growth of the company in the long term. This approach guarantees fair compensation without compromising governance standards. The debate in India continues: could such practices adopt to balance independence with the appropriate rewards for independent directors?

Section 149 (1) (c) of the Business Law, 2013It prohibits independent directors from receiving options on employee actions (ESOP). For the following reasons:

to. The fundamental principle behind an independent director is to guarantee impartiality and equity in corporate governance.

b. Granting ESOP could create a material pecuniary relationship between the company and the independent director, which can restrict its independence.

But by contradiction: The Commission based on profits can be granted to independent directors (IDS)

If financial incentives impact independence, why do independent directors allow commissions based on profits, while ESOPs remain prohibited?

We are going to immerse ourselves deeply:

• Independent directors can receive commissions based on earnings together with the sitting rates, but only with the prior approval of the shareholders.
• The key question: Is the Commission based on profits influences the independence of independence?

Risk involved:

• If the profits of an independent director are linked to short -term profits, will they not be attracted to immediate profits on the long -term stability of the company?
• Accounting profits can easily manipulate through non -operational income such as:
• Premium on issues of obligations
• Win for sale of assets
• Investment returns
• Some companies counteract this by linking the commission of independent directors only with operational profits, which provides a fairer representation.
• Why does the equation justify why he was appointed by the director first?

Operational profits = Gain of the Independent Director

So why are the ESOP more risky than the Commission based on profits?

The global perspective

• In developed countries, independent directors can receive ESOP but with longer award periods.
• Countries such as the United States, the United Kingdom and Singapore allow independent directors to receive ESOP with conditions that guarantee the creation of long -term value and adequate compensation to IDs.
• This guarantees that independent directors focus on the long -term growth of the company instead of the price of short -term shares.
• After a period, when the company grows genuinely, you can take advantage of the benefits of ESOP without compromising independence.

The final thought

The debate on ESAPSS versus commissions based on profits for independent directors highlights a central theme: how do we guarantee that corporate governance remains impartial and at the same time compensate for those who take care of it?

Would India benefit from ESOP with longer award periods for independent directors such as other global economies? May the debate continue!