Paying Directors for Professional Services: Guidelines and Limits

Picture a company board that includes a director who also happens to be a practising chartered accountant. If that director prepares a tax valuation report for the company, should the fee be treated the same as their director’s salary? Company law says no, provided a few conditions are met. This carve-out under the Companies Act, 2013 lets directors earn separately for professional work without breaching the strict ceilings placed on managerial remuneration.

Why managerial remuneration is capped in the first place 🔗

Under Section 197 of the Companies Act, 2013, a public company’s total managerial remuneration to its directors, managing director, whole-time director, and manager cannot exceed 11% of net profits in a financial year. Within this ceiling, a single managing director or whole-time director is generally capped at 5% of net profits, and this rises only with shareholder approval through a special resolution.

These limits exist to stop promoters and executive directors from quietly draining company profits through inflated pay packages, at the cost of minority shareholders. The law assumes that whatever a director earns from the company, in whatever role, should count toward this cap, since Section 197(4) states that remuneration determined for a director is inclusive of pay for services rendered by them in “any other capacity.”

The professional services carve-out 🔗

That inclusive rule would create an odd problem. If a director happens to also be a lawyer, architect, or cost accountant, and the company genuinely needs their professional services, folding their professional fees into the managerial remuneration cap would either force the company to underpay them for real work or force it to breach the statutory ceiling. The law resolves this through a proviso to Section 197(4), which excludes such payments from the managerial remuneration calculation altogether, as long as two conditions are satisfied.

Condition one: the services must be professional in nature 🔗

The work must fall within a recognised profession, not general business or administrative tasks dressed up as “consultancy.” A director who is a practising Chartered Accountant preparing the company’s tax computations, or an advocate representing the company in litigation, is rendering professional services. A director simply overseeing daily operations or supervising staff, even if titled a “consultant,” is not.

Condition two: the director must hold the requisite qualification 🔗

The director must actually be qualified to practise that profession. This is not a formality. A membership certificate, licence, or degree recognised by the relevant regulatory body, such as the Institute of Chartered Accountants of India or the Bar Council, is what establishes eligibility. Without this qualification, the fee cannot be treated as professional income and would instead be clubbed with managerial remuneration.

Who approves this: NRC or the full board 🔗

Meeting these two conditions is not enough on its own. Someone within the company has to formally record the opinion that the conditions are satisfied, and the law specifies exactly who that is.

Companies with a Nomination and Remuneration Committee 🔗

Under Section 178(1), certain classes of companies, including every listed public company and unlisted public companies crossing prescribed thresholds of paid-up capital, turnover, or borrowings, must constitute a Nomination and Remuneration Committee (NRC). In these companies, it is the NRC that must form the opinion that the director possesses the requisite qualification before the professional fee can be excluded from managerial remuneration.

Companies without an NRC 🔗

Where a company is not required to have an NRC, this opinion is instead formed by the Board of Directors as a whole. Either way, the approval is not a rubber stamp. The NRC’s broader mandate under the Act includes recommending remuneration policy for directors and key managerial personnel, which makes it a natural body to also vet claims of professional service exemptions when it exists.

What this looks like in practice 🔗

Suppose a listed manufacturing company has an independent director who is also a practising company secretary. The company engages this director to conduct a secretarial audit or draft compliance documentation, work distinct from board duties. If the NRC records its opinion that the director holds a valid Company Secretary qualification and that the assignment is genuinely professional, the professional fee paid can sit outside the 11% managerial remuneration ceiling.

Contrast this with a director who is asked to “consult” on marketing strategy despite holding no marketing-related professional qualification. Even if this work is billed separately, it would not qualify for the exemption, since neither condition, professional nature nor requisite qualification, is clearly met. Such payments would need to be folded back into the managerial remuneration calculation.

Why the law builds in this exception 🔗

Company law does not want to discourage companies from tapping the specialised expertise sitting on their own boards. A tax expert, a lawyer, or an actuary who happens to be a non-executive director can add real value beyond attending board meetings. Requiring the company to either overpay them nominally as “directorial” compensation or forgo their professional input entirely would be counterproductive. The exemption strikes a balance: it lets companies pay market-rate professional fees while still preserving the intent of Section 197, which is to prevent management from siphoning off profits under the guise of remuneration.

This principle also connects to the wider mandate of the NRC. As governance commentary from law firms notes, the committee’s role is meant to ensure remuneration decisions are made with independence and scrutiny, not merely as a formality, which is part of why its recommendations carry weight in Indian corporate governance, even though shareholders retain ultimate voting power on remuneration matters.

Points auditors and companies watch closely 🔗

Because this is an exemption from a statutory cap, it invites scrutiny. A few practical safeguards typically come up:

• Documentation of the opinion: The NRC or Board must record, usually through board minutes, that it has specifically considered and approved the professional nature of the service and the director’s qualification.
• Arm’s length pricing: The fee charged should reflect what an unrelated professional would charge for similar work, not an inflated figure designed to bypass the remuneration cap.
• Genuine separation of roles: The professional assignment should be clearly distinguishable from the director’s board-level responsibilities, with its own scope, deliverables, and engagement terms.
• Auditor disclosure: Under the Act, the statutory auditor is required to report on whether remuneration paid to directors complies with Section 197, which indirectly puts pressure on companies to justify any amount excluded under this provision.

Companies that get this wrong risk having the “professional fee” reclassified as disguised managerial remuneration during an audit or regulatory review, which can trigger the same compliance consequences as breaching the 11% cap outright.

How this fits into the bigger managerial remuneration picture 🔗

This provision is best understood as one carefully carved exception within a much larger framework. Sections 196 to 198, along with Schedule V, together govern how directors are appointed and paid, what happens when a company has inadequate profits, and how remuneration is calculated. The professional services exemption does not dilute this framework; it simply recognises that not every payment to a director is compensation for managing the company. Some payments are for expertise the company would have had to buy externally anyway, only now it happens to be sitting on the board.

What do you think? If you were designing an NRC’s checklist for approving a director’s professional fee, what evidence would you want to see before signing off on it? And should the same exemption logic apply to private companies that aren’t required to constitute an NRC at all?

References

1. https://www.indiacode.nic.in/show-data?actid=AC_CEN_22_29_00008_201318_1517807327856&orderno=182
2. https://indiankanoon.org/doc/168868116/
3. https://ibclaw.in/section-178-of-the-companies-act-2013-nomination-and-remuneration-committee-and-stakeholders-relationship-committee/?print=pdf
4. https://taxguru.in/company-law/nomination-remuneration-committee-role-requirements-companies-act.html
5. https://corporate.cyrilamarchandblogs.com/2022/12/gatekeepers-of-governance-nomination-and-remuneration-committee/