APPOINTMENT OF MANAGING DIRECTOR AND MANAGER


UPDATE: on 30th August 2013: Companies Bill 2012 became the Companies Act, 2013 (Act 18 of 2013).

Managing Director is Key Managerial Personal of utmost importance. He is face of a company and its decision-making mechanism. A person gain significant advantages as Managing Director which may not be there, in case of his appointment as Manager or Chief Executive Officer. While Chief Executive Officer has no special advantage except his clubbing as Key Managerial Personnel with Manager and Managing Director, Manager has some. Their definitions speak themselves. Appointment of Managing Director, Whole – Time Director and Manager is governed by provision of Section 196 of the Bill. They all are a different class of Key Managerial Personnel and has specific provision of appointment in addition of Section 203, discussed in an earlier post.

APPOINTMENT OF MANAGING DIRECTOR, WHOLE – TIME DIRECTOR OR MANAGER (SECTION 196):

A company can appoint either Managing Director or Manager not both. {Sub – section (1)}

Appointment of Managing Director, Whole – Time Director or Manager shall only be for a term which must be less than five years. However, the company may re-appointment them for next term before expiry of their present term but not earlier than one year before expiry of the term. This means, company may re-appoint them for next term in last one year of current term.  {Sub – section (2)}

.

The minimum age for appointment for these positions is twenty – one years and normal retirement age is seventy years. Words used in this Section are “shall appoint or continue the employment of”.  A company may appoint a person on these positions, who has attained the age of seventy years. Where it is proposed to appoint a person who has attained aged of seventy years, an explanatory statement justifying such appointment shall be annexed to the notice for motion of appointment. {Sub – section (3)}

Appointee should not be an un-discharged insolvent nor has any time been adjudged as an insolvent. Appointee has not any time suspended payment to his creditors or has made a composition with them. Appointee should not be a convict of an offence and sentenced for a period of more than six months. {Sub – section (3)}

Board of Directors in its meeting shall appoint Managing Director, Whole Time Director or Manager, subject to the approval of the company in its next General Meeting. This appointment should be in accordance with provision of Section 197 and Schedule V. Where, such appointment is at variance to the conditions specified in the schedule, this appointment shall also be subject to the approval of the Central Government. {Sub – section (3)}

The Notice convening Board or General Meeting for such appointment shall include terms and conditions of such appointment, remuneration payable and other matter including interests of directors in such appointment. {Sub – section (4)}

A return of such appointment shall be filed within sixty days of such appointment. {Sub – section (4)}

Provisions of this Section 196 are applicable to all companies; while, provisions of next Section 197 which deals with Managerial remuneration are to public companies.

There is a little difference in appointment of Manager, Managing Director or Whole – Time Director, which reflect from definition clause. While drafting agreement and resolution for such appointment, one should take care of respective definition. These positions solely depend upon drafting of appointment documents not only on the designation mentioned in these documents.

MANAGERIAL REMUNERATION (SECTION 197, 198):

There is no restriction relating to managerial remuneration for a private company. {Section 197(1)}

Total managerial remuneration payable by a public company to its directors (including Managing Director and Whole Time Director) and Manager in a financial year shall not exceed eleven percent of net profit of the company. Manner of calculation is given in Section 198. {Section 197(1)}

Any remuneration exceeding 11% of net profit limit may be payable subject to compliance of conditions given in Schedule V. In case these requirements of Schedule are not fulfilled, such remuneration will be subject to the approval of Central Government. {First Proviso to Section 197(1)}

The remuneration of any one Managing Director or Whole Time Director or Manager shall not exceed 5% of net profit. Where, there is more than one Managing Director or Whole Time Director, the overall limit is 10% of net profit. The remuneration may exceed this limit only after approval by company in general meeting and after satisfying the conditions given in this Section and Schedule V. {Second Proviso to Section 197(1)}

The remuneration to other directors shall not exceed 3% of net profit, where there is no Managing Director, Whole – Time Director or Manager. In any other case, remuneration shall not exceed 1% of net profit. {Second Proviso to Section 197(1)}

The percentage as mentioned in sub – section (1) shall be exclusive of remuneration popularly known as sitting fee. {Section 197(2)}

Net profit for this section shall be computed as per method given in Section 198. {Section 197(8)}

In case of no profit or inadequate profit, the company shall pay remuneration to directors, Managing Directors, Whole Time Directors and Managers in accordance with Schedule V or with previous approval of Central Government. {Section 197(3)} {Section 197(11)}

The remuneration payable to any director shall be determined either by articles of the company or by resolution or by special resolution passed by the company where its articles required for special resolution. The remuneration payable to directors shall be inclusive of all remuneration payable to him for services rendered by him in any other capacity except services rendered are of professional in nature and in opinion of Nomination and Remuneration Committee or of Board of Directors as the case may be, director has requisite qualification for practice of profession. {Section 197(4)}

A Director may receive remuneration by way of fee for attending meetings of the Board or committee thereof. The amount of such remuneration shall not exceed the amount prescribed by the Government. {Section 197(5)}

Remuneration of Director or Manager may be paid monthly payment or otherwise by way of specified percentage of profit or partly by one and partly by other way. {Section 197(6)}

An Independent Director shall not be entitled of any stock option. Independent Director may receive fee as per sub – section (5), reimbursement of expenses and profit related commission as approved by members (in general meeting). {Section 197(7)}

If any director receives directly or indirectly by way of remuneration any sum in excess of prescribed limit, he shall refund such sum. Until refund, he will keep this sum in trust for the company. {Section 197(9)}

Without Central Government permission, the company shall not waive recovery of any such sum. {Section 197(10)}

Every listed company shall disclose ration of remuneration of each director to the median employees’ remuneration and such other details as prescribed. {Section 197(12)}

Premium paid for “Kay Managerial Personnel Liability Insurance” shall not be included to the remuneration of any key managerial personnel. However, if such person found guilty, such premium shall be treated as part of their remuneration. {Section 197(13)}

Any director, receiving commission from the company and Managing Director or Whole Time Director may receive any remuneration or commission from holding company or subsidiary company. This information shall be disclosed by company in the Board’s Report. {Section 197(14)}

We will discuss calculation of profit for remuneration and provision of Schedule V in a future post.

Please note: this blog post is not a professional advice but general information about the subject covered here. I welcome your comments and feedback.

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98 responses to “APPOINTMENT OF MANAGING DIRECTOR AND MANAGER

  1. Thank you for the article. I’m new to accounting, please help with the following questions as nowhere on the net I could find answers for these.
    1. In a One Person Company (OPC), can the director working full-time be appointed as an executive director and get remuneration? If yes, does it require resolution?
    2. In a OPC, can a full time director take director remuneration directly? If yes, does it require resolution?
    3. If a director/ed takes remuneration, are these expenses corporate tax deductible?

    Like

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  4. Sir, Can a Whole Time Director be appointed as a Managing Director in (two) other companies?

    Like

  5. can there be a CEO and a MD in a same company?

    Like

  6. Which forms are required to be filed for re-appointment of MD in a pvt Ltd company?

    Liked by 1 person

  7. thanks a lot for your kind information..Dear Sir,
    Pl provide draft board resolution for remuneration and change in designation from WTD to executive director incase of unlisted public co. and which forms needs to be filed in this regard?

    Like

  8. Dear Sir,
    i have a query. what all forms are necessary to be filed to ROC? is Form DIR-12 required to be filed in case of re-appointment of MD & WTD? when is the agreement relating to their re-appointment required to be executed.. after the BM or after the approval received from Shareholders? Is the agreement required to be attached in Form MR-1?

    Like

  9. Dear Sir,

    For a Pvt. Ltd. co. (subsidiary of a Foreign co.):

    1. Is the MD full-time position? Or like a Director, MD can also be part-time?
    2. The MD was appointed in the 1st board meeting for one year (just resolved by Directors for him to be MD with immediate effect) without any remuneration or other details. The agreement between the Indian subsidiary and MD has still not happened i.e. MD does not have an appointment letter and is therefore on the rolls of his previous company. Is it okay or what corrective action needs to be taken?
    3. What procedure needs to be followed for MD to be designated as MD& CEO?

    Thanks and regards
    Surabhi

    Like

    • 1. Full time but, a person may be MD in two companies.
      2. Technically, it is wrong if not deputation, in present company form earlier company and evidence there.
      3. Resolution and Form DIR – 12.

      Like

      • Thank you Sir. I understand that technically it is wrong if there is no deputation from previous company to new company and evidence for it. In such a case, how to resolve the issue?(Example: The person may sign an agreement w.e.f. a future date and his MD full-time employmentsstarts from then. In the next board meeting the correction or new effective date can be made?)

        Regards
        Surabhi

        Like

  10. Nice article sir,
    i have a query w.r.t the appointment of MD in Pvt. Co.

    1.what would be situation if there is only two directors and they themselves are the only shareholders and are husband wife. meaning thereby is the other director is automatically interested in the appointment then only the resolution is suffiecient that the director in interested in the and in that case who will pass the said resolution?
    2.do we need to check the prov. of sec197 if the remuneration is at variance as per schedule V which talks abt section 197?
    3 if the appointing director is also a director of another pvt. co. can he withdraw a small amt. as remuneration?
    plz resolve my query as i am confused init.
    Thanks in advance

    Like

  11. Procedure for change in designation from Managing director to Director. is there any need to file forms with ROC and intimations to BSE?

    Like

  12. Procedure for change in designation from MD to Director? Is there any need to file forms with ROC and lntimations to BSE.

    Like

  13. Do we need to pass ordinary or special resolution for ratification at agm?
    and do we need to file MGT-14 again for ratification of appointment?

    Like

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  15. a person is whole-time director of a listed company and also an independent director in two other listed companies out of which he is also the Chairman of the audit committee of one company. He is also on the Board of 5 other public companies which are not listed companies. Three other private companies which are not subsidiary companies of any public company have invited him to join him as a director on their Board..
    Can he accept the offer??

    Like

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  17. Can a letter of appointment be given to an additional director to be appointed as a MD PRIOR to convening of the board meeting?

    Like

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  22. dear sir ,
    we require draft resolution and explanatory statement for reappointment of whole time director in a private limited company as per comapnies act,2013

    Like

  23. Sir,
    Pl tell what will be the procedure to appoint Manager in Sec 8 company
    If MR1 also required to be filed except DIR-12 and MGT14.
    Only through Board meeting is it possible or by EGM?

    Like

  24. radhika khandelwal

    WHETHER IT IS REQUIRED TO FILE FORM DIR-12 OR MR-1 FOR APPOINTMENT OF MANAGING DIRECTOR THROUGH ALTERATION IN AOA IN PRIVATE LIMITED COMPANY ?

    Like

  25. CS Radhika Raninga

    Public company having authorized share capital Rs. 40Lacs. and appointment of managing director. Then
    IS it compulsory to Draft Agreement for Appointment of MD?

    Like

  26. CS Vijay L Vyas

    WHETHER MANAGING DIRECTOR GETTING REMUNERATION (WHICH IS OVER AND ABOVE THE REMUNERATION PAYABLE TO OTHER NON EXECUTIVE DIRECTORS) WOULD BE CONSIDERED TO BE HOLDING ‘OFFICE OR PLACE OF PROFIT’ UNDER SECTION 188? IF YES, THEN WHETHER HIS RELATIVES CAN VOTE ON THE SPECIAL RESOLUTION APPROVING REMUNERATION OF MD?

    Like

  27. Thanks a ton sir
    want to change in designation from WTD into Director
    ok pass board resolution only but can co need to file MGT 14 for board resolution?

    Like

  28. Private company has two whole time directors wants to change the designation of both the directors into executive directors what compliance company needs to comply execpt filing of form DIR 12 either pass board resolution or special resolution? needs to file MGT 14 in case of change in designation of WTD into executive director?
    Thanku sir

    Like

  29. Sir, if a CEO is alredy appointed as per companies act, 1956, wherein there was no requirment of filing forms..
    But since companies act, 2013 mandates filing form DIR -12 and MR-1, what will be his date of apppintment..
    If its orginal date as per 1956 and form filing is done, that will attract additional fees.
    What should we do??
    Kindly revert

    Like

    • There was no Concept of CEO under earlier Act 1956, there is no issue of appointment of CEO under that Act. In That Act, CEO is a functional position not legal one. MD is legal position under both Acts.

      Now, a company which has a CEO as functional positional position want to appoint a person for position of CEO as legal position.

      The company may appoint same person with filing all required documents/forms with an appointment date after commencement of new Act of 2013 as a re-designation/reappointment. There is no question of appointment from “that original date”.

      Like

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  31. Dear Sir,

    Please let me know if a Company has appointed a Company Secretary as per the requirements of the Companies Act, 2013, is it mandatory to have digital signatures only of that Company Secretary on all the e-forms such as e-form DIR-12, e-form MGT-14 etc. instead of any of the Directors. Is it fine if the director signs the form, since nowhere in the Companies Act, 2013 it is mentioned that only Company Secretary has to sign all the e-forms, because Directors / CFO / CS all are authorised to sign the e-forms.

    Kindly confirm.

    Like

  32. I am the Managing Director of a Public Limited Company. My son works as Works Manager. I wish to appoint him to the board. If I do not increase his salary, do I need to go for a special resolution?

    Like

  33. Please let me know whether as per Companies Act, 2013, an alternate director can sign the financial statements-balance sheet, statement of profit and loss, cash flow statement.

    Like

  34. Dear Sir,

    Kindly guide me as to what is the procedure for payment of Managerial Remuneration exceeding 11% of net profits in a financial year for listed companies.

    Like

  35. I am 69 years old and MD of a public limited company. I was appointed MD for 5 years last year in July 2013. Sould I resign as soon I reach 70, even if I have not completed 5 years?

    Like

    • There is no legal requirement to resign.
      Your appointment is legally valid for 5 years.

      This will be your own decision depending upon your personal parameters and also willingness to follow legally “suggested” age of retirement under new Companies Act 2013.

      Like

  36. I would like to know, whether for the appointment of Manger in Pvt co, Is Shareholders approval required.

    Like

  37. Sir,

    Kindly confirm the following:-

    In case of re-appointment of whole-time director cum vice chairman in a private limited company, the following forms are required to be filed as per Companies Act, 2013 :-

    Form MGT-14 within 30 days of the Board Meeting
    Form MR-1 within 60 days of the Board Meeting
    Form DIR-12 within 30 days of the General Meeting

    Form MGT-14 and Form MR-1 should be filed after Board Meeting, because the Company cannot withheld the remuneration to be given to the whole-time director till the general meeting. And once the re-appointment is confirmed in the General Meeting, then Form DIR-12 should be filed as the confirmation of re-appointment.

    Kindly correct me if I am wrong.

    Like

    • DIR – 12 simultaneously with other forms.

      Like

      • Thanks a lot for your prompt response,

        So you mean to say that all three forms Form MGT-14, Form DIR-12 and Form MR-1 should be filed after board meeting and no form should be filed after general meeting.

        Kindly confirm, because it is not clearly mentioned in the Companies Act, 2013.

        Thanks.

        Like

        • 1. Board appoint Additional Director not Director, File form DIR – 12 for AD.
          2. General Meeting confirm Additional Director as Director, File Dir – 12 for change in Designation.

          Like

          • But this is the re-appointment of whole-time director who has already been appointed as an additional director back in 2007 and Form 32 was filed for the regularisation then as per Companies Act, 1956.

            In this regard, please let me know which forms should be filed for re-appointment of the whole-time director of a private limited company as per Companies Act, 2013. It is very confusing.

            Thanks.

            Like

  38. CS Vijay L Vyas

    Whether as per Sub Rule (2) of Rule-7 of the Companies(Appointment & Remuneration of Managerial Personnel)Rules, 2014 a Company which has only one Managing Director can pay him remuneration in excess of 5% of NP by passing Special Resolution at a general meeting for payment of remuneration for a period upto 3 years.. and no approval of Central Government would be required?
    (preconditions prescribed in Rule 7(2) need to be complied.)

    Like

  39. Sir, Thanks a lot for your replies. In my case, one of the director is unwell and cannot attend meetings or sign any papers. Company want to remove him from directorship. They are planning that they will show him absent from meetings and later on remove him. Till last year he was getting remuneration from company but this year company do not want him to give remuneration. Do I have to pass a resolution regarding non payment of any remuneration to director or submit any form to ROC?

    Like

  40. In a newly incorprated small private limited company, a MD was appointed in the Articles. Is it now necessary to file MGT 14 and MR 1 Forms in this case?

    Like

  41. I have filed DIR-12 for appointing of directors to MCA but later on I came to know that they are to be appointed as WTD. What remedy do I have now?

    With respect to remuneration of WTD of private companies only section 196 is applicable?

    Like

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  43. Hariom Rastogi

    I am in limbo with the provision governing Managing Director.
    My question is – one of the private company had appointed his director as MD of the Company in 2004 and filed physical Form 23. after that, nothing action has been taken regarding their reappointment or any form filing with ROC.

    Now, whether we need to make fresh appointment of MD as per CA 2013??

    Like

  44. Shivali Gupta

    Sir if private company had Managing director as per old Act, but as per new provisions there is no such requirement applicable on that company,
    then do we need to re-appoint that MD, if yes kindly provide the resolution for the same…..
    Plz reply
    thanks in advance….

    Shivali Gupta
    cs.shivaligupta707@gmail.com

    Like

  45. Mukesh Agarwal

    My question is related to transitioning of MD in a private company under 1956 and 2013 Act. The MD was appointed by the Board of Directors, without specifying any time for appointment. The resolution contained terms of appointment (as per appointment contract) but not remuneration as required in section 196 of the 2013 Act.
    Do I need to ratify the appointment of an existing MD complying with new requirements i.e. Board Approval, Shareholder approval, filings with ROC, resolutions to mention terms of appointment including REMUNERATION.

    Your views on this shall be highly appreciated.

    Regards

    Mukesh

    Like

  46. as per my understanding. schedule V is not applicable to private company. but if i m appionting MD and i hv inadequate profit then do i need to comply with schedule V ???

    Like

  47. Sneha Tibrewal

    A private limited company wishes to appoint one of it’s employee as a whole time director, who will continue to get salary from the company as decided by the management. What is the procedure to be followed by the company for such an appointment under companies act, 2013 ?

    Like

  48. Anil H. Parmar, ACS-10842

    Sir, your presentation on the applicability of various sections relating to MD is appreciable. I wish to ask whether (a) Only a Board Resolution for appointing and paying remuneration to MD will do as far as private limited company is concerned (b) A Board Resolution can be so drafted so as to take care of future increase/upward revision in the remuneration of MD say “Not exceeding Rs.3 lakh per month but subject to a minimum of Rs.2 lakh per month” so far as private limited is concerned (c) If such a resolution is passed, what amount is to be written in the form MR-1 in Point No.7 in the column of salary which is also to be signed by a a practising CA/CS etc. How will he certify if such a resolution is passed?

    Like

    • In my opinion, (a) Section 196(4) suggests appointment by board subject to approval by next General Meeting in all companies including private companies. (b)Yes Resolution can be so drafted. (c) In Pont 7(a) present salary 7(c) limits and annual increment.

      Like

  49. Nice write up.thanks.

    Sir, I hv small query…section 196 is applicable to all companies (Pvt and Pub) in new act, 2013.Whereas as sec 197 is applicable to Pub companies only.

    Now u/s 196 it has been mentioned that in case appointment is not made as per schedule-V, then approval of central government is required.

    1. Does this statement is applicable to Pvt company also.

    2. If yes, merely because Pvt company is having non-resident director, it need to take approval of CG as it s not meeting Schedule-V requirement.

    3. Their is confusion, one side it is appears that limits of remuneration is not applicable to Pvt, companies but on other hand sec-196 says that appointed should be subject to schedule -V and schedule-V if defining limits of remuneration in part-2 and part-03.

    Should private company also consider part-3 of schedule -V and if remuneration exceed the limit apply for CG approval. (It seems to contra of section 197).

    or Pvt companies should consider Part-1 of schedule V and not consider part-2 and 3 which is pertaining to remuneration.

    Thanks in anticipation.
    NS

    Like

    • Hope, you are referring to Sub – section (4) of Section 196. It starts with “Subject to the provisions of section 197 and Schedule V… ”
      Same time Sub – section (1) of Section 197 start with “The total managerial remuneration payable by a public company…”

      I read, “and” in sub- section (4) of Section 196 as connecting and binding both terms “Section 197” and “Schedule V”.

      I do not see applicability of Schedule V to private companies regarding remuneration.

      Like

  50. Facts:
    1. Public Company
    2. Two Managing Directors.

    Query:
    1. Payment to One MD can be 5 % or Less of Net profit ?
    2. Payment to One MD can be 5 % or more but less than 10 % of Net profit ?

    Please answer with case law if possible.

    Like

  51. Can a Director on the Board be appointed as CEO(KMP)

    Like

    • This is a very interesting question.
      The answer is given in Section 134 of the Companies Act 2012. This read, “The financial statement, including consolidated financial statement, if any, shall be approved by the Board of Directors before they are signed on behalf of the Board at least by the chairperson of the company where he is authorised by the Board or by two directors out of which one shall be managing director and the Chief Executive Officer, if he is a director in the company….”
      Clearly, a director of a company may be appointments as Chief Executive Officer of the company.

      Like

    • Thanks a ton for your prompt , clear and coherent answer

      Like

  52. thanks a lot for your kind information..

    Like

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