MANAGERIAL REMUNERATION IN CASE OF IN ADEQUATE PROFIT

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

Managerial remuneration is one of major corporate governance issue in India. Promoters and controlling shareholders consider themselves owner of company and get maximum remuneration. Difference between corporate tax rate and income tax rate also priority to withdraw much money from “owned” company. Indian concept of “owned company” and corporate governance has co – existence in last two decades.

In my last post, I did not analyse legal issues of managerial remuneration in case of inadequate profit under Companies Bill 2012 (Now the Act).

Section 197 of the companied Bill 2012 in its sub section (3) and (11) say that 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.

CONDITIONS OF APPOINTMENT (PART I SCHEDULE V):

A person should satisfy following conditions for appointment as managerial person:

1. He had not been sentenced to imprisonment for any period or to a fine exceeding Rs. One thousand for the conviction of an offence under 26 Acts listed in schedule.
2. He had not be detained for any period under COFEPOSA, 1974.

Central Government may permit to appoint any person as managerial person not satisfying these two conditions.

1. He has completed the age of 21 years and not attained age of seventy years. However a person may be appointed as managerial person with Central Government permission.
2. Where he is managerial person of more than one company ceiling under Section V of Part II will apply.
3. He is resident of India. A resident in India include a person who has been staying in India for a continuous period of not less than twelve months immediately preceding the date of his appointment as a managerial person and who has come to stay in India,— (i) for taking up employment in India; or (ii) for carrying on a business or vacation in India. A non-resident in India shall enter India only after obtaining a proper Employment Visa.

REMUNERATION (PART II SCHEDULE V)

Remuneration payable by companies having adequate profit in a financial year shall be as per Section 197. (Section I Part II Schedule V)

Remuneration in case of inadequate or no profit (Section II Part II Schedule V):

In case of inadequate or no profit, a company may pay to a managerial person without central government approval higher of the following two options (A or B):

1. As per following table with approval of company by ordinary resolution in general meeting or double of these limit with approval by special resolution:

Effective Capital (EC)

Negative to Rs. 5 Crore                                    Rs 30 Lakh yearly

Rs. 5 crore to Rs. 100 Crore                              Rs. 42 Lakh yearly

Rs. 100 crore to Rs.250 Crore                           Rs. 60 Lakh yearly

Rs. 250 Crore and above                                  Rs. 60 lakh + 0.01% of EC above                                                                      these Rs. 250 Crore

OR

1. In case of managerial person who was not a security holder holding securities of the company of nominal value of rupees five lakh or more or an employee or a director of the company or not related to any director or promoter at any time during the two years prior to his appointment as a managerial person, — 2.5% of the current relevant profit.

If, shareholders passes special resolution this limit will be double. This remuneration should be approved by resolution of Board of director and also by Nomination and Remuneration committee (where it is). The company has not made any default in repayment of its debt or debenture or interest thereon for a continuous period of 30 days in preceding financial year. The approval of remuneration by special resolution should be for not more than three years. The statement along with the notice of this resolution should provide information like:

(I)          General Information i.e. Nature of industry, commencement of production, Financial performance, Foreign investment or collaboration;

(II)        Appointee information i.e. Background, past remuneration, recognition or award, job profile, suitability, proposed remuneration, comparative remuneration profile, Pecuniary relationship;

(III)      Other information i.e. reason for loss or inadequate profit, step for improvement and expected increase.

(IV)       Disclosure in Board of Director’s report under corporate governance i.e. remuneration package, fixed component and performance linked incentives, service contract, notice period, severance fee, stock options.

Careful reading of Second Proviso, which is applicable as second proviso to both part of This Section, suggests, There must be Special Resolution in all case to safeguard all possible interpretation. 

Remuneration in case of inadequate or no profit in certain circumstances (Section III Part II Schedule V):

In these cases, the company may pay remuneration in excess of Section II:

1. Where remuneration in excess of these limit is paid by other company, which is within permissible limit under Section 197.
2. A company within seven year from its incorporation or a sick company within five years from sanction of scheme of revival may pay up to two times the amount permissible under Section II.
3. Remuneration fixed by BIFR or NCLT
4. An unlisted company in SEZ may pay up to Rs. 240 Lakh yearly.

The conditions are:

1. An auditor or Company Secretary of the company or company secretary in practice has certifies that
   1. all secured creditors and term lenders have stated in writing that they have no objection for the appointment of the managerial person as well as the quantum of remuneration and such certificate is filed along with the return as prescribed.
   2. There is no default on payments to any creditors, and all dues to deposit holders are being settled on time.
2. For Para (b) and (c), the managerial person is not receiving remuneration from any other company.

Perquisites not included in managerial remuneration (Section IV Part II Schedule V):

1. A managerial person shall be eligible for:
   1. Contribution to provident fund, superannuation fund or annuity fund to the extent these either singly or put together are not taxable under the Income-tax Act.
   2. gratuity payable at a rate not exceeding half a month’s salary for each completed

     Year of service; and

1. encashment of leave at the end of the tenure
2. A expatriate managerial person shall be eligible for:
   1. Children’s education allowance
   2. Holiday package studying outside India or family staying outside India.
   3. Leave travel concession

Remuneration payable to a managerial person in two companies (Section V Part II Schedule V):

A managerial person shall draw remuneration from one or both companies. The total remuneration drawn should not exceed the higher maximum limit admissible from any company of which he is a managerial person.

GENERAL CONDITION (PART III SCHEDULE V):

1. The remuneration shall be approved by a resolution of shareholders in general meeting.
2. The Auditor or Company Secretary of company or company secretary in practice certify that the requirement of this Schedule have been complied with and such certificate shall be incorporated in the return filed with the Registrar.

EXEMPTION BY CENTRAL GOVERNMENT (PART IV SCHEDULE V):

The Central Government may, by notification, exempt any class or classes of companies from any of the requirements contained in this Schedule.

Effective capital:

The aggregate of the paid-up share capital (excluding share application money or advances against shares); amount, if any, for the time being standing to the credit of share premium account; reserves and surplus (excluding revaluation reserve); long-term loans and deposits repayable after one year (excluding working capital loans, over drafts, interest due on loans unless funded, bank guarantee, etc., and other short-term arrangements) as reduced by the aggregate of any investments (except in case of investment by an investment company whose principal business is acquisition of shares, stock, debentures or other securities), accumulated losses and preliminary expenses not written off.

Where the appointment of the managerial person is made in the year in which company has been incorporated, the effective capital shall be calculated as on the date of such appointment. In any other case the effective capital shall be calculated as on the last date of the financial year preceding the financial year in which the appointment of the managerial person is made.

Please note: this blog post is not a professional advice but general information about the subject covered here.