ISSUES RELATED TO MANAGERIAL REMUNERATION


We have much earlier discussed “Appointment of Managing Director and Manager” and “Managerial Remuneration in case of inadequate profit”. I understand, Section 197 read with Schedule V is a code for managerial remuneration. Now, we will discuss other relevant provision for managerial remuneration.

CALCULATION OF PROFIT (SECTION 198):

In computing the net profit of a company in any financial year credit shall be given for:

(a)  bounties; and

(b) subsidies received from any Government;

received from any government or public authorities unless and except so far as the Central Government otherwise direct.

In computing the net profit of a company in any financial year credit shall not be given for:

(a)  profit by way securities premium;

(b) profit on sale of forfeited shares;

(c)  profit of a capital nature;

(d)  profit from sale of immovable property or fixed assets or undertaking which exceed difference of original cost and its written – down value; and

(e)  any change in carrying amount of an assets or liability recognised in equity reserves including surplus in profit or loss account on measurement of the assets or the liability at fair value.

In computing the net profit of a company in any financial year, following sums shall be deducted:

(a)  all the usual working charges;

(b) directors’ remuneration;

(c)  bonus or commission paid or payable;

(d)  any tax notified by the Central Government as being the nature of a tax on excess or abnormal profits;

(e)  any tax on business profits imposed for special  reason or in special circumstances and notified by the Central Government in this behalf;

(f)   interest on debentures issued;

(g)  interest on mortgages and loan and advances secured by a charge on its fixed or floating assets;

(h)  interest on unsecured loans and advances;

(i)   expenses on repairs, whether to immovable or to movable property, provided the repairs are not of a capital nature;

(j)   outgoing inclusive of contributions made to charitable funds under section 181;

(k)  depreciation to the extent specified in section 123 at the time of depreciation;

(l)   the excess of expenditure over income in so far as such excess has not been deducted in any subsequent year preceding the year in respect of which the net profit have to be ascertained;

(m)                any compensation or damages to be paid for any legal liability;

(n)  any sum paid by way of insurance against the risk of legal liability; and

(o) debts considered bad and written off or adjusted during the year.

In computing the net profit of a company in any financial year, following sums shall not be deducted:

(a)  income tax, super tax or any other tax on the income of the company;

(b) any compensation, damages or payments made voluntarily  otherwise than in virtue of a liability;

(c)  loss of a capital nature including loss on sale of the one or more undertaking or part thereof not including any excess of the written – down value of any assets which is sold, discarded or destroyed over its sale proceeds or its scrap value;

(d)  any change in carrying amount of any assets or liability recognised in equity reserve including surplus in profit and loss account on measurement of the assets or the liability at fair value.

RECOVERY OF REMUNERATION IN CERTAIN CASES (SECTION 199):

Rupee Symbol

Rupee Symbol (Photo credit: karmadude)

Where a company re – state its financial statements due to fraud or non – compliance, the company shall recover from past and present managing director or whole – time – director or Manager or Chief Executive Officer who during that period received remuneration in excess of what would have been payable to him as per restatement of financial statement.

CENTRAL GOVERNMENT OR COMPANY TO FIX LIMIT WITH REGARD TO REMUNERATION (SECTION 200):

Under Section 196, where a appointment is proposed to be made with variation to the conditions under Section 197 and Schedule V, the appointment shall be approved by the company in general meeting and by the central government, otherwise by the company in general meeting.

Section 200 says, while approving any appointment or remuneration under Section 197, the company or the government may fix the remuneration at such amount or percentage of profit of the company but within the limits specified in this Act. The company in general meeting and the Central Government shall have regard to –

(a)  the financial position of the company;

(b) the remuneration or commission drawn by the individual concerned in any other capacity;

(c)  the remuneration or commission drawn by him from any other company;

(d)  professional qualification and experience of the individual concerned;

(e)  such other matters as may be prescribed.

FORM OF AND PROCEDURE IN RELATION TO CERTAIN APPLICATION (SECTION 201):

A prior general notice shall be issued by or on behalf of the company to the members indicating the nature of the application under this Chapter XIII.

Such notice shall be published at least once in a newspaper in the principal language of the district in which the registered office of the company is situate and circulating in that district and at least once in English in an English Newspaper circulating in that district.

The copies of the notices, together with a certificate by the company as to the due publication thereof shall be attached to the said application.

COMPENSATION FOR LOSS OF OFFICE OF MANAGING DIRECTOR OR WHOLE – TIME DIRECTOR OR MANAGER (SECTION 202):

A company may pay compensation for or in connection with loss of office or for retirement from office to a managing director or whole – time – director or manager.

No compensation in following cases –

(a)  where director resign from his office as a result of the reconstruction or amalgamation and appointed in a position in the reconstructed company or resulting company;

(b) where the director resign from his office;

(c)  where the office of director is vacated under Section 167 (1) vacation of office;

(d)  where the company is being wound up, provided the winding up was due to the negligence or default of the director;

(e)  where the director has guilty of fraud or breach of trust in relation to or gross negligence in or gross mismanagement of, the conduct of the affairs of the company or any subsidiary company or holding company thereof; and

(f)   where the director has instigated or has taken part directly or indirectly in bring about the termination of his office.

Amy payment of compensation shall not exceed the remuneration for remaining period of his term or for three years, whichever is shorter calculated on average actual remuneration for last three years.  Where he held the office for a lesser period than three years, than calculation shall be made on that period.

This section does not prohibit payment of any remuneration for services rendered by him to the company in any other capacity.

Please note: I welcome your comments and feedback. This blog post is not a professional advice. Readers may share this post on social media by using buttons given here.

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3 responses to “ISSUES RELATED TO MANAGERIAL REMUNERATION

  1. Pingback: AishMGhrana: 2014 in review | AishMGhrana

  2. Pingback: REMUNERATION OF DIRECTORS | AishMGhrana

  3. RAJENDRA PRASAD

    DETAILS PROVIDED ARE VERY HELPFUL PLEASE ALSO MENTION RULE REGARDING REMUNERATION PAYABLE TO DIRECTORS OF PVT LTD. COMPANY.

    Like

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