We have already discussed remuneration of managerial personnel under Section 197 read with Schedule V of the Companies Act 2013. In addition to managerial remuneration under Section 197 a company may pay sitting fees to its directors.
According to Rule 4 of the Companies (appointment and Remuneration of Managerial Personnel) Rule 2014, a company may pay a sitting fee to a director for attending meetings of the Board or committees thereof, such sum as may be decided by the Board of directors thereof which shall not exceed one lakh rupees per meeting of the Board or committee thereof. For Independent Directors and Women Directors, the sitting fee shall not be less than the sitting fee payable to other directors.
In case of inadequacy of profit, the company may have to follow certain procedure, as we have discussed earlier here.
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.
According to Rule 6 of the Companies (appointment and Remuneration of Managerial Personnel) Rule 2014, the company and the Central Government shall have regard to following matters in relation to managerial remuneration:
(a) the Financial and operating performance of the company during the three preceding financial years.
(b) the relationship between remuneration and performance.
(c) the principle of proportionality of remuneration within the company, ideally by a rating methodology which compares the remuneration of directors to that of other directors on the board who receives remuneration and employees or executives of the company.
(d) whether remuneration policy for directors differs from remuneration policy for other employees and if so, an explanation for the difference.
(e) the securities held by the director, including options and details of the shares pledged as at the end of the preceding financial year.
Accordingly, remuneration policy of the company shall have regard to these matters.
According to Section 197(3), a company has no profits or its profits are inadequate, the company shall not pay to its directors, including any managing or whole – time director or manager, by way of remuneration any sum exclusive of any fees payable to directors except in accordance with the provisions of Schedule V and if it is not able to comply with such provisions, with the previous approval of the Central Government. A company may need to make an application to seek approval from Central Government for appointment, reappointment, payment of remuneration including increase in remuneration, waiver of excess remuneration to the managerial personnel (managing director or whole time director or manager) and payment of commission or remuneration to directors or modification in terms and conditions of appointment.
According to Rule 7 of these Rules, every application made to the Central Government under the provisions of Chapter XIII shall be made in Form MR – 2 and shall be accompanied by fee as may be specified for the purpose. [Rule 7(1)]
The companies other than listed companies and subsidiary of a listed company may without Central Government approval pay remuneration to its managerial personnel, in the event of no profit or inadequate profit beyond ceiling specified in Section II, Part II of Schedule V, subject to complying with the following conditions namely:-
(i) payment of remuneration is approved by a resolution passed by the Board and, in the case of a company covered under sub-section (1) of section 178 also by the Nomination and Remuneration Committee, if any, and while doing so record in writing the clear reason and justification for payment of remuneration beyond the said limit;
(ii) the company has not made any default in repayment of any of its debts (including public deposits) or debentures or interest payable thereon preference shares and dividend on preference shares for a continuous period of thirty days in the preceding financial year before the date of payment to such managerial personnel;
(iii) the approval of shareholders by way of a special resolution at a general meeting of the company for payment of remuneration for a period not exceeding three years;
(iv) astatement along-with a notice calling the general meeting referred to clause (iii) of sub-rule (2) above, shall contain the information as per sub clause (iv) of second proviso to clause (B) of section II of part-II of Schedule V of the Act including reasons and justification for payment of remuneration beyond the said limit;
(v) the company has filed Balance Sheet and Annual Return which are due to be filed with the Registrar of Companies. [Rule 7(2)]
Every such application seeking approval shall be made to the Central Government within a period of ninety days from the date of such appointment. [Rule 7(3)]
We have discussed Application in Form MR – 2 earlier here.
Please note: This blog post is not a professional advice. I welcome your comments and feedback. Readers may share this post on social media by using buttons given here.