Transition period for Managerial Remuneration


This is very settled law that law applicable at the time of any act or action is law applicable to that action. This is also applicable on Company Law and for that matter also on managerial remuneration also.

The provisions of Schedule XIII (sixth proviso to Para (C) of Section ll of Part ll) of the Companies Act, 1956 (Earlier Act) and as clarified vide Circular number 14/11/2012-CL-VII dated 16th August, 2012, which allowed listed companies and their subsidiaries to pay remuneration, without approval of Central Government, in excess of limits specified in para II Para (C) of such Schedule if the managerial person met the conditions specified therein.

Similar provisions are not available in the Schedule V of the Companies Act, 2013. There is no need to worry because law that time was clear and applicable to the terms and conditions of agreement entered into that time. However, absence of similar provision in present law, may have a question that whether present law discontinue and invalidate act done under earlier law. Many stakeholders asked for a need for a clarification that a managerial person appointed in accordance with such provision of Schedule XIII of Earlier Act may receive relevant remuneration for the period as approved by the company in accordance with such provisions of Earlier Act.

Now, Ministry of Corporate Affairs through its General Circular 07/2015 dated 10th April 2015 clarified this transitional matter.

A managerial person may continue to receive remuneration for his remaining term in accordance with terms and conditions approved by company as per relevant provisions of Schedule XIII of earlier Act even if the part of his/her tenure falls after 1st April, 2014.

Now the question raised by this circular is very pertinent. The phrase used in the circular “a managerial person referred to in para 1 above may continue to receive” denote all other person receiving remuneration as per provision of earlier Act, may not continue to receive remuneration for remaining term.

Please note, the Companies Act, 2013 does not ask companies and managerial personnel to discontinue agreement in continuation at the time of new Act come into force. All agreements related to Managerial Remuneration under the provision of the Companies Act 1956.

CAUTION UPDATE:

Please note following points before working on the circular discussed here:

  1. There is no Circular number 14/11/2012-CL-VII dated 16th August, 2012 referred in the circular issued by Ministry of Corporate Affairs.
  2. Nearest possibility is that this circular may be talking about notification issued under File number 14/11/2012-CL-VII dated 16th August 2012 which is available on site of Ministry of Corporate Affairs here.
  3. The Proviso VI to Para (C) of Section II of Part II of Schedule XIII referred in present circular was inserted by a notification dated 14th July 2011 which is available on site of Ministry of Corporate Affairs here.
  4. The Notification dated 16th August 2012 does not talk about listed companies and their subsidiaries but companies in general.
  5. The Notification dated 16th August 2012 which is applicable to all companies that time clarified that any employee of a company holding shares of the companies up to 0.5% of paid up share capital therof under any scheme formulated for allotment of shares to such employees including under Employee’s Stock Option Plan or by way of qualification shares are also covered under the category of person not having any interest in the capital of the company in terms of the Ministry’s Notification 534(E) dated 14.07.2011.
  6. The notification 534(E) dated 14.07.2011 inserted proviso VI which is also referred in present circular.
  7. The Proviso VI as inserted on 14th July 2011 provided that no approval of central government is required if the managerial person is not having any interest in the capital of the company or its holding company, directly or indirectly or through any other statutory structures and not having any direct or indirect interest or related to directors or promoters of the company or its holding company at any time during last two years before or on the date of appointment and is having a graduate level qualification with expert and specialized knowledge in the field of his profession.
  8. Interestingly, the proviso V was also inserted on same date as a result of substitution of earlier Proviso IV substituted by not one but two proviso.
  9. Proviso V inserted as above said manner provided that “a listed company or a subsidiary of a listed company shall not require Central Government approval for the payment of remuneration to its managerial personnel, if the remuneration is fixed by Board of Industrial and Financial Reconstruction.”
  10. However, this seems clear Proviso VI stand alone. The word “The” refer to company to main provision that is Section II of which this is a proviso and an independent proviso. The word “the” does not refer any earlier proviso because which is not a proviso of earlier proviso. [Readers may Please share your views on this interpretation]
  11. For the sake of interest new Proviso IV came into effect by the notification provided that “approval of Central Government is not require for a subsidiary of a listed company, if- (i) the Remuneration Committee and Board of Directors of the holding company give their consent for the amount of such remuneration of the applicant and for the said amount to be deemed remuneration by the holding company for the purpose of Section 198 of the Companies Act 1956 and (ii) a special resolution has been passed at the general meeting of the company for payment of remuneration of the applicant and (iii) the remuneration of the applicant is deemed to be remuneration paid by holding company and (iv) all members of subsidiary of body corporate.

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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10 responses to “Transition period for Managerial Remuneration

  1. Pingback: Index of Companies Law Posts | AishMGhrana

  2. Shaurya Nijhawan

    In points no. 4 and 5 of Cautionary Updates above, you imply that the notifications and circulars referred in your article should ideally be covering all companies (as opposed to only listed companies & subsidiaries thereof).

    I guess you missed second proviso to clause (C) of Paragraph 1, Section II, Part II of Schedule XIII as amended by Notification No. GSR 70(E), dated 8-2-2011
    http://www.mca.gov.in/Ministry/notification/pdf/GSR_70(E)_08feb2011.pdf

    “provided that the prior approval of the Central Government is obtained for payment of remuneration on the above scale
    if the company is a listed company or a subsidiary of a listed company”

    What I mean is the circular issued by MCA presents the whole case in a more simple manner. Please correct me if I am wrong.

    Thanks

    Like

    • Please, refer to Para 7 and 10 of Cautionary Updates above.
      MCA take law “simply” but does not present law simply. A circular with wrong fact does not serve any purpose.

      Like

      • Shaurya Nijhawan

        Corrigendum – in second paragraph of my reply, the third proviso is what I was referring to (not the second one)

        Regarding Interpretation:

        In para 10 of Cautonary Updates supra, you have attempted to interpret ‘the’ used in 6th proviso.

        Here’s my interpretation on how companies not listed are not covered by these provisos:

        Case A: Refers to main provision only
        if you read all provisos, ‘the’ precedes ‘company’ – which means that all these provisos are directly related to Paragraph 1 (“… , a company has no profits …”). That is, ‘the company’ wherever used in the provios, refers to ‘a company’ introduced in Paragraph 1. Also because wherever a requirement arose to describe the company as listed or not, everywhere, ‘a listed company’ has first been used in each of the provisos.

        Case B: Might as well refer to third proviso – regarding it as main provision
        Now, before Notification No. GSR 70(E), the position that stood was that approval of Central Government was required for payment of remuneration as per the limits laid down in Clause (C). Thus, this was applicable for unlisted companies also. (have not done background check on this though)

        After the said notification, requirement was only imposed on listed companies or their subsidiaries vide 3rd proviso

        Regarding your contention of independence of 6th proviso, in particular, that it must be applicable to companies not listed – I believe that since this proviso was inserted after (and not before) the insertion of GSR 70(E), its application starts prospectively (obviously) and it provides an exception to
        the second proviso (see 4th, 5th and 6th – all are of the same nature). Function of a proviso is to carve out an exception or limit the application of the main provision (which for 4th, 5th and 6th provisos is the 3rd proviso – regard as main provision)

        Final word

        Also, as per general rule of construction, a proviso has to be read as part of the main provision and not as an independent provision itself. To judge whether a proviso is a substantive provision or not, regard must be had to the substance (content) of the proviso and not its form. Think about the intent of this 6th proviso.

        Further, refer punctuation marks at the end of each proviso – a colon

        Your take on this?

        Like

        • If we are interpreting these proviso for academic interest, this may be good exercise but drafting is very poor and conflicting interpretation are possible up to Supreme Court.
          Otherwise, present circular is not required at all because of simple legal principles regarding applicability and interpretation. Basic reply of hidden query (if any) is already somewhere in this post.

          Like

          • Shaurya Nijhawan

            Regarding issuance of present circular: People generally would swear by (read: follow) if something is written. If not, there would be presence of conflicting views in many minds which could lead to that not being followed. Hence the requirement.

            Like

            • 1. Circular has just legal opinion of the department.
              2. MCA not permitted to issue circular under the Companies Act, 2013 hence circular has no legal value.
              3. Present circular with all wrong legal reference in it, has no legal value.

              Like

  3. Why only listed companies and not unlisted public companies. There were provisio 6 in earlier Schedule XIII which allowed exemption to all the Companies from taking central government’s approval if director is not a promoter or person related to them and is not holding any interest in the shares of the Company. What was the need to use phrase “Listed Companies and subsidiaries of listed company” in the present clarification

    Like

  4. see, the word ‘a’ used here is meant for general purpose and not for counting purpose. So a managerial person means managerial person in general and not one managerial person.

    Like

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