Amendment in Schedule V

Ministry of Corporate Affairs, on 12^th September 2016 issued notification amending Schedule V of the Companies Act, 2013. Schedule V deals with managerial remuneration in cases of inadequate profit and to some extend managerial appointment in public companies.

Penalty under previous companies law

Before the present amendment sub – paragraph (vi) of paragraph (a) of part I of Schedule V of the Companies Act, 2013 as discussed earlier here read as –

“No person shall be eligible for appointment as a managing or whole-time director or a manager (hereinafter referred to as managerial person) of a company unless he satisfies the condition, that he had not been sentenced to imprisonment for any period, or to a fine exceeding one thousand rupees, for the conviction of an offence under the Companies Act, 2013.”

This provision inadvertently did not mentioned about previous company law. The effect of this inadvertent omission, a person who was punished with imprisonment or fine exceeding one thousand rupees under the Companies Act, 1956 or the Companies Act, 1913.

Now, this omission has been rectified –

“No person shall be eligible for appointment as a managing or whole-time director or a manager (hereinafter referred to as managerial person) of a company unless he satisfies the condition, that he had not been sentenced to imprisonment for any period, or to a fine exceeding one thousand rupees, for the conviction of an offence under the Companies Act, 2013 or any previous company law.”

Remuneration Payable in case of inadequate profit

Section II of Part II of Schedule V of the Companies Act, 2013 has been substituted by this amendment. This section relates to remuneration payable by companies having no profit or inadequate profit without Central Government approval.

Remuneration in case of any managerial personnel

Where in any financial year during the currency of tenure of a managerial person, a company has no profits or its profits are inadequate, it may, without Central Government approval, pay remuneration to the managerial person not exceeding the limits given in clause (A) –

Double the remuneration

Above limits shall be doubled if the resolution passed by the shareholders is a special resolution. [Proviso to clause (A)]

Managerial Person in professional capacity

A managerial person functioning in a professional capacity may get any amount of remuneration without Central Government approval on satisfaction of following conditions that such managerial person –

• is not having any interest in the capital of the company or its holding company or any of its subsidiaries directly or indirectly or through any other statutory structures [Independent from company], and
• not having any direct or indirect interest or related to the directors or promoters of the company or its holding company or any of its subsidiaries at any time during the last two years before or on or after the date of appointment [Independent from promoters and directors], and
• possesses graduate level qualification with expertise and specialised knowledge in the field in which the company operates [Professional expertise and knowledge].

Interest in the company

Any employee of a company holding shares of the company not exceeding 0.5% of its paid up share capital under any scheme formulated for allotment of shares to such employees including Employees Stock Option Plan or by way of qualification shall be deemed to be a person not having any interest in the capital of the company. [Proviso to section (b) of section II of part II of Schedule V]

Statutory Structure

“Statutory Structure” means any entity which is entitled to hold shares in any company formed under any statute. [Explanation to Schedule V of the Companies Act, 2013]

Difference with Section 197(4)

As discussed earlier here, according to sub – section (4) of section 197 of the Companies Act, 2013 read with its proviso, 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.

However, Clause (B) does not talk about professional income of any director of the company but income of a professional director of the company.

General conditions for managerial remuneration

In relation to both clauses (A) and (B), following conditions shall apply –

• 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 [approval by Board and NRC, if required];
• the company has not committed any default in repayment of any of its debts (including public deposits) or debentures or interest payable thereon for a continuous period of thirty days in the preceding financial year before the date of appointment of such managerial person and in case of a default, the company obtains prior approval from secured creditors for the proposed remuneration and the fact of such prior approval having been obtained is mentioned in the explanatory statement to the notice convening the general meeting [in case of default, prior approval by secured creditor];
• an ordinary resolution or a special resolution, as the case may be, has been passed for payment of remuneration as per the limits laid down in item (A) or a special resolution has been passed for payment of remuneration as per item (B), at the general meeting of the company for a period not exceeding three years [Approval in GM].
• a statement along with a notice calling the general meeting referred to in clause (iii) is given to the shareholders containing the information mentioned in the Schedule V.