[NOTE: The law stated in this post is effective from 12th September 2018. For the law applicable from 1st April 2014 till 11th September 2018, please visit here and here.
In this post, we will discuss managerial remuneration. The managerial remuneration in case of inadequate profit shall be discussed in a future post, soon.
Applicability
There is no restriction relating to managerial remuneration for a private company. {Section 197(1)}
Total managerial remuneration and certain limits
Total managerial remuneration payable by a public company to its directors (including Managing Director and Whole Time Director) and Manager in a financial year shall not exceed eleven per cent of net profit of the company. The manner of calculation is given in Section 198. For calculation of such net profit, the remuneration of the directors shall not be deducted from the gross profits. {Section 197(1)}
Net profit for this section shall be computed as per method given in Section 198. {Section 197(8)}
Any remuneration exceeding 11% of net profit limit may be payable subject to compliance of conditions given in Schedule V.
It is important to understand how Schedule V comes into picture which deals with remuneration in case of inadequate profit. Let us assume an amount Rs. Z for managerial remuneration. The net profit to approve such remuneration under section 197(1) should be Rs. [Z*100/11]. Any amount which is less than Rs. [Z*100/11] is inadequate profit for this section.
With effect from 12th September 2018, the company in general meeting may authorise the payment of remuneration exceeding eleven per cent of the net profits of the company, subject to the provisions of Schedule V. There is no requirement of approval from the central government for payment of remuneration under section 197 and Schedule V of the Act. {First Proviso to Section 197(1)}
The remuneration of anyone Managing Director or Whole Time Director or Manager shall not exceed 5% of net profit. Where, there is more than one Managing Director or Whole Time Director, the overall limit is 10% of net profit. {Second Proviso to Section 197(1)}
The remuneration to other directors shall not exceed 3% of net profit, where there is no Managing Director, Whole – Time Director or Manager. In any other case, remuneration shall not exceed 1% of net profit. {Second Proviso to Section 197(1)}
Where a remuneration exceed respective limits of 1%, 3% 5%, or 10% specified in section 197 in any manner, it become remuneration in case of inadequate profit and attract approval company in general meeting by special resolution, subject to the provisions of Schedule V. {Second Proviso to Section 197(1)}
A prior approval is required, where the company has defaulted in payment of dues to:
- any bank; or
- public financial institution; or
- non-convertible debenture holders; or
- any other secured creditor.
Such prior approval shall be obtained from the bank or public financial institution concerned or the non-convertible debenture holders or other secured creditors, as the case may be, by the company before obtaining the approval in the general meeting. {Third Proviso to Section 197(1) with effect from 12th September 2018}
The percentage as mentioned in sub – section (1) shall be exclusive of any fee payable as sitting fee {Section 197(2)}. Sub – section (5) deals with sitting fee and discussed hereinafter.
Remuneration beyond Limitation
If in any financial year, 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 under sub-section (5) hereunder except in accordance with the provisions of Schedule V. This may be noted carefully that profit of the financial year in which remuneration is being paid should be calculated not of the previous financial year. However, the sitting fee may be paid. {Section 197(3)}
In cases where Schedule V is applicable on grounds of no profits or inadequate profits, following provision relating to the remuneration of any director which purports to increase or has the effect of increasing the amount thereof shall not have any effect unless are in accordance with the conditions specified in that Schedule:
- the provision contained in the company’s memorandum or articles, or
- in an agreement entered into by the company, or
- in any resolution passed by the company in general meeting or its Board. {Section 197(11)}
Determination of remuneration
The remuneration payable to any director shall be determined:
- by articles of the company or
- by resolution or
- by a special resolution passed by the company where its articles required for special resolution.
The remuneration payable to directors shall be inclusive of all remuneration payable to him for services rendered by him in any other capacity.
Any remuneration for services rendered by any such director in other capacities shall not be so included, where:
- services rendered are of professional in nature; and
- in the opinion of Nomination and Remuneration Committee or of Board of Directors as the case may be, a director has requisite qualification for the practice of a profession. {Section 197(4)}
Parameters for consideration of remuneration
The company shall have regard to the following matters while considering the remuneration of managerial personnel, namely:-
(1) the Financial and operating performance of the company during the three preceding financial years.
(2) the relationship between remuneration and performance.
(3) 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.
(4) whether remuneration policy for directors differs from remuneration policy for other employees and if so, an explanation for the difference.
(5) the securities held by the director, including options and details of the shares pledged as at the end of the preceding financial year.
{Rule 6 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules 2014, as amended}
Sitting Fee and other fees
A Director may receive remuneration by way of fee for attending meetings of the Board or committee thereof. The Board may also decide fee payable for the director for any other purpose whatsoever as may be decided by the Board. The amount of such remuneration shall not exceed the amount prescribed by the Government. {Section 197(5)}
Payment terms
Remuneration of Director or Manager may be paid monthly payment or otherwise by way of specified percentage of profit or partly by one and partly by another way. {Section 197(6)}
This requires specific drafting and calculation skill to comply with the provision of taxation, labour and other laws as may be applicable to the director. A mistake of calculation may require the refund of remuneration already paid to a director.
Certain limit on remuneration of Independent director
An independent director shall not be entitled of any stock option.
An independent director may receive a fee as per sub – section (5),
- reimbursement of expenses for participation in the Board and other meetings and
- profit related commission as approved by members (in general meeting). {Section 197(7)}
Refund of Excess Remuneration
If any director receives directly or indirectly by way of remuneration any sum in excess of the prescribed limit, he shall refund such sum. Such refund shall be made within two years or such lesser period as may be allowed by the company. Until refund, he will keep this sum in trust for the company. {Section 197(9)}
The company shall not waive the recovery of any sum refundable to it under sub-section (9) unless approved by the company by special resolution within two years from the date the sum becomes refundable. {Section 197(10)}
Please keep in mind that such waiver requires Central Government approval in case of such refund was due before 2 years from 12th September 2018. However, there may not be any mechanism remain for this purpose.
Disclosure in Listed Companies
Every listed company shall disclose ration of remuneration of each director to the median employees’ remuneration and such other details as prescribed. {Section 197(12)}
Premium paid for “Kay Managerial Personnel Liability Insurance”
Premium paid for “Kay Managerial Personnel Liability Insurance” shall not be included to the remuneration of any key managerial personnel. However, if such a person found guilty, such premium shall be treated as part of their remuneration. {Section 197(13)}
The rider requires caution. It may be advisable to access the risk of found guilty properly. The amount paid for a certain period may become part of remuneration years later on the pronouncement of guilt by the court of law.
Remuneration from other companies
Any director, receiving the commission from the company and Managing Director or Whole Time Director may receive any remuneration or commission from the holding company or subsidiary company. This information shall be disclosed by the company in the Board’s Report. {Section 197(14)}
Accordingly, a director receiving communication or remuneration may receive remuneration or commission from holding and subsidiary companies but not any other company.
Report by Auditor
The auditor of the company shall, in his report under section 143, make a statement as to whether the remuneration paid by the company to its directors is in accordance with the provisions of this section, whether remuneration paid to any director is in excess of the limit laid down under this section and give such other details as may be prescribed. {Section 197(16)}
This provision is applicable with effect from 12th September 2018. Most of the audit reports for year 2017-18 or any period earlier than that were already signed by this date.
Pending applications
On and from the commencement of the Companies (Amendment) Act, 2017, any application made to the Central Government under the provisions of this section as it stood before such commencement, which is pending with that Government shall abate, and the company shall, within one year of such commencement, obtain the approval in accordance with the provisions of this section, as so amended. {Section 197(17)}
Penal provision
If any person contravenes the provisions of this section, he shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.
AishMGhrana 