MANAGERIAL REMUNERATION UNDER SECTION 197 OF THE COMPANIES ACT 2013 – AN ANALYSIS

MANAGERIAL REMUNERATION UNDER SECTION 197 OF THE COMPANIES ACT 2013 – AN ANALYSIS

Section 197 of CA 2013 deals with the overall maximum managerial remuneration and managerial Remuneration in case of absence or inadequacy of profits. According to this section, the total managerial remuneration payable by a public company, to its directors, including managing director and whole-time director, and its manager in respect of any financial year shall not exceed eleven per cent. of the net profits of that company for that financial year computed in the manner laid down in section 198 except that the remuneration of the directors shall not be deducted from the gross profits.

However, a company in general meeting may, with the approval of the Central Government, authorise the payment of remuneration exceeding eleven per cent. of the net profits of the company, subject to the provisions of Schedule V:

However , the remuneration payable to any one managing director; or whole-time director or manager shall not exceed five per cent. of the net profits of the company and if there is more than one such director remuneration shall not exceed ten per cent. of the net profits to all such directors and manager taken together;

The remuneration payable to directors who are neither managing directors nor whole-time directors shall not exceed,—

(a) one per cent. of the net profits of the company, if there is a managing

or whole-time director or manager;

(b) three per cent. of the net profits in any other case.

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 and if it is not able to comply with such provisions, with the previous approval of the Central Government.

Any remuneration for services rendered by any such director in other capacity shall not be so included if—

a)the services rendered are of a professional nature; and

b) in the opinion of the Nomination and Remuneration Committee, if the company is covered under sub-section (1) of section 178, or the Board of Directors in other cases, the director possesses the requisite qualification for the practice of the profession.

In calculation of the above , the sitting fees paid to directors for attending the board meeting will not be taken into account.

An independent director shall not be entitled to any stock option and may receive remuneration by way of fees provided under sub-section (5), reimbursement of expenses for participation in the Board and other meetings and profit related commission as may be approved by the members.

Thus , under the Companies Act 2013, independent directors of a public company can be paid commission other than sitting fees and reimbursement of expenses for attending the meeting provided if the shareholders approval is available for the same.

Any amount paid in excess to director other than prescribed under the above provisions shall be refunded by the director and a company cannot waive the same.

 

In case , if a company which has inadequacy of profits shall have to get the prior approval from Central Government in addition to shareholders approval in excess of the limits specified in the Schedule V ( Earlier Schedule XIII).

Every listed company shall disclose in the Board’s report, the ratio of the remuneration of each director to the median employee’s remuneration and such other details as may be prescribed.

Any premium paid on the insurance policy to cover the risk for managing director or other directors or Company Secretary shall not form the part of the above limit.

Section 197 of the Company Act 2013 also does not bar a managing or whole-time director of a company to receive compensation from its holding company or subsidiary provided the same should be disclosed in the director’s report.

Any contravention of the provisions of section 197 of CA 2013 shall end up with a fine of minimum of Rs 1 lac with a maximum of Rs 5 lacs.

Section 198 of Companies Act 2013 prescribes the method of calculation of net profits for the purpose of managerial remuneration.

Part II of Schedule V ( earlier Schedule XIII) – Remuneration Payable by a company in case where is no profit or inadequacy of profit without central government is detailed below

Where Effective Capital is	Limit of Yearly Remuneration payable shall not exceed (Rupees)
(i)Negative or less than 5 Crores	30 lakhs
(ii) 5 Crores and above but less than Rs 100 Crores	42 lakhs
(iii) 100 crores and above but less than 250 crores	60 lakhs
(iv) 250 Crores and above	60 lakhs plus 9.91% of the effective capital in excess of Rs 250 crores

A company with inadequate profit may pay to its managing director or whole-time director 200% of the above mentioned managerial remuneration if shareholders have given their approval through a special resolution.

Where the managerial person who is not holding Rs 5 lacs worth of shares or more or an employee or a director of the company not related to any director or promoter at any time during the two years prior to his appointment as a managerial person, In such cases , the company can pay to him up to maximum of 2.5% of the current relevant profits and up to 5% with the approval of shareholders by a special resolution.