MANAGERIAL REMUNERATION – The Companies Act, 2013

OVERALL MANAGERIAL REMUNERATION IN TERMS OF THE COMPANIES ACT, 2013 AND SEBI (LISTING OBLIGATIONS AND DISCLOSURE REQUIREMENTS), REGULATIONS, 2015

INTRODUCTION

The term “remuneration” has been defined under Section 2 (78) of The Companies Act, 2013, (“Act”), which means any money or its equivalent given or passed to any person for services rendered by him and includes perquisites as defined under the Income-tax Act, 1961.

As per Schedule V of the Act, remuneration includes reimbursement of any direct taxes to the managerial person.

In simple words, managerial remuneration means any remuneration paid by the Company to managerial persons, i.e. its directors, including managing director and whole-time director, and its manager. The provisions of managerial remuneration are governed by Section 197, 198, 199 and Schedule V of the Act.

DETERMINATION OF REMUNERATION

The remuneration payable to the directors of a company, including any managing or whole-time director or manager, shall be determined (subject to the provisions Section 197 of the Act) and in accordance with either by:

1. the articles of the company, or
2. by a resolution or,
3. if the articles so require, by a special resolution, passed by the company in general meeting

The remuneration payable to a director determined aforesaid shall be inclusive of the remuneration payable to him for the services rendered by him in any other capacity:

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

1. the services rendered are of a professional nature; and
2. in the opinion of the Nomination and Remuneration Committee (if the company is covered under  section 178 (1)),or the Board of Directors in other cases, the director possesses the requisite qualification for the practice of the profession.

OVERALL MANAGERIAL REMUNERATION ALLOWED TO MANAGERIAL PERSONS IN TERMS OF SECTION 197 OF THE ACT READ WITH SCHEDULE V

A. WHERE THE COMPANY HAS ADEQUATE PROFITS

1. 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 11% of the net profits of the company. However, the company in general meeting may, authorise the payment of remuneration exceeding 11%. of the net profits of the company, subject to the provisions of Schedule V.

2. The following is overall limits of managerial remuneration that cannot be exceeded except with the approval of the company in general meeting by a special resolution:

B. WHERE THE COMPANY DOES NOT HAVE ADEQUATE PROFITS

1. If, in any financial year, a company has no profits or its profits are inadequate to pay the remuneration fixed by the board, the company cannot payto its directors (including any managing or whole time director or manager) remuneration except in accordance with the provisions of schedule V of the Act. [Section 197(3)]
2. Section II Part II of Schedule V,also states that where in any financial year during the tenure of a managerial person, a company has no profits or its its profits are inadequate, it may, pay remuneration to the managerial person not exceeding, the limits under (A) and (B) given below:-

Provided that the remuneration in excess of above Iimits may be paid if the resolution passed by the shareholders is a special resolution.

Explanation: – It is hereby clarified that for a period less than one year, the limits shall be pro-rated.

In case of a managerial person who is functioning in a professional capacity, remuneration as per item (A) may be paid, if 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 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 and possesses graduate level qualification with expertise and specialised knowledge in the field in which the company operates:

Provided that 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;

Provided further that the limits specified under items (A) and (B) of this section (as mentioned in point 2 above) shall apply, if-

1. 1. Payment of remuneration is approved by a resolution passed by the Boardand, in the case of a company covered under Section 178 (1) also by the Nomination and Remuneration Committee;
   2. the company has not committed any default in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, and in case of default, the prior approval of the bank or public financial institution concerned or the non-convertible debenture holders or other secured creditor, as the case may be, shall be obtained by the company before obtaining the approval in the general meeting.
   3. an ordinary resolution or a special resolution, as the case may be, has been passed for payment of remuneration as per 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.
   4. a statement along with a notice calling the general meeting referred to in clause (iii) is given to the shareholders containing the information as provided in Schedule V.

C. Other Cases: Remuneration payable by companies having no profit or inadequate profit in certain special circumstances:

In the following circumstances a company may, pay remuneration to a managerial person in excess of the amounts provided in points 1 to 5 above (i.e. Section II of Part II of Schedule V of the Act) :

(a) where the remuneration in excess of the limits specified in Section I or II of Part II of Schedule V of the Act is paid by any other company and that other company is either a foreign company or has got the approval of its shareholders in general meeting to make such payment, and treats this amount as managerial remuneration for the purpose of section 197 and the total managerial remuneration payable by such other company to its managerial persons including such amount or amounts is within permissible limits under section 197.

(b) where the company—

(i) is a newly incorporated company, for a period of seven years from the date of its incorporation, or

(ii) is a sick company, for whom a scheme of revival or rehabilitation has been ordered by the Board for Industrial and Financial Reconstruction for a period of five years from the date of sanction of scheme of revival, or

(iii) is a company in relation to which a resolution plan has been approved by the National Company Law Tribunal under the Insolvency and Bankruptcy Code, 2016 for a period of five years from the date of such approval, it may pay any remuneration to its managerial persons.

(c) where remuneration of a managerial person exceeds the limits in Section II but the remuneration has been fixed by the Board for Industrial and Financial Reconstruction or the National Company Law Tribunal:

Provided that the limits under this Section shall be applicable subject to meeting all the conditions specified under Section II and the following additional conditions:—

• except as provided in para (a) of this Section, the managerial person is not receiving remuneration from any other company;
• the auditor or Company Secretary of the company or where the company has not appointed a Secretary, a Secretary in whole-time practice, certifies that all secured creditors and term lenders have stated in writing that they have no objection for the appointment of the managerial person as well as the quantum of remuneration and such certificate is filed along with the return as prescribed under sub-section (4) of section 196.
• the auditor or Company Secretary or where the company has not appointed a secretary, a secretary in whole-time practice certifies that there is no default on payments to any creditors, and all dues to deposit holders are being settled on time.

Remuneration to Non-Executive Directors (Including Independent Director) In Case Company has no profits or inadequate profits

As per the provisions of Section 197(5) read with Schedule V of the Act, if company has no profits in any financial year, only managerial personnel are entitled to remuneration. Hence, it cannot pay remuneration to its non-executive directors (Including Independent Director) except the sitting fees.

However as per Companies Amendment Act, 2020, there is a new proviso inserted in section 149(9) and section 197(3) has been amended, which provides that non-executive directors (Including independent director) may receive remuneration, if a company has no profits or inadequate profits in accordance with Schedule V of the Act, by aligning the same with the provisions for remuneration to executive directors in such cases.

Other relevant points:

1. The net profits shall be calculated in terms of Section 198 of the Act.
2. 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, the prior approval of the bank or public financial institution concerned or the non-convertible debenture holders or other secured creditor, as the case may be, shall be obtained by the company before obtaining the approval in the general meeting.

SITTING FEES

The aforesaid remuneration will be exclusive of the sitting fees payable under Section 197(5) of the Act.

Rule 4 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 mentions that 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:

Further, for Independent Directors and Women Directors, the sitting fee shall not be less than the sitting fee payable to other directors.

Fuurther that different fees for different classes of companies and fees in respect of independent director may be such as may be prescribed.

1. Perquisites not included in managerial remuneration: (as per Schedule V of the Act)
2. A managerial person shall be eligible for the following perquisites which shall not be included in the computation of the ceiling on remuneration specified in Section II and Section III of Part II of Schedule V of the Act:—

(a) contribution to provident fund, superannuation fund or annuity fund to the extent these either singly or put together are not taxable under the Income-tax Act, 1961 (43 of 1961);
(b) gratuity payable at a rate not exceeding half a month’s salary for each completed year of service; and
(c)encashment of leave at the end of the tenure.

2. In addition to the perquisites specified in paragraph 1 of this section, an expatriate managerial person (including a non-resident Indian) shall be eligible to the following perquisites which shall not be included in the computation of the ceiling on remuneration specified in Section II or Section III—
   (a) Children’s education allowance: In case of children studying in or outside India, an allowance limited to a maximum of Rs. 12,000 per month per child or actual expenses incurred, whichever is less. Such allowance is admissible up to a maximum of two children.

(b) Holiday passage for children studying outside India or family staying abroad: Return holiday passage once in a year by economy class or once in two years by first class to children and to the members of the family from the place of their study or stay abroad to India if they are not residing in India, with the managerial person.

(c) Leave travel concession: Return passage for self and family in accordance with the rules specified by the company where it is proposed that the leave be spent in home country instead of anywhere in India.
Explanation I.—For the purposes of Section II of this Part, “effective capital” means the aggregate of the paid-up share capital (excluding share application money or advances against shares); amount, if any, for the time being standing to the credit of share premium account; reserves and surplus (excluding revaluation reserve); long-term loans and deposits repayable after one year (excluding working capital loans, over drafts, interest due on loans unless funded, bank guarantee, etc., and other short-term arrangements) as reduced by the aggregate of any investments (except in case of investment by an investment company whose principal business is acquisition of shares, stock, debentures or other securities), accumulated losses and preliminary expenses not written off.
Explanation II.— (a) Where the appointment of the managerial person is made in the year in which company has been incorporated, the effective capital shall be calculated as on the date of such appointment;
(b) In any other case the effective capital shall be calculated as on the last date of the financial year preceding the financial year in which the appointment of the managerial person is made.

Explanation III.— For the purposes of this Schedule, ‘‘family’’ means the spouse, dependent children and dependent parents of the managerial person.

Explanation IV.— The Nomination and Remuneration Committee while approving the remuneration under Section II or Section III, shall—

(a) take into account, financial position of the company, trend in the industry, appointee’s qualification, experience, past performance, past remuneration, etc.;

(b) be in a position to bring about objectivity in determining the remuneration package while striking a balance between the interest of the company and the shareholders.

Explanation V.— For the purposes of this Schedule, “negative effective capital” means the effective capital which is calculated in accordance with the provisions contained in Explanation I of this Part is less than zero.

Explanation VI.— For the purposes of this Schedule:-

“Remuneration” means remuneration as defined in clause (78) of section 2 and includes reimbursement of any direct taxes to the managerial person.

REMUNERATION PAYABLE BY PRIVATE COMPANY:

As per the provisions of Companies Act, 2013, the restriction under Section 197 and Section 198 shall apply only when managerial remuneration or remuneration paid by a public Company. Hence, any remuneration paid or payable by a private company to its director shall be out of purview of the above said section and shall not be counted for the purpose of maximum remuneration payable by the company.

SEBI (LISTING OBLIGATIONS AND DISCLOSURE REQUIREMENTS REGULATIONS), 2015, AS AMENDED, FOR NON-EXECUTIVE DIRECTORS – Regulation 17 (6)

1. The board of directors shall recommend all fees or compensation, if any, paid to non-executive directors, including independent directors and shall require approval of shareholders in general meeting.
2. The requirement of obtaining approval of shareholders in general meeting shall not apply to payment of sitting fees to non-executive directors, if made within the limits prescribed under the Companies Act, 2013 for payment of sitting fees without approval of the Central Government.
3. The approval of shareholders mentioned in clause (a), shall specify the limits for the maximum number of stock options that may be granted to non-executive directors, in any financial year and in aggregate.
4. The approval of shareholders by special resolutionshall be obtained every year, in which the annual remuneration payable to a single non-executive director exceeds fifty per cent of the total annual remuneration payable to all non-executive directors, giving details of the remuneration thereof.
5. Independent directors shall not be entitled to any stock option.
6. The fees or compensation payable to executive directors who are promoters or members of the promoter group, shall be subject to the approval of the shareholders by special resolution in general meeting, if-

(i) The annual remuneration payable to such executive director exceeds rupees 5 crore or 2.5 per cent of the net profits of the listed entity, whichever is higher; or

(ii) where there is more than one such director, the aggregate annual remuneration to such directors exceeds 5 per cent of the net profits of the listed entity:

Provided that the approval of the shareholders under this provision shall be valid only till the expiry of the term of such director.

Explanation: For the purposes of this clause, net profits shall be calculated as per section 198 of the Companies Act, 2013.

xxx

Post your query on rajnikant@rmpsco.com

Please follow and like us: