Annual Compliance

Managerial Remuneration of Managing and Whole-time Directors

Managerial remuneration in the simple words is a remuneration paid to managerial personnel. Here managerial personnel includes directors both managing director and whole-time director and also the manager. As profits drive the business, incentives drive the directors of the business. It’s important, in a fiercely competitive corporate environment^[1], to decide managerial remuneration in the management. Also, the incentives are necessary for performing the challenging role of managing companies. It is equally necessary not to go overboard with perks and pay. In India, it is required to monitor an unnecessary profit squandering by the companies and, at the same time, it is ensured that adequate and reasonable compensation is given to managerial personnel. The law intervenes while maintaining the balance through an act.

Managerial Remuneration to Personnel

Section 197 of Companies Act, 2013 provides a maximum ceiling for payment of the managerial remuneration in a public company to its managing director or whole-time director and manager. However, it must not exceed 11% of the net profit of a company in particular financial year computed according to the provisions of section 198 except that the remuneration of the directors has not to be deducted from the gross profits.

In furtherance, the company in a general meeting with the approval of the Central Government may authorize the payment of remuneration exceeding to 11% of the net profits of the company with subject to the provisions given in Schedule V.

The remuneration payable to a managing director or whole-time director or manager must not exceed 5% of the net profits of a company. In case when there is more than one director, the remuneration must not exceed 10% of the net profits to all the directors and managers taken together.

Except and otherwise with the approval of a company in general meeting, the remuneration payable to those directors who are neither managing directors nor whole-time directors must not exceed to—

— 1% of the net profits of a company,

— 3% of the net profits in any of the other case

The percentages mentioned will be exclusive for any fees payable to directors who attend the meeting of the board/committees or for other purposes as decided by the Board.

Remuneration paid by a Company when no Profit or Inadequate Profit

In case of any financial year, where the company has made no profits or its profits are inadequate, then the company must not pay to its directors including both managing or whole-time director any remuneration except according to the provisions of Schedule V and approval of the Central Government.

However, when Schedule V is applicable on the grounds of no profits or inadequate profits, the provisions in relation to the increase in remuneration of any director must not have any effect unless such increase is according to the conditions specified in such Schedule and required the approval of the Central Government.

Remuneration of Directors in other Capacity [Section 197(4)]

The remuneration payable to the directors including both managing and whole-time director must be inclusive with the remuneration payable for any services rendered by them in the other capacity. Except in the following circumstances:

(a) The services rendered are of professional in nature; and

(b) In the opinion of the Nomination and Remuneration Committee or the Board of Directors as the case may be, the director possesses the requisite qualification to practice such profession.

Sitting Fees to Directors for Attending Meetings [Section 197(5)]

A director can receive remuneration in the form of fees for attending any of Board/Committee meetings or for other purposes as may be specified by the Board. Provided that the amount of particular fees must not exceed the amount as specified.

The Central Government rules prescribed the amount of sitting fees payable to the director who attends the meeting of the Board or committee as decided by the Board of directors or the Remuneration Committee. The fees must not exceed the sum of rupees 1 lakh per meeting of the Board or committee.

The Board has the right to decide different sitting fee which will be payable to independent directors other than whole-time directors.

Monthly Remuneration of Directors and Managers

A director or manager has to be paid remuneration by way of a monthly payment or by a fixed percentage of the net profits made by a company. It can be paid by either way partly by one and partly by others. [Section 197 (6)]

An independent director must not be entitled to a stock option, and he can receive remuneration in the form of fees or reimbursement of expenses for participation in the Board or profit related commission as prescribed and approved by members. [Section 197 (7)]

Any director who receives of any commission by the company and who is a managing or whole-time director of the company must not be disqualified from receiving any further remuneration or commission from such holding company or subsidiary company subject to its disclosure made by them in the Board’s report. [Section 197 (14)]

Remuneration Drawn in Excess of the Prescribed Limit

In case if any director receives or draws, directly or indirectly, by way of remuneration any sum of amount which is in excess of the limit prescribed and also without any prior sanction of the Central Government, then it is required by the director to refund such amount back to the company. [Section 197(9)]

The company cannot waive any recovery of the amount as refundable to it under sub-section 9 unless permitted by the Central Government. [Section 197 (10)]

Is Insurance Premium a Part of Remuneration

When any insurance is taken by the company on behalf of its managing director or whole-time director, Chief Financial Officer, Chief Executive Officer, or Company Secretary to indemnifying them against any liability in regard to any negligence, misfeasance, default, breach of trust or breach of duty, then the premium paid on such insurance must not be treated as part of the remuneration payable to any personnel.

However, if any of the persons is proved to be guilty, the premium paid on such insurance will be treated as part of remuneration. [Section 197(13)]

Disclosure of Remuneration in the Board Report [(Section 197 (14)]

Every listed company have to disclose in the Board’s report, the ratio of the remuneration paid from each director to all employees and also other such details as may be prescribed.

The central government rules specified the following disclosure made by the listed company in its Board’s report:

(i) The ratio of remuneration paid to each director to the remuneration of the employees of a company in that financial year

(ii) Increase in percentage of director’s remuneration and remuneration of CEO in that financial year

(iii) Increase in percentage of remuneration of employees in that financial year

(iv) Number of all permanent employees in the company

(v) The relationship between the average increase in remuneration and company’s employees’ performance

(vi) Comparison in the remuneration of the Key Managerial Personnel which is against the performance of a company

(vii) variations in the market capitalization of a company, price-earnings ratio as on closing date of the current financial year and previous financial year and also percentage increase over the decrease in the market quotations of the shares of a company in comparison to the rate at which a company was with the last public offer. The variations in the net worth of a company in the previous financial year and current financial year;

(viii) Average increase of percentage that already made in the remunerations of employees other than that of managerial personnel last financial year and its comparison with the current financial year

(ix) Comparison of the remuneration of each key Managerial Personnel against the performance of a company

(x) The key parameters of any variable component for remuneration availed by the directors

(xi) The ratio of the remuneration as of highest paid director to that of the employees who are not directors and the receiving of remuneration in excess of the highest paid director during that year

(ix) Affirmation of remuneration as per the remuneration policy of a company.

The Board’s report must also include the statement that shows the name of each employee of the company who-

(i) If employed in the current financial year, and has received the remuneration in that year, in the aggregate, which must not less than 60 lakh rupees;

(ii) If employed in that financial year, and has received the remuneration for any part of the year, in the aggregate, at a rate which must not less than 5 lakh rupees per month;

(iii) if employed in a whole financial year or part, and received remuneration in that year, in the aggregate, at a rate which, is in excess of that is drawn by a managing director or whole-time director which is held by himself or with his spouse, must not less than 2% of the equity shares of a company.

The particulars of employees posted and working outside India, but not being a director or his relatives, draws more than 60 lakh rupees per financial year or 5 lakh rupees per month, must not be included in the Board’s report but such particulars have to be filed with the (ROC) Registrar of Companies while filing the financial statement and Board Reports. The particulars must be available for any shareholder on a specific request made by him during the course of the annual general meeting when the financial statements for the financial year are proposed to be adopted by the shareholders.

Managerial Remuneration under Schedule V (Part II)

Section I: Remuneration by Companies making Profits

A company making profits in a financial year has to pay remuneration to all its managerial persons according to Section 197.

Section II: Remuneration by Companies making no profits or inadequate profits without Central Government approval

When in any financial year during the currency of tenure of a managerial person, if a company makes no profits or if its profits are inadequate then without the approval of Central Government it can pay remuneration to the managerial person not exceeding the higher of the limits as mentioned below:

The effective capital	Limit of yearly remuneration which must not exceed to (Rs)
Less than 5 Crore	30 Lakhs
Less than 100 Crore and 5 Crore or above	42 Lakhs
Less than 250 Crore and 100 Crore or above	60 Lakhs
250 Crore or above	60 Lakhs

Explanation: – It is clarified that for the period less than 1 year, the limits shall be pro-rated.

The Schedule V also specifies certain conditions and additional disclosures which are to be made in an explanatory statement to the notice of the general meeting, when remuneration is required to be paid according to the Schedule V

Section III Remuneration in Special Circumstances

Section III of Schedule V talks about special circumstances under which companies make no profit or inadequate profit to pay any remuneration to its managerial personnel in excess of amount as provided in Section II above, or with Central Government’s approval.

Net Profit for the purpose of Managerial Remuneration (Section 198)

Section 198 of Companies Act, 2013, states about the manner of calculations of net profits of any financial year for a company in regard to Section 197.  Sub- Section (2) of the section states the calculations of sums for which credit will be given whereas sub-section (3) specifies the sums for which credit must not be given while calculating the net profit. In the same way, sub-section (4) and sub-section (5) specifies the sums which must be deducted and which must not be deducted while calculating the net profits.

Recovery of the Managerial Remuneration in certain cases (Section 199)

This is a newly added provision introduced in the Act. It specifies about the recovery of remuneration that including stock options as received by the specified Managerial Personnel. When the benefits are given to personnel and are found in excess, it must be recovered.

Conclusion

The new Act has considerably liberalized the provisions concerning Managerial Remuneration, will be subject to adequate disclosures to the shareholders. The necessity of approaching Central Government for the approval has been substantially dispensed with-

1. No approval of the Central Government is required for giving payment of salary to Non-Executive Directors by way of monthly payment provided it is within limits provided. There are some concluded points
2. Independent Directors can be paid different Sitting Fees compared to other directors. They can receive remuneration only by way of sitting fees, or reimbursement of expenses for participation in the Board and other meetings or profit related commission as approved by the members of the company.

For remuneration payable to any Director in any other capacity, if such services are of professional nature, no approval of the Central Government is required, when the Nomination and Remuneration Committee or Board of Directors is of the opinion, that the person possesses the necessary qualification for the practice of the profession.

Read our article:Types of Committee as per the Companies Act, 2013