Disclosure of Remuneration- Board Report
Disclosure of Remuneration- Board Report
As we are aware that MCA has issued a Notification
dated 30th June, 2016 Companies (Appointment and Remuneration of
Managerial Personnel) Amendment Rules, 2016 and made some major amendments in
Rule 5 “Disclosure in Board’s Report -remuneration of employees”.
BACKGROUND:
Many professionals have been raising two questions on
interpretation of applicability of the Rules:-
i i. If Company
is not falling in limit of Rule 5(2) (a,b,c), whether company have to disclose
the name of top 10 employees or not in the Board’s Report?
ii. Whether all
the Companies have to disclose in the Board’s report, the
information regarding remuneration of employees and other details as given in Rule 5(2) OR only listed companies have to disclose?
Let’s first discuss the first question:
Whether Company have to disclose the name of top 10 employees if no
employee is falling in limit of Rule 5(2) (a,b,c). Some people hold a view that
Company have to disclose in directors’ report regarding name of top 10
employees only when those employee fall in criteria of Rule 5(2) (a,b,c). One
of the arguments put forth by the people supporting the first school of thought
where no employee is receiving salary as give in rule 5. Employees are getting
minimal salary in thousands then it doesn’t affect the interest of stake holder
therefore no need to disclose.
Statutory Provisions Contained Under the Act:
Provisions of the Companies Act, 2013 to the extent relevant for our
discussion, are stated as under (with necessary comments and modifications,
wherever felt necessary)
1. As stated in
Section 134(3)(q): The Company shall attach to the financial statement laid
before a company in general meeting, a report by its Board of Directors,
which shall include such other matters as may be prescribed.
Section
134 states that if anywhere in the Companies act, its mentioned that Company
will disclose such details in director Report then Company shall have to comply
the same and have to disclose such details in Directors’ Report.
2. As stated in
Section 197(12): 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 [1]*as may be prescribed.
Language of Law: [2]Rule 5(2) of Companies (Appointment and
Remuneration of Managerial Personnel) Rules, 2014 states that the board’s
report shall include a statement showing [3]the name of every employee of the company,who
i. the names of the top ten (10) employees in terms of
remuneration drawn AND
ii. the name of every employee, who-
·
if employed throughout the financial
year, was in receipt of remuneration for that year which, in
the aggregate, was not less than sixty lakh
rupees one crore and two lakh rupees (1.02 Crore p.a.);
· if employed for a part of the
financial year, was in receipt of remuneration for any part of that year, at
a rate which, in the aggregate, was not less than five
lakh rupees per month eight lakh and fifty thousand
rupees per month (8.5 lac p.m.)
· if employed throughout the financial
year or part thereof, was in receipt of remuneration in that year which,
in the aggregate, or as the case may be, at a rate which, in the aggregate, is
in excess of that drawn by the managing director or whole-time director or
manager and holds by himself or along with his spouse and dependent
children, not less than two percent of the equity shares of the company
Interpretation Note:
Therefore,
as per the language of Rule 5(2) Company have to give details of two type of
employees:
I.
the names of the top ten employees in terms of
remuneration drawn; and (“here after referred as ‘Class I’ employees)
II.
the name of every employee, who receive
remuneration as mentioned above(“here after referred as ‘Class II’ employees)
There may be
situation when employees of class II includes in Class I or vice versa.
Example:
If there is situation when no employee of the Company received the remuneration
as per limits given in class II employees in such situation whether company
required to give details of top 10 employee if the Company in Board Report.
YES, as the rule
5(2) used the word AND between
both the sentence. It is clear that Company have to give details of top 10 employees
in Directors’ Report.
CONCLUSION
Whether employees receiving
or not receiving remuneration as full time (1.02 crore p.a.), part of the
financial year (8.5 lac p.m.) etc.
Company has to disclose name of top 10 employees in its Board of
Directors’ Report.
Let’s first discuss
the SECOND QUESTION:
Whether only listed Company required disclosing
in the Board’s report, the information regarding remuneration of each employee
and other details or all the
Companies required disclosing.
Some people hold a view that all the Companies required to disclose such
information in Directors Report. One of the arguments put forth by the people
supporting the first school of thought that rule 5(2) starts with word BOD
shall include statement showing the name of every employee of the ‘COMPANY’. It’s not mention the every listed Company as mentioned
in rule 5(1).Therefore, its applicable on all the Companies according to them.
It was beyond doubt that the Rule 5 was made pursuant to sub-section (12)
of Section 197 and was applicable only in case of Listed Companies. However,
due to drafting anomalies, there was one school of thought that some clauses of
sub-rule (1) of Rule 5 and the sub-rule (2) of Rule 5 applies to all companies.
In an attempt to bring clarity and remove drafting infirmities, on 30th
June, 2016, the Central Government came out with several amendments to Rule 5
and also enlarged its scope; mainly of sub-rule (2) of Rule 5.
Statutory Provisions Contained Under the Act:
Provisions of the Companies Act, 2013 to the extent relevant for our
discussion, are stated as under (with necessary comments and modifications,
wherever felt necessary)
As
stated in Section 197(12): 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 [4]*as
may be prescribed.
Preamble
to the Remuneration Rules is as under:
“In
exercise of the powers conferred under sub-section (4) of section
196, sub-section (5) of section 197, sub-section (12) of section 197,
section 200, sub-section (1) of section 198, sub-section (1) of section 203,
sub-section (1) of section 204 and sub-section (1) of section 205 of the
Companies Act, 2013,read with sub-sections (1) and (2) of section 469 of the
Companies Act, 2013 (18 of 2013) and in supersession of the Companies (Central
Government's) General Rules and Forms, 1956 or any other relevant rules
prescribed under the Companies Act, 1956 (1 of 1956) on matters covered under
these rules, except as respects things done or omitted to be done before such
supersession, the Central Government hereby makes the following rules,
namely:-“
Disclosure
in Board’s report:-
Rule
5(1)
Every listed company shall
disclose in the Board’s report-
1. the
ratio of the remuneration of each director to the median remuneration of the
employees of the company for the financial year;
2. the
percentage increase in remuneration of each director, Chief Financial Officer,
Chief Executive Officer, Company Secretary or Manager, if any, in the financial
year;
3. the
percentage increase in the median remuneration of employees in the financial
year;
4. the
number of permanent employees on the rolls of company;
5. average
percentile increase already made in the salaries of employees other than the
managerial personnel in the last financial year and its comparison with the
percentile increase in the managerial remuneration and justification thereof
and point out if there are any exceptional circumstances for increase in the
managerial remuneration;
6. the
key parameters for any variable component of remuneration availed by the
directors;
7. affirmation
that the remuneration is as per the remuneration policy of the company.
Rule 5 is made pursuant to sub-section (12) of section 197
In the list of statutory provisions stated above, preamble
has also been listed out as a key aid for interpretation. Why so? "The
preamble of statue has been said to be a good means to find out its meaning,
and, as it were, a key to the understandings of it, and as it usually states,
or professes to state, the general object and intention of the Legislate in
passing the enactment, it may legitimately be consulted for the purpose of
solving any ambiguity or of fixing the meaning of words which may have more
than one, or of keeping the effect of the Act within its real scope, whenever
the enacting part is in any of these respects open to doubt."
Further, it is
settled principle that normally the opinion of the authority concerned that the
rule made by it is necessary to carry out the purposes mentioned in the Act and
when this opinion is recited in the preamble to the Rules, it should be greatly
respected. In the preamble of the Rules, it is being mentioned from very
beginning that they are made under various sections including the one we are
concerned with as regard the powers intended to be exercised by the Central
Government i.e. sub-section (12) of section 197. Therefore, there doesn’t seem
to be any justification to enlarge the authority and intent of the Central
Government.
In other words, no doubt that the
Central Government has wide powers to frame rules pursuant to Section 134,
however, it is evident from the reading of preamble to Remuneration Rules and
Account Rules that the Rule 5 of the Remuneration Rules has not been framed
pursuant to powers vested by the legislature under section 134; it is made
pursuant to powers vested by virtue of Section 197(12). In fact, the Central
Government has framed Rule 8 of the Account Rules pursuant to Section 134.
Thus, irrespective of what powers
the Central Government has under Section 134, Rule 5 of Remuneration Rules can
not go beyond the express powers stipulated in sub-section (12) of Section 197
and hence, Rule 5 shall apply only to Listed Companies.
It is worth noting that the Central Government understood
these drafting infirmities and brought out several changes in Rule 5 as could
be seen from the number of deletions being made in sub-rule (1) of Rule 5 and
deletion as well as minor additions made in sub-rule (2) of Rule 5. Even in
absence of these amendments made w.e.f June 30, 2016, the legal position would
have remained to be the same.
Rule 5(2) already discussed above in
question no.1.
Drafting Infirmities and Ambiguities Rectified Vide
Amendment Dated June 30, 2016
Sub-rule (1) of Rule 5 begins with the
words “Every listed company shall disclose in the
Board's report….” whereas sub-rule (2) of Rule 5 uses the words “the board's
report shall include a statement showing [5][the names of the top ten employees
in terms of remuneration drawn and the name of every employee, who—]
Here, it is pertinent to apply the rule of
contextual interpretation. In Reserve Bank of India
case (supra), the Apex Court ruled that interpretation must depend on the text
and the context and if the text is the texture, context is what gives the
colour, therefore, neither can be ignored. The interpretation is best which makes
the textual interpretation match the contextual. If a statute is looked at, in
the context of its enactment, with the glasses of the statute-maker, provided
by such context, its scheme, the sections, clauses, phrases and words may take
colour and appear different than when the statute is looked at without the
glasses provided by the context. No part of a statute and no word of a statute
can be construed in isolation. Statutes have to be construed so that every word
has a place and everything is in its place.[6]
Sub-rule (2) of Rule 5 has to be read in context of
sub-rule (1) and sub-section (12) of Section 197. Further, wordings of sub-rule
(2) of Rule 5 has gone through vast changes vide June 30, 2016 amendment and
considering the present wordings of sub-rule (2) of Rule 5 it can be safely
held that the sub-rule (2) applies only to listed companies.
To further strengthen the arguments made
above, we may consider to see the wordings with which sub-rule (2) of Rule 5
used to start before theamendment dated June 30, 2016, which is reproduced as
under:
“The board's report shall include a statement
showing the name of every employee of the company, who”
It is worth pointing out that vide
amendment dated June 30, 2016 the Central Government has explicitly deleted the
words “of the Company” in sub-rule (2) of Rule 5, to get rid of the drafting
infirmity which was existing prior to the said amendment.
Perhaps, there was some confusion in the
mind of few, due to the use of the word “Company” in sub-rule (2) as against
the use of the word “Listed Company” in sub-rule (1) of Rule 5; further,
erstwhile clause (vii) of sub-rule (1) of Rule 5 required even an unlisted
company to state the variations in the net worth of the company as at the close
of the current financial year and previous financial year. The said clause
(vii) of sub-rule (1) of Rule 5 has also been deleted vide amendment dated June
30, 2016.
All these changes in the Remuneration
Rules w.e.f. June 30, 2016 indicate the correct legal position in so many words
and thereby, brings in much neededclarity.
LITERAL RULE OF INTERPRETATION
Before we discuss this issue at length, it may be
mentioned in this connection that the first and foremost principle of
interpretation of a statute in every system of interpretation is the literal
rule of interpretation. The other rules of interpretation e.g. the mischief
rule, purposive interpretation etc. can only be resorted to when the plain
words of a statute are ambiguous or lead to no intelligible results or if read
literally would nullify the very object of the statute. Where the words of a
statute are absolutely clear and unambiguous, recourse cannot be had to the
principles of interpretation other than the literal rule.
The literal rule of interpretation is not only
followed by Judges and lawyers, but it is also followed by the lay man in his
ordinary life. To give an illustration, if a person says "this is a
pencil", then he means that it is a pencil; and it is not that when he
says that the object is a pencil, he means that it is a horse, donkey or an
elephant. In other words, the literal rule of interpretation simply means that
we mean what we say and we say what we mean. If we do not follow the literal
rule of interpretation, social life will become impossible, and we will not
understand each other. If we say that a certain object is a book, then we mean
it is a book. If we say it is a book, but we mean it is a horse, table or an
elephant, then we will not be able to communicate with each other. Life will
become impossible. Hence, the meaning of the literal rule of interpretation is
simply that we mean what we say and we say what we mean.[7]
Interpretation Note:
As per the section 197(12)
specifically mentioned the word “Every Listed Company”
shall
disclose in directors report ration of remuneration and such other details.
These other details are stated in rule 5. Rule 5 is given in this chapter only because it refer/complete in
197(12).
Therefore, it is clear that Governing/ charging
section of Rule 5 is section 197(12). As per literal rule of interpretation if
section 197(12) applicable only on the Listed Companies then rule 5 shall also
applicable only on the listed Companies. Even in Rule 5(1) also mentioned that
“every listed” Company. Only rule 5(2) not mentioned the word “Every listed
Company”.
CONCLUSION
In view of legal position as discussed above, it is
clear that the provisions of Rule 5 applies only to listed companies. In
reality, the amendment dated June 30, 2016 has brought out the much needed
changes in the Rule 5 and has removed various drafting infirmities. Thus, the
mandate of sub-rule (1) and sub-rule(2) of Rule 5 does not create any issues at
all for the unlisted companies as it doesn’t apply to them.
(Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES
Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com)
Disclaimer:
The
entire contents of this document have been prepared on the basis of relevant
provisions and as per the information existing at the time of the preparation.
Although care has been taken to ensure the accuracy, completeness and
reliability of the information provided, I assume no responsibility therefore.
Users of this information are expected to refer to the relevant existing
provisions of applicable Laws. The user of the information agrees that the
information is not a professional advice and is subject to change without
notice. I assume no responsibility for the consequences of use of such
information. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT,
SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION
WITH THE USE OF THE INFORMATION. This is only a knowledge sharing initiative
and author do not intend to solicit any business or profession.
[1]
Details
are prescribed under Rule 5 of Companies (Appointment and Remuneration of Managerial
Personnel) Rules, 2014
[2]
Rule of Section 197
[3]
substituted vide MCA notification date 30.06.2016
[4]
Details
are prescribed under Rule 5 of Companies (Appointment and Remuneration of Managerial
Personnel) Rules, 2014
[5]substituted
for "the name of every employee of the company, who—" by the
Companies (Appointment and Remuneration of Managerial Personnel) Amendment
Rules, 2016, w.e.f. 30-6-2016.
[6]Referred to in Reliance Industries Ltd. and
Anr.Vs. State of Maharashtra and Ors.
(Bombay High Court) [2006] MANU/MH/0265/2006
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