Managerial remuneration – FAQ’s
Managerial
remuneration – FAQ’s
(MD, WTD, Directors)
Section 197, Schedule V
Notified on 12th September, 2018
As per Section 197 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
As per Section 197 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
Legislature Background:
The author has already discussed the provisions in
relation to Section 197 and Amended Schedule V in article series no. 382 and
the same has been published on blog of author www.csdiveshgoyal.info.
i.
As per Section 197, which persons shall be include in limit of 11%
Remuneration?
i.
Directors,
and
ii.
Managing
Director and
iii.
Whole-Time
Director, and
iv.
Manager
ii.
Whether Section 197 & Schedule V applicable on Private Limited
Company?
Section 197 and Schedule V applicable
only on Public Limited Companies. Private Limited Companies are out of preview
of Section 197 and Schedule V.
There is no limit on remuneration for Private
Limited Companies. They can pay any amount of remuneration without comply with
provision of Section 197 and Schedule V.
iii.
Whether there is any need of General Meeting approval for appointment
of MD/WTD in Private Limited Company.
As per Section 196(4) Board of
Directors of Company shall appoint MD/ WTD subject to approval of Shareholders
in General Meeting.
However, due to Exemption to private
limited Companies by notification dated 05.06.2015 Section 196(4) shall not be
applicable on Private Limited Companies.
Therefore, Private Limited Company
can designate its Director as MD/WTD without approval of share holder only by
passing of Board Resolution.
iv.
Whether a Company can pay remuneration more than 11% to its Directors/
MD/ WTD?
As per Section 197(1), Company in
General Meeting may authorize the payment of remuneration exceeding 11% of net
profit of Company.
Therefore, by passing of resolution
in General Meeting Company can make payment of remuneration more than 11% to
its Directors. However, Limit of remuneration shall be as per Schedule V.
v.
What are the limits of remuneration under schedule V?
As per
Schedule V, Company by passing of Ordinary Resolution in General Meeting can
pay remuneration upto below mentioned limit:
|
Where the
effective capital is
|
Limit of yearly
remuneration payable shall not exceed (Rupees)
|
|
(i) Negative or less than 5 crores
|
60 Lakhs
|
|
(ii) 5 crores and above but less
than 100 crores
|
84 Lakhs
|
|
(iii) 100 crores and above but less
than 250 crores
|
120 Lakhs
|
|
(iv) 250 crores and above
|
120 lakhs plus 0.01% of the effective capital in excess of Rs. 250
crores:
|
vi.
If Company wants to pay remuneration more than above mentioned limits of Part B of Schedule II?
If Company wants to make payment of remuneration
more than above mentioned limit than company can do the same by passing of
“Special Resolution” in General Meeting of Company.
vii.
What is meaning of inadequate profit?
If
Company wants to make payment of remuneration more than above mentioned limit
than company can do
Inadequate Profit:
This is situation when Company is having sufficient profit in its financials
for payment of remuneration. However, profit is not sufficient to cover in
limit of 11% of net profit. Exp.
|
S. No.
|
Profit Amount
|
11% of Profit
|
Remuneration
want to pay
|
Remark
|
|
i.
|
1,00,00,000
|
11,00,000
|
50,00,000
|
Inadequate Profit
|
|
ii.
|
1,50,00,000
|
16,50,000
|
17,00,000
|
Inadequate Profit
|
|
iii.
|
50,00,000
|
550,000
|
500,000
|
Sufficient
|
|
iv.
|
0
|
0
|
50,00,000
|
No Profit
|
viii. As per Section 196(4) approval of shareholder is mandatory for
appointment of MD/WTD in Public Limited Company? If Company fail to get
approval of shareholders then whether work/act done by MD/WTD during Board
Meeting to general Meeting shall be valid or invalid?
As per Section 196(5) where an
appointment of a managing director, whole-time director or manager is not
approved by the company at a general meeting, any act done by him before such
approval shall not be deemed to be invalid
PROVISIONS
OF REMUNERATION TO DIRECTORS
Section 197(1):
The
total managerial remuneration payable by a Public
Company, to its:
v.
Directors,
and
vi.
Managing
Director and
vii.
Whole-Time
Director, and
viii.
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.
NOTE:
As
per above mentioned provisions:
ü It is clear in first line that
section 197 applicable only on ‘Public Limited’ Companies.
ü Limit of 11% of net profit for a
financial year.
ü Limit of 11% includes all 4 above
mentioned categories. However limit of 11% divided in 4 categories as
following:
i. (A)
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
(B) 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;
ii. 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.]
__________________________________________________________________________________
HOWEVER,
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:
PART II SECTION
II SCHEDULE V
Remuneration payable by companies
having no profit or inadequate profit
Above
mentioned section of part II States about remuneration to Directors including
MD/WTD / Manager.
No Profit: This is
situation when Company is in loss, it doesn’t have any profit in its
financials.
Inadequate Profit:
This is situation when Company is having sufficient profit in its financials
for payment of remuneration. However, profit is not sufficient to cover in
limit of 11% of net profit. Exp.
|
S. No.
|
Profit Amount
|
11% of Profit
|
Remuneration
want to pay
|
Remark
|
|
v.
|
1,00,00,000
|
11,00,000
|
50,00,000
|
Inadequate Profit
|
|
vi.
|
1,50,00,000
|
16,50,000
|
17,00,000
|
Inadequate Profit
|
|
vii.
|
50,00,000
|
550,000
|
500,000
|
Sufficient
|
|
viii.
|
0
|
0
|
50,00,000
|
No Profit
|
As per
Schedule V, Part II, Section II company can pay remuneration more than 11% by following
the below mentioned:
Company by passing of Ordinary
Resolution in General Meeting can pay remuneration upto below mentioned limit:
|
Where the
effective capital is
|
Limit of yearly
remuneration payable shall not exceed (Rupees)
|
|
(i) Negative or less than 5 crores
|
60 Lakhs
|
|
(ii) 5 crores and above but less
than 100 crores
|
84 Lakhs
|
|
(iii) 100 crores and above but less
than 250 crores
|
120 Lakhs
|
|
(iv) 250 crores and above
|
120 lakhs plus 0.01% of the effective capital in excess of Rs. 250
crores:
|
Company
by passing of Special Resolution in General Meeting can pay remuneration ANY AMOUNT without any limit:
For payment of remuneration as per
above mention Limit of Section II Company has to comply with following
conditions:
i.
Board Resolution: payment of remuneration is approved by a resolution passed
by the Board and, in the case of a company covered under sub-section (1) of
suction 178 also by the Nomination and Remuneration Committee
No Default: 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.
iii.
General Meeting: an ordinary resolution or a special resolution, as the case
may be, has been passed for payment of remuneration as per item (A) or
(B), at the general meeting of the company for a period not exceeding three
years.
iv.
Notice of General Meeting: a statement along with a notice calling the general
meeting referred to in clause (iii) is given to the shareholders containing the
following information as mention in schedule:-
v.
Company Secretary Certificate: The
auditor or the Secretary of the company or where the company is not required to
appointed a Secretary, a Secretary in whole-time practice shall certify that
the requirement of this Schedule have been complied with and such certificate
shall be incorporated in the return filed with the Registrar under sub-section
(4) of section 196.
(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
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