Managerial Remuneration Under Companies Act, 2013: Complete Legal Framework

Managerial Remuneration under the Companies Act, 2013: A Comprehensive Analysis of Sections 196, 197 and Schedule V

Introduction

Managerial remuneration has always been a sensitive and closely regulated area of corporate governance. It reflects not only the reward for leadership but also the balance between managerial incentives and shareholders’ interests. Under the Companies Act, 2013, the framework governing managerial remuneration is primarily laid down in Sections 196, 197 and Schedule V, which together provide a structured mechanism for appointment, limits, and payment of remuneration to key managerial personnel.

This article provides a comprehensive understanding of these provisions and their practical implications.

Section 196: Appointment of Managing Director, Whole-Time Director or Manager

Section 196 lays the foundational framework for the appointment of managerial personnel.

A company shall not appoint or employ, at the same time, both a Managing Director and a Manager. Further, the term of appointment of a Managing Director (MD), Whole-Time Director (WTD), or Manager cannot exceed five years at a time, and reappointment cannot be made earlier than one year before the expiry of the existing term.

The section also prescribes eligibility conditions. A person must be at least 21 years old and below 70 years. However, a person above 70 years may be appointed through a special resolution, with proper justification disclosed to shareholders. Additionally, individuals who are insolvent, have suspended payments to creditors, or has not been convicted by a court of an offence and sentenced for a period exceeding six months.  from such appointments.

From a procedural standpoint, the appointment and remuneration must be approved by:

• The Board of Directors,
• The shareholders in general meeting, and
• The Central Government, only where such appointment is not in accordance with Schedule V.

Also note that the notice convening the meeting shall include the terms and conditions of appointment, the remuneration payable, and all other relevant matters, including the interest of directors, if any.

The Company shall file Form MR-1 within 60 days of the appointment of a Managing Director, Whole-Time Director, or Manager.

Thus, Section 196 ensures that only qualified individuals are appointed and that such appointments are subject to adequate oversight.

Section 197: Overall Limits on Managerial Remuneration

While Section 196 governs appointment, Section 197 regulates the quantum of remuneration.

The section provides that the total managerial remuneration payable by a public company shall not exceed 11% of the net profits of the company in a financial year, calculated in accordance with Section 198.

Within this overall ceiling, specific limits are prescribed:

• 5% of net profits for a single MD/WTD/Manager
• 10% collectively for multiple MDs/WTDs/Managers
• 1% or 3% for other directors depending on the presence of  MD/WTD/Manager

The company may exceed these limits by passing a special resolution, subject to compliance with Schedule V.

Approval in Case of Default

Where the company has defaulted in payment of dues to:

• Banks
• Public financial institutions
• Debenture holders
• Other secured creditors

It must obtain prior approval of such creditors before seeking shareholder approval for remuneration.

Remuneration in Case of No or Inadequate Profits

In situations where a company has no profits or inadequate profits, it shall not pay remuneration (other than sitting fees) unless it complies with the provisions of Schedule V.

Mode and Determination of Remuneration

Remuneration may be paid:

• By way of monthly salary
• As a percentage of net profits
• Partly by both methods

Such remuneration must be:

• Authorized by the Articles of Association, or
• Approved by shareholders through an ordinary or special resolution

Remuneration includes payments for services rendered in other capacities, except where:

• The services are of a professional nature, and
• The director possesses requisite qualifications and approval of the Board/Nomination and Remuneration Committee.

Recovery and Waiver of Excess Remuneration

• Any excess remuneration paid without approval or beyond limits must be refunded within two years (or a shorter period as permitted)
• Until refunded, such amount is held in trust for the company

Waiver of recovery:

• Requires approval by special resolution, and
• In case of default, also requires prior approval of creditors

Disclosure in Board’s Report (Rule 5)

Rule 5 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 mandates disclosures to ensure transparency. The applicability varies based on the type of company:

Listed Companies (Rule 5(1))

The Board’s Report of listed companies must disclose:

• Ratio of remuneration of each director to the median employee remuneration
• Percentage increase in remuneration of directors and KMP (CEO, CFO, CS, Manager)
• Percentage increase in median remuneration of employees
• Number of permanent employees
• Comparison of average increase in employee remuneration (excluding managerial personnel) with managerial remuneration, along with justification
• Confirmation that remuneration is as per the company’s remuneration policy

Meaning of Median:

Median represents the middle value in a dataset. In case of an even number of employees, it is the average of the two middle values.

All Companies (Rule 5(2) & 5(3))

Applicable to private, public, and listed companies, the Board’s Report must include:

• Names of:
  • Top 10 employees in terms of remuneration
  • Employees earning:
    • ≥ ₹1.02 crore per annum, or
    • ≥ ₹8.5 lakh per month (if employed for part of the year), or
    • More than MD/WTD/Manager and holding ≥ 2% equity shares

For such employees, the following details must be disclosed:

• Designation
• Remuneration received
• Nature of employment
• Qualifications and experience
• Date of commencement of employment
• Age
• Previous employment
• Shareholding percentage
• Whether related to any director or manager

Employees Outside India

• Details of employees working outside India (not being directors or their relatives):
  • Need not be included in the Board’s Report
  • Must be filed with the Registrar of Companies
• Such details shall be:
  • Provided within 3 days if requested before AGM
  • Provided within 7 days if requested after AGM

Other Key Provisions

• Listed companies must disclose remuneration ratios and details in the Board’s Report
• Insurance premium paid for directors/KMP is not treated as remuneration unless misconduct is established
• Managing or Whole-Time Directors may receive remuneration from holding or subsidiary companies with proper disclosure
• The auditor must report whether remuneration complies with the provisions of the Act
• Non-compliance attracts penalty ranging from ₹1,00,000 to ₹5,00,000

Schedule V: Detailed Framework for Appointment and Remuneration

Schedule V complements Sections 196 and 197 by providing conditions for appointment and detailed rules for remuneration, particularly in cases of inadequate or no profits.

Part I: Conditions for Appointment

Part I specifies the eligibility criteria for appointing a managerial person without Central Government approval. A person must:

• Not have been convicted under specified laws,
• Not have been detained under preventive detention laws,
• Be between 21 and 70 years (subject to special resolution for higher age), and
• Be a resident in India.

These conditions ensure integrity, competence, and accountability in top management.

Part II: Remuneration

1. Companies Having Profits

Where a company has adequate profits, remuneration is governed by the limits prescribed under Section 197.

2. Companies Having No Profit or Inadequate Profit

This provision applies when:

• A company has no profits, or
• Profits are inadequate during any financial year

In such cases, remuneration can be paid to:

• Managerial personnel (MD/WTD/Manager)
• Other directors

Permissible Limits of Remuneration

The company may pay remuneration not exceeding the higher of limits under Item (A) and (B).

Based on Effective Capital

The limits depend on the effective capital of the company:

• If remuneration exceeds these limits → Special Resolution required
• For a period less than one year → limits are pro-rated

Remuneration in Professional Capacity

A managerial person or director functioning in a professional capacity may receive remuneration as per Item (A), provided:

• He/she has no interest in capital of the company, holding or subsidiary
• Not related to directors/promoters (past 2 years and at present)
• Possesses graduate-level qualification and expertise

Exception:

• Shareholding up to 0.5% under ESOP or qualification shares is allowed

Conditions for Payment of Remuneration

The above limits apply only if the following conditions are satisfied:

Approvals

• Approved by Board of Directors
• Also by Nomination & Remuneration Committee (if applicable under Section 178)

No Default Condition

• Company should not have defaulted in payment to:
  • Banks
  • Financial institutions
  • Debenture holders
  • Secured creditors

If default exists → prior approval of creditors required

Shareholder Approval

• Ordinary Resolution or Special Resolution (as applicable)
• Valid for a period not exceeding 3 years

Statement to Shareholders (Mandatory Disclosure)

A detailed statement must be included in the notice of general meeting covering:

General Information

• Nature of industry
• Date of commencement of business
• Expected date of operations (for new companies)
• Financial performance
• Foreign investments/collaborations

Information about Appointee

• Background details
• Past remuneration
• Achievements/awards
• Job profile & suitability
• Proposed remuneration
• Industry comparison
• Relationship with company/management

III. Other Information

• Reasons for loss or inadequate profits
• Steps taken for improvement
• Expected increase in productivity and profits

Disclosures in Board’s Report

Under Corporate Governance section:

• Full remuneration package (salary, bonus, stock options, etc.)
• Fixed and performance-linked components
• Service contracts, notice period, severance fees
• Stock option details and pricing

Key Concept: Effective Capital

Effective capital generally includes:

• Paid-up share capital
• Share premium
• Reserves & surplus
• Long-term loans

(Used to determine permissible remuneration limits)

Important Notes

• Limits apply per annum
• Special resolution allows payment beyond limits
• Conditions must be strictly complied with
• Transparency through disclosures is mandatory

Special Circumstances

Schedule V further relaxes limits in certain cases, such as:

• Newly incorporated companies (for seven years)
• Companies under revival or rehabilitation
• Companies with approved resolution plans under insolvency laws

In such situations, companies may pay remuneration beyond standard limits.

Perquisites Excluded from Remuneration

Certain benefits are excluded from the computation of remuneration ceilings, including:

• Provident fund contributions
• Gratuity
• Leave encashment

This allows companies to structure compensation packages more effectively without breaching statutory limits.

Interplay between Sections 196, 197 and Schedule V

The three provisions operate as an integrated framework:

• Section 196 governs the appointment and eligibility of managerial personnel
• Section 197 prescribes remuneration limits based on profits
• Schedule V provides flexibility and detailed conditions, especially in cases of inadequate profits

Together, they ensure that managerial remuneration is regulated, transparent, and aligned with the financial position of the company.

Conclusion

The provisions relating to managerial remuneration under the Companies Act, 2013 strike a careful balance between rewarding managerial talent and safeguarding stakeholder interests. While Section 197 imposes profit-linked ceilings, Schedule V introduces flexibility, ensuring that companies can attract and retain competent professionals even during financially challenging periods.

For professionals and companies alike, a clear understanding of these provisions is essential to ensure legal compliance, effective governance, and sustainable corporate growth.

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Disclaimer: The entire contents of this article have been prepared based on relevant provisions and as per the information existing at the time of the preparation. Although utmost 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 piece of professional advice and is subject to change without notice. I assume no responsibility for the consequences of the use of such information.

The author, Ms. Chinki Singhal, is a Company Secretary in Practice at M/s Chinki Singhal and Associates and can be reached at: Mobile: +91-9050320565 Email: chinki.singhal@csassociate.com