Managerial remuneration (MD, WTD, Directors) with FAQs

Articles explains amended Provisions related to Managerial remuneration of Managing Director (MD),  Whole Time Director (WTD) and Directors under Companies ACt, 2013 as amended by Companies (appointment and remuneration of managerial personnel) Amendment Rules 2018, Amended Schedule V of Companies Act, 2013 and amended section 196, 197, 198, 200 and 201 of Companies Act, 2013 as amended by Companies Amendment Act, 2013

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:

Section 197(1):

The total managerial remuneration payable by a Public Company, to its:

i. Directors, and

ii. Managing Director and

iii. Whole-Time Director, and

iv. 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:

√ It is clear in first line that section 197 applicable only on ‘Public Limited’ Companies.

√ Limit of 11% of net profit for a financial year.

√ 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.]

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Schedule V:

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:

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.

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:

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 have 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

ii. 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. 

FAQs on Managerial remuneration (MD, WTD, Directors) 

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:

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.

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.

(Author CS Divesh Goyal  is Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com).