Remuneration of KMPs | Section 197 & 198 | Companies Act, 2013

Section: 197 of the  Companies Act, 2013

Remuneration to Key Managerial Personnel

1. Maximum ceiling for payment of Managerial Remuneration

Section 197 of the Companies Act, 2013 prescribed the maximum ceiling for payment of managerial remuneration by a public company to its managing director whole-time director and manager which shall not exceed 11% of the net profit of the company in that financial year computed in accordance with section 198 except that the remuneration of the directors shall not be deducted from the gross profits.

2. Payment of Managerial Remuneration More than ceiling i.e 11%

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

3. Payment of Remuneration to the M.D or W.T.D

The remuneration payable to any one managing director or whole time director or manager shall not exceed 5% of the net profits of the company and if there is more than one such director remuneration shall not exceed 10% of the net profits to all such directors and manager taken together.

4. Payment of Remuneration to the Director, who neither the MD nor the W.T.D of the Company

Subject to approval in the general meeting, the remuneration payable to directors who are neither managing directors nor whole-time directors shall not exceed,— — 1% of the net profits of the company, if there is a managing or whole-time director or manager; — 3% of the net profits in any other case.

Remuneration by a Company in case company having no Profit or Inadequate Profit

Relevant Provisions: Provisions of Schedule V to be followed

The company shall not pay to its directors, including managing or whole time director or manager, any remuneration exclusive of any fees payable to directors except in accordance with the provisions of Schedule V.

In cases, where Schedule V is applicable on grounds of no profits or inadequate profits, any provision relating to the remuneration of any director which purports to increase or has the effect of increasing the amount thereof, shall not have any effect unless such increase is in accordance with the conditions specified in that Schedule

If the company is not able to comply with the requirement of Schedule V

If the Company is not able to comply with the provisions and  Conditions of Schedule V then the Company shall paid the remuneration with prior approval of the Central Government.

Remuneration to Directors in other Capacity 

The remuneration payable to the directors including managing or whole-time director or manager shall be inclusive of the remuneration payable for the services rendered by him in any other capacity except the following:

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

(b) In the opinion of the Nomination and Remuneration Committee (if applicable) or the Board of Directors in other cases, the director possesses the requisite qualification for the practice of the profession.

Sitting Fees to Directors for Attending the Meetings

1. A director may receive remuneration by way of fee for attending the Board/Committee meetings or for any other purpose as may be decided by the Board. Provided that the amount of such fees shall not exceed the amount as may be prescribed.

2. The Central Government through rules prescribed that the amount of sitting fees payable to a director for attending meetings of the Board or committees thereof may be such as may be decided by the Board of directors or the Remuneration Committee thereof which shall not exceed the sum of rupees 1 lakh per meeting of the Board or committee thereof.

3. The Board may decide different sitting fee payable to independent and non-independent directors other than whole-time directors.

Remuneration Drawn in Excess of Prescribed Limit

1. If any director draws or receives, directly or indirectly, by way of remuneration any such sums in excess of the limit prescribed or without the prior sanction of the Central Government, where it is required, he shall refund such sums to the company and until such sum is refunded, hold it in trust for the company.

2. The company shall not waive the recovery of any sum refundable to it under sub-section 9 mentioned above, unless permitted by the Central Government.

Mandatory disclosure of Remuneration in the Board Report

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 as may be prescribed.

The central government through rules prescribed the following disclosure by a listed company in its Board’s report:

(i) The ratio of the remuneration of each director to the median remuneration of the employees of the company for the financial year;

(ii) Percentage increase in remuneration of each director and CEO in the financial year;

(iii) Percentage increase in the median remuneration of employees in the financial year;

(iv) Number of permanent employees on the rolls of company;

(v) Explanation on the relationship between average increase in remuneration and company performance;

(vi) comparison of the remuneration of the Key Managerial Personnel against the performance of the company; (vii) variations in the market capitalisation of the company, price earnings ratio as at the closing date of the current financial year and previous financial year and percentage increase over decrease in the market quotations of the shares of the company in comparison to the rate at which the company came out with the last public offer in case of listed companies, and in case of unlisted companies, the variations in the net worth of the company as at the close of the current financial year and previous financial year;

(viii) 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;

(ix) Comparison of the each remuneration of the Key Managerial Personnel against the performance of the company;

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

(xi) The ratio of the remuneration of the highest paid director to that of the employees who are not directors but receive remuneration in excess of the highest paid director during the year;

(ix) Affirmation that the remuneration is as per the remuneration policy of the company

The board’s report shall include a statement showing the name of every employee of the company who-

(i) 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;

(ii) 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;

(iii) 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.

The above statement shall also indicate –

(i) Designation of the employee;

(ii) Remuneration received;

(iii) Nature of employment, whether contractual or otherwise;

(iv) Qualifications and experience of the employee;

(v) Date of commencement of employment;

(vi) The age of such employee;

(vii) The last employment held by such employee before joining the company;

(viii) The percentage of equity shares held by the employee in the company within the meaning of sub-clause (iii) of sub-rule (2) above; and

(ix) Whether any such employee is a relative of any director or manager of the company and if so, name of such director.

Managerial Remuneration under Schedule V (Part II)

Remuneration by Companies having Profits

A company having profits in a financial year may pay remuneration to its managerial persons in accordance with Section 197.

Remuneration by Companies having no profits or inadequate profits without Central Government approval

Where in any financial year during the currency of tenure of a managerial person, a company has no profits or its profits are inadequate, it, may, without Central Government approval, pay remuneration to the managerial person not exceeding the higher of the limits under (A) and (B) below

(A)

Where the effective capital is	Limit of yearly remuneration payable shall not exceed (Rs)
Negative or less than 5 Crore	30 Lakhs
5 Crore and above but less than 100 Crore	42 Lakhs
100 Crore and above but less than 250 Crore	60 Lakhs
250 Crore and above	60 Lakhs plus 0.01% of the effective capital in excess of Rs. 250 Crore

If a special resolution is passed by the shareholders, the above limits shall be doubled.

(B) In the case of managerial person who was not a shareholder, employee or a Director of the company at any time during the two years prior to his appointment as managerial person- 2.5% of the current relevant profit. If a special resolution is passed by the shareholders, this limit shall be doubled.