Managerial Remuneration: Companies Act, 2013 and Companies (Amendment) Bill, 2016
The Central government on 16th of March, 2016 introduced in the Lok Sabha Companies (Amendment) bill, 2016 to further amend the Companies Act, 2013 as part of efforts to address difficulties faced by stakeholders and improve the ease of doing business in the country.
Most of the changes are based on the report submitted by the Company Law Committee, set up by the MCA.
This Article is an analysis of Section 197 of the Companies Act, 2013 and is in Continuation of the Series of Comparative Analysis of Companies Act, 2013 & Companies (Amendment) Bill, 2016 of both the Existing and Proposed provisions. I have re-drafted the Section 197 along with proposed changes.
The 3 Part Comparative Analysis of Companies Act, 2013 & Companies (Amendment) Bill, 2016 can be viewed from the Following Links:
ANALYSIS OF PROPOSED AMENDMENT IN SECTION 197 OF COMPANIES ACT, 2013
| SUB SECTION: | SECTION 197 – ALONG WITH PROPOSED CHANGES | REMARKS |
| 1. | 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:
Provided that the company in general meeting may, with the approval of the Central Government (Proposed to be Omitted), authorise the payment of remuneration exceeding eleven per cent. of the net profits of the company, subject to the provisions of Schedule V. |
The Requirement of Seeking Approval from Central Government for Payment of Remuneration exceeding 11% of the net profits of the Company has been proposed to be removed.
Companies will now mandatorily be required to comply with the provisions of Schedule V. |
| Provided further that, except with the approval of the company in general meeting BY A SPECIAL RESOLUTION (Proposed to be Inserted),
“Provided also that, where any term loan of any bank or public financial institution is subsisting or the company has defaulted in payment of dues to non-convertible debenture holders or any other secured creditor, 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.” (Proviso Proposed to be Inserted) (i) 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 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. |
· In case the Remuneration exceeds the below mentioned limits the Requirement of Ordinary Resolution has now been proposed to be enhanced to Special Resolution.
· The major Change proposed seems to be the Requirement of Lender’s Prior Approval in case a PUBLIC company has defaulted in payment of dues to NCD holders or any Secured creditor which includes bank or public financial institution, NBFC. Ø Suppose, a Company has taken secured loan from a NBFC and has defaulted the payment, then prior approval from the NBFC will be required before taking approval from the members at the General Meeting by a SR. So, in case A public company wants to pay an amount of remuneration that exceeds 11% of the Net Profits of the company. The consent is needed not just from one of the lenders, but each one of them. This will turn out to be cumbersome exercise for the companies because usually lender will be to say NO. Note: There will be no need to seek lenders’ consent in case of private companies, even if such private company has a running default with its lenders. |
|
| 2. | The percentages aforesaid shall be exclusive of any fees payable to directors under sub-section (5). |
No change in the provision. |
| 3. | (3) Notwithstanding anything contained in sub-sections (1) and (2), but subject to the provisions of Schedule V, if, in any financial year, a company has no profits or its profits are inadequate, the company shall not pay to its directors, including any managing or whole-time director or manager, by way of remuneration any sum exclusive of any fees payable to directors under sub-section (5) hereunder except in accordance with the provisions of Schedule V and if it is not able to comply with such provisions, with the previous approval of the Central Government.(proposed to be Omitted). |
The requirement to obtain approval of Central Government is proposed to be omitted. |
| 4. | The remuneration payable to the directors of a company, including any managing or whole-time director or manager, shall be determined, in accordance with and subject to the provisions of this section, either by the articles of the company, or by a resolution or, if the articles so require, by a special resolution, passed by the company in general meeting and the remuneration payable to a director determined aforesaid shall be inclusive of the remuneration payable to him for the services rendered by him in any other capacity:
Provided that any remuneration for services rendered by any such director in other capacity shall not be so included if- (a) the services rendered are of a professional nature; and (b) in the opinion of the Nomination and Remuneration Committee, if the company is covered under sub-section (1) of section 178, or the Board of Directors in other cases, the director possesses the requisite qualification for the practice of the profession. |
No change in the provision. |
| 5. | A director may receive remuneration by way of fee for attending meetings of the Board or Committee thereof or for any other purpose whatsoever as may be decided by the Board:
Provided that the amount of such fees shall not exceed the amount as may be prescribed: Provided further that different fees for different classes of companies and fees in respect of independent director may be such as may be prescribed. |
No change in the provision. |
| 6. | A director or manager may be paid remuneration either by way of a monthly payment or at a specified percentage of the net profits of the company or partly by one way and partly by the other. | No change in the provision. |
| 7. | Notwithstanding anything contained in any other provision of this Act but subject to the provisions of this section, an independent director shall not be entitled to any stock option and may receive remuneration by way of fees provided under sub-section (5), reimbursement of expenses for participation in the Board and other meetings and profit related commission as may be approved by the members. | No change in the provision. |
| 8. | The net profits for the purposes of this section shall be computed in the manner referred to in section 198. | No change in the provision. |
| 9. | If any director draws or receives, directly or indirectly, by way of remuneration any such sums in excess of the limit prescribed by this section 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.
Section Proposed to be substituted with: “(9) If any director draws or receives, directly or indirectly, by way of remuneration any such sums in excess of the limit prescribed by this section or without approval required under this section, he shall refund such sums to the company, within two years of such lesser period as may be allowed by the company, and until such sum is refunded, hold it in trust for the company.” |
The existing sub-section is proposed to be substituted and the proposed amendment specifically provides that the excess remuneration drawn or received by the director shall be paid back to the company which SHALL NOT be in any case more than two years. |
| 10. | The company shall not waive the recovery of any sum refundable to it under sub-section (9) unless permitted by the Central Government. Words to be substituted with – “approved by the company by SPECIAL RESOLUTION WITHIN TWO YEARS FROM THE DATE THE SUM BECOMES REFUNDABLE.” Following proviso shall be inserted: “Provided that where any term loan of any bank or public financial institution is subsisting or the company has defaulted in payment of dues to non-convertible debenture holders or any other secured creditor, 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 approval of such waiver.” |
As per the existing provisions companies are required to take permission from Central Government, the same has now been proposed to be change to Special Resolution within Two years from the date the sum becomes refundable. |
| 11. | 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, whether the provision be contained in the company’s memorandum or articles, or in an agreement entered into by it, or in any resolution passed by the company in general meeting or its Board, shall not have any effect unless such increase is in accordance with the conditions specified in that Schedule and if such conditions are not being complied, the approval of the Central Government had been obtained. (proposed to be Omitted). |
Approval of Central government – Proposed to be omitted. |
| 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 as may be prescribed. |
No change in the provision.
|
| 13. | Where any insurance is taken by a company on behalf of its managing director, whole-time director, manager, Chief Executive Officer, Chief Financial Officer or Company Secretary for indemnifying any of them against any liability in respect of any negligence, default, misfeasance, breach of duty or breach of trust for which they may be guilty in relation to the company, the premium paid on such insurance shall not be treated as part of the remuneration payable to any such personnel:
Provided that if such person is proved to be guilty, the premium paid on such insurance shall be treated as part of the remuneration. |
No change in the provision. |
| 14. | Subject to the provisions of this section, any director who is in receipt of any commission from the company and who is a managing or whole-time director of the company shall not be disqualified from receiving any remuneration or commission from any holding company or subsidiary company of such company subject to its disclosure by the company in the Board’s report. |
No change in the provision. |
| 15. | If any person contravenes the provisions of this section, he shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees. |
No change in the provision. |
| 16. | NEWLY INSERTED SUB SECTION:
(16) The AUDITOR of the company shall, in his report under section 143, make a statement as to whether the remuneration paid by the company to its directors is in accordance with the provisions of this section, whether remuneration paid to any director is in excess of the limit laid down under this section and give such other details as may be prescribed. |
Proposed new provision puts an obligation on the auditors to ensure that the company is paying remuneration to its directors in accordance with the limits laid down in section 197 or where it exceeds the prescribed limits, necessary approvals are in place. The same is required to be reported by the auditors in their report. |
| 17. | NEWLY INSERTED SUB SECTION: (17) On and from the commencement of the Companies (Amendment) Act, 2016, ANY APPLICATION MADE TO THE CENTRAL GOVERNMENT under the provisions of this section [as it stood before such commencement], which is pending with that Government shall abate, and the COMPANY SHALL, WITHIN ONE YEAR OF SUCH COMMENCEMENT, OBTAIN THE APPROVAL IN ACCORDANCE WITH THE PROVISIONS OF THIS SECTION, AS SO AMENDED.” *The bold part in the table above highlights the proposed changes by way of insertion/deletion/substitution. *Strikethrough signifies that the particular provision has been proposed to be omitted. |
The bill further proposes that on or after the commencement of the Companies Amendment Bill, 2016 if any application made to Central Government under the provisions of this section and the same is pending then company shall within ONE YEAR obtain approval in accordance with the provisions of the revised section 197. |
Author: CS Rahul Harsh is a Company Secretary in Employment from Kolkata and can be contacted at: csrahulharsh@gmail.com
Very well explained