Private vs Public Companies: Remuneration Rules Compared

Managerial remuneration refers to the compensation paid by companies to their directors, including managing directors, whole-time directors, and managers, for overseeing the company’s affairs. The Companies Act, 2013, prescribes detailed rules and ceilings to ensure remuneration practices are fair, transparent, and aligned with sound corporate governance. Understanding these provisions is vital for compliance officers, company secretaries, legal professionals, and business leaders.

This article presents detailed FAQs covering definitions, legal sections, practical scenarios, procedural compliances, and recent developments to serve as a comprehensive guide for anyone dealing with managerial remuneration in India.

1. Which sections of the Companies Act, 2013, deal with managerial remuneration?

Managerial remuneration is primarily governed by:

• Section 196: Appointment of managerial personnel.
• Section 197: Limits and approval for managerial remuneration.
• Section 198: Calculation of net profits for remuneration.
• Section 2(78): Definition of ‘remuneration’.
• Schedule V: Limits in case of no profits/inadequate profits.
• Companies (Appointment & Remuneration of Managerial Personnel) Rules, 2014.

2. What is the definition of remuneration and managerial personnel under the Act?

• Remuneration (Section 2(78)): Any money or its equivalent given or passed to any person for services rendered and includes perquisites as per the Income-tax Act, 1961.
• Managerial Personnel: Includes Managing Director (MD), Whole-Time Director (WTD), Manager, Chief Executive Officer (CEO), Chief Financial Officer (CFO), and Company Secretary (CS) as per Sections 2(53), 2(54), 2(94), and 2(51).

3. Who is eligible for managerial remuneration?

Managerial remuneration is paid to:

• Managing Director
• Whole-Time Director
• Manager
• Other Directors (Executive and Non-Executive), subject to limits and company profitability
• Key Managerial Personnel (KMP), as per Section 203 and Schedule V.icsi+1

4. What is the maximum managerial remuneration payable by a public company?

A public company may not pay more than:

• 11% of net profits (calculated under Section 198) in one financial year to managerial personnel (directors, MD/WTD, or manager).
• Within this 11%:
  • Single MD/WTD/Manager: up to 5% of net profits
  • More than one MD/WTD/Manager: up to 10% (collectively)
  • Non-executive directors: 1% (with MD/WTD/Manager); 3% (without).
• Sitting fees (for meetings) are excluded, but capped at ₹1 lakh per meeting.

5. How is ‘net profit’ calculated for remuneration purposes?

• Calculated as per Section 198, with specific inclusions (government subsidies, bounties) and exclusions (capital profits, asset sales, unrealized gains, etc.).
• Usual operating charges/costs are deducted; capital gains and extraordinary items are generally excluded.

6. What to do if the company has inadequate or no profits?

• Under Schedule V, remuneration can be paid based on the company’s ‘effective capital’ as follows:

Higher limits apply with a special shareholder resolution. For a tenure of less than one year, pro-rata limits apply.

7. What is ‘effective capital’ and how is it calculated?

Effective capital means the sum of:

• Paid-up share capital (excluding share application money)
• Share premium account
• Reserves and surplus (excluding revaluation reserve)
• Long-term loans and deposits repayable after one year

Less:

• Investments (except by investment companies)
• Accumulated losses
• Preliminary expenses not written off Calculated on the last day of the previous financial year.

8. What procedural requirements apply for paying remuneration above the prescribed limit?

• Special Resolution: Needed from shareholders in a general meeting to pay above limits (Section 197, Schedule V).
• Notice: Should include terms, is filed with ROC in the prescribed form (MR-1).
• No Defaults: No default in payments to banks, financial institutions, creditors, etc.
• Disclosure: Detailed information and justification required in notice and Board report. Annual disclosures about the ratio to employee median, etc., are mandatory for listed companies.
• Duration: Approval covers up to three years; renewal needed if continuing.

9. Does Section 197 apply to private companies?

No, the Section does not apply to private companies (as per recent exemptions), so there are no specific caps for them. Still, private companies should ensure compliance as per their articles and sound governance.

10. Can a person be an MD/manager in two companies and draw remuneration?

Yes, provided Board resolutions are passed in both companies, and overall remuneration does not exceed statutory limits in either company.

11. What happens if the company fails to comply with the rules?

Non-compliance may result in:

• Excess remuneration must be refunded, held in trust till refund
• Penalties: Director up to ₹1 lakh and company up to ₹5 lakh per default
• The company cannot waive recovery without special shareholder approval.

12. How is remuneration for professional services treated?

If a director renders services of a professional nature (meeting qualifications), remuneration for these services is not included as ‘managerial remuneration’.

13. Are directors’ sitting fees included in remuneration limits?

No, sitting fees (up to ₹1 lakh per meeting) are not included in the 11% cap, but other monetary or non-monetary compensation is.

14. Can Independent Directors receive stock options?

No, Independent Directors cannot be granted stock options, but can receive sitting fees and commission (as per shareholder approval).

15. What is disclosed annually regarding managerial remuneration?

Listed companies must disclose:

• Ratio of each director’s remuneration to the median employee’s pay
• Percentage increase in remuneration for directors/employees
• Other prescribed particulars in the Board’s report and annual return.

16. When is Central Government approval required?

If the company doesn’t meet the conditions in Schedule V (e.g., disqualifications, special cases), Central Government approval is required to appoint/pay a managerial person.

17. How to treat insurance premiums for Director & Officer (D&O) liability?

Director & Officer liability insurance premium is not treated as remuneration unless a director is found guilty of fraud, negligence, or breach of duty.

18. What are the penalty provisions for non-compliance with the managerial remuneration provisions?

If a company pays, or a director/manager receives, remuneration in excess of the prescribed limits or without the required approvals:

• Refund Obligation: The excess remuneration must be refunded by the recipient to the company, held in trust until repayment.
• Penalty Amounts: As per Section 197(15):
  • Company: Fine up to ₹5 lakh per contravention.
  • Individual (director/manager):Fine up to ₹1 lakh per contravention.
• Waiver Restriction: Any waiver of recovery of excess remuneration requires approval from the company by a special resolution within two years from the date the sum becomes refundable.

19. What are the statutory forms required for managerial remuneration compliance?

The principal ROC (Registrar of Companies) forms are:

Timely filing is essential; late filing may attract additional penalties.

20. What is the shareholder approval required for paying remuneration above monetary caps or in cases of inadequate profits?

• Type of Approval: Special resolution of shareholders in a general meeting (≥75% majority).
• Specifics for Inadequate Profits: Approval is sought under Section II of Schedule V if remuneration exceeds the limits set out for the company’s effective capital.
• Central Government Approval: Only required if the company does not fulfill basic eligibility/conditions in Schedule V (very limited scenarios today).
• Resolution Validity: Generally valid for a period up to 3 years for such excess payment or as specified in the resolution.

21. Is shareholder approval required every financial year for paying excess managerial remuneration?

• No, not automatically every year.
• The special resolution can authorize excess remuneration for up to three years (the maximum allowed under Schedule V section II), provided the circumstances (profits/effective capital) remain the same.
• New approval is needed:
  • If the approved period ends, but the excess payment continues.
  • If there is a material change (e.g., remuneration amount, change in profitability status, new appointee).
  • In case of a change in terms or scheme of remuneration exceeding limits.
• Still, annual compliance (audit, disclosure, and Board affirmation) is required each year as part of the Board’s report and filings.

22. What information must be included in the notice for shareholder approval?

The explanatory statement to the shareholders must include:

• Nature of the concern or interest of every director and manager.
• Financial performance of the company.
• Proposed remuneration and justification.
• Comparative remuneration figures for similar positions in peer companies.
• Background, past remuneration, job profile of the managerial person.
• Other relevant details for transparency as per Schedule V.icsi+1

23. What are the disclosure requirements in the Board’s report regarding managerial remuneration?

For listed companies, additional disclosure requirements in the Board’s Report include:

• Ratio of remuneration of each director to median employee pay.
• Percentage increase in remuneration for each director/employee.
• Number of permanent employees on the rolls.
• Name and remuneration of top employees as per Rule 5(2) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014.

24. Is there a limit on remuneration for non-executive or independent directors?

Yes. Non-executive/independent directors may receive sitting fees (excluding in percentage limits), and profit-related commission if approved by shareholders and within the limits prescribed under Section 197 and Schedule V. They cannot receive stock options.

25. How often should companies monitor compliance for managerial remuneration?

• Annually: Before payment/credit of remuneration for the year, especially at the time of finalizing accounts.
• At appointment or reappointment: Whenever a managerial person is appointed, re-appointed, or terms changed.
• At change of effective capital/profit scenario: If there’s a shift to inadequate profits/no profits, or effective capital increases to a new bracket in Schedule V.

26. Can a company recover excess remuneration paid by mistake or oversight?

Yes. Section 197(9) and (10) mandatorily require directors/managers to refund any excess amount received. The company cannot waive such recovery unless permitted by a special resolution of the shareholders passed within two years.

27. What if the special resolution for excess managerial remuneration is not passed?

If the shareholders refuse:

• The company cannot lawfully pay remuneration in excess of the statutory limits.
• Any payment made will be treated as a violation, triggering a refund and penalties.

28. What is the process flow for approval and payment of managerial remuneration above limits?

1. Assess profit/adequacy status as per Section 198.

2. If above limits, Board and NRC (if applicable) approval.

3. Prepare a detailed notice with justification as per Schedule V.

4. Convene a general meeting and seek a special resolution.

5. File MGT-14 with ROC for the resolution.

6. File MR-1 for appointment/changes.

7. Annual Board report disclosures and auditor certification.

29. What is the role of the Nomination & Remuneration Committee (NRC) in managerial remuneration?

For listed and other prescribed companies, the NRC must:

• Recommend remuneration policies.
• Review and recommend specific remuneration packages for MD/WTD/manager/KMP.
• Ensure alignment with performance metrics and industry benchmarks.
• Provide its written recommendations to the Board before any decision or shareholder resolution.

30. Can remuneration be paid on a pro-rata basis if a director’s term is less than one year?

Yes. When a managerial person’s appointment or re-appointment covers less than a full financial year, the remuneration limits (both Section 197 and Schedule V) are calculated pro rata for the actual tenure served in that year, based on net profits or effective capital, as applicable.

31. How should variable pay (bonus/commission) be structured under Section 197?

• Commission on profits: Requires shareholder approval and must fall within overall caps.
• Performance bonus: Treated as part of remuneration; must be within the approved plan and comply with profit-linked limits.
• Disclosure: Variable components and performance criteria must be disclosed in the Board’s report.

32. What is the auditor’s role in managerial remuneration compliance?

In their report, auditors must:

• Confirm computation of net profits under Section 198.
• Verify that remuneration paid is within approved limits or that excess was approved by shareholders.
• Report non-compliance or defaults, if any, in the audit observations.

33. Can a company claw back remuneration if a director leaves before completing the performance period?

Claw-back or recovery provisions are not expressly mandated by the Act. However, companies may include claw-back clauses in the service agreement or Board resolution to recoup unearned bonuses or incentives if the director resigns early or is terminated for cause.

34. Is remuneration payable during the vacancy of the MD/WTD/managerial post?

No remuneration under Section 197 can be paid in respect of a vacant MD/WTD/manager post. However, if an acting or interim manager is appointed, remuneration for that person must comply with the same limits and approvals.

35. How are cap limits affected when a company issues new capital mid-year?

The effective capital or net profit base is determined on the last day of the immediately preceding financial year. Mid-year capital changes do not affect the existing year’s limits; they apply in the next financial year after recalculation.

36. Key Differences in Managerial Remuneration Framework between Public Company and Private Company?  

 Conclusion:-

Managerial remuneration under the Companies Act, 2013, is an area that balances fair compensation for top executives with accountability and transparency to shareholders and stakeholders. The legal framework—through Sections 196, 197, 198, Schedule V, and related rules—lays down clear, structured procedures for appointment, remuneration limits, approvals, disclosures, and penalties for non-compliance.

Companies must stay current with regulatory amendments, ensure robust documentation and disclosures, and uphold the spirit of sound corporate governance. Adhering to these rules strengthens shareholder trust and safeguards long-term sustainability.

Disclaimer: The information provided is for educational purposes and should not be considered as professional advice. The author shall not be liable for any direct, indirect, special, or incidental damage resulting from, arising out of, or in connection with the use of the information.