Analysis Of The Recent Amendment To Section II Of Part II Of Schedule V Relating To Managerial Remuneration vide Notification No. S.O. 2922(E) dated 12.09.2016 Under Companies Act, 2013
Recently, the Ministry of Corporate Affairs has issued a notification for making amendments in the Section-II of Part-II of Schedule-V (hereinafter referred to as ‘SP-II-V’) of the Companies Act, 2013 (hereinafter referred to as ‘the 2013 Act’) which contain a privilege change from the point of view of corporate.
It has always been difficult for the Companies to pay the worthy consideration in the situation where the Company is in loss or is having inadequacy of profits, as there are certain limits prescribed by the 2013 Act. The Company which wants to pay the remuneration to the managerial personnel in case of loss or inadequate profits, have been provided with some compliances to be done out of which one is Central Government Approval.
Obtaining Central Government’s approval is itself a hassle task to do and it usually takes long time to attain the approval of both the Company and also the professionals involved in the matter and is an encumbrance in the ease of doing business.
In this article, we will make a comparative study of the earlier provisions to be complied with in case of loss or inadequate profits and the new concept been introduced by the MCA in the recent notification.
SECTION 197(3) OF THE 2013 ACT
“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.”
If we go through the plain reading of the above provision, it clearly states that-
In case the Company is having loss or the profits of the Company are inadequate to pay the requisite amount of remuneration, the Company have to choose either of the two options given below-
- To comply with SP-II-V of the 2013 Act, or
- Central Government Approval (in case the Company do not want to follow Schedule V or is not able to comply it.).
EARLIER SECTION II OF PART II OF SCHEDULE V OF THE 2013-
Earlier, whenever the Company has having loss or inadequate profit and the company wants to pay managerial remuneration it needs to comply with SP-II-V, which specifically prescribed certain limit or upper cap on the payment of remuneration to managerial personnel.
As per the provisions of SP-II-V
“Where in any financial year during the currency of tenure of any managerial person, a Company has no profit 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) given below-
|Where the effective capital is||Limit of yearly remuneration|
|(i) Negative or less than 5 Crores||30 Lakhs|
|(ii) 5 Crores and above but less than 100 Crores||42 Lakhs|
|(iii) 100 Crores and above but less than 250 Crores||60 Lakhs|
|(iv) 250 Crores and above||60 Lakhs plus 0.01% of the effective capital in excess of Rs. 250 Crore.|
In the case the managerial who was not a security holder holding securities of the Company of nominal value of rupees five lakh or more or an employee or a director of the Company or not related to any director or promoter at any time during the two years prior to his appointment as a managerial person- 2.5% of the current relevant profit”
Comment- The above limit in itself is very constrained and does not allow the worthy consideration to be paid to the managerial person, which may lead to increase in the turnover of the managerial personnel of the Company and that may lead to the harmful effects to the Company.
How the remuneration is decided in case of loss or inadequate profit?- AN AMBIGUITY.
Another ambiguity in the mind of the professional is in determining the manner in which the remuneration is to be decided.
As per the provisions of Section 197(4) of the 2013 Act-
“(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”
As per the above provision, the remuneration of the director is to be determined in the following manner-
- In case where the articles of the Company provide some specific process or compliance to be done, then by complying with the ARTICLES OF THE COMPANY, and
- In case where the articles of the Company do not provide anything regarding it, then by passing ORDINARY RESOLUTION.
As we have discussed earlier that the Company which is carrying loss and inadequate profits have to comply with SP-II-V of Schedule V of the 2013 but if we read the provisions specified under SP-II-V it generates ambiguity regarding the manner of determination of remuneration to be paid to managerial persons.
Going through the provisions of SP-II-V and the proviso to the respective limits prescribed under ITEM A and B, it clearly resolves that-
“The limit specified in the above two ITEMS can be doubled if the consent of the members of the Company by way of SPECIAL RESOLUTION is taken.”
For making the payment of remuneration above the double of the limit specified in ITEM A, the Company needs to obtain CENTRAL GOVERNMENT APPROVAL.
Up-till now, it clearly indicates that in the case where the company wants to pay remuneration within the limit specified in the respective categories and do not want to double it, it only requires to attain the approval of members by way of ORDINARY RESOLUTION only.
But if we read the further proviso mentioned in SP-II-V, then it indicates certain conditions to be fulfilled for the determination of remuneration out of the limit specified in the respective categories, out of which one is as under-
“A Special Resolution has been passed at the general meeting of the Company for payment of remuneration for a period not exceeding three years.”
The insertion of above condition was the reason for the evolution of ambiguity in the mind of professionals and it was not clear as to whether to pass Ordinary Resolution or Special Resolution for the determination of Remuneration in the limit prescribed under the respective categories.
Thus, it was recommended to pass SPECIAL RESOLUTION for the determination of the Remuneration in case the company has loss or inadequate profits.
What in case the Company has defaulted in repayment of debts, or debentures or interest payable thereon?
By the second condition in the proviso mentioned in the SP-II-V and applicable to whole Section, no company can pay remuneration to the managerial person in case it has made default in repayment of debts, or debentures or interest payable thereon.
If such circumstances is persisting in the Company then it is left with only one option i.e. CENTRAL GOVERNMENT APPROVAL.
ANALYSIS OF THE MCA NOTIFICATION DATED 12.09.2016 AND IT’S IMPACT?
Recently, the Ministry of Corporate Affairs has issued the notification through which it has substituted the old SP-II-V of Schedule V with the new one, the impacts of which are as under-
♥ The Limit specified under the ITEM A of SP-II-V has been doubled to give flexibility to the Companies in determining the remuneration to be paid to managerial person. The revised Limits are as under-
|Where the effective capital is|| Limit of yearly remuneration |
|(i) Negative or less than 5 Crores||60 Lakhs|
|(ii) 5 Crores and above but less than 100 Crores||84 Lakhs|
|(iii) 100 Crores and above but less than 250 Crores||120 Lakhs|
|(iv) 250 Crores and above||120 Lakhs plus 0.01% of the effective capital in excess of Rs. 250 Crore.|
Provided that the above limit shall be doubled if the resolution passed by the Company is Special Resolution.
♥ The ITEM B has been substituted with the new provisions, which are as under-
“In case of managerial person who is functioning in a professional capacity, no approval of Central Government is required, if such managerial person is not having any interest in the capital of the Company or its holding company or any of its subsidiaries directly or indirectly or through any other statutory structures and not having any direct or indirect interest or related to the directors or promoters of the Company or its holding or any of its subsidiaries at any time during the last two years before or on or after the date of appointment and possesses graduate level qualification with expertise and specialised knowledge in the field in which the company operates;
Provided that any employee of a Company holding shares of the Company not exceeding 0.5% of its paid-up share capital under any scheme formulated for allotment of shares to such employees including Employee Stock Option Plan or by way of qualification shall be deemed to be a person not having any interest in the capital of the Company.”
“Professional Directors are now can be remunerated without CENTRAL GOVERNMENT APPROVAL irrespective of the limit”
By the insertion of the above provision the MCA has provided the relaxation to the directors who are being appointed in the Company in the professional capacity. In case the director is being appointed in the professional capacity, the Central Government Approval is NOT required to be obtained, even if the remuneration drawn by him is over the double of the limit specified in new ITEM-A and mere passing of special resolution will suffice the purpose. But at the same time, they have to comply with some conditions to avail such exemption, which are as under-
- Such managerial person shall not have any interest in the capital of the Company, its holding or any of its subsidiaries, either directly or indirectly, and not even through any other statutory structures like company, society, trust, etc.
- Such managerial person shall not be possessing any direct or indirect interest or relation with any directors or promoters of the Company or its holding company or its subsidiaries at any time during two years before or on or after the appointment, and
- Such managerial person shall possess graduate level qualification with specialised and expertise in the field or activity as relating to object of the Company.
Exemption to employees-
Employees will not be considered to be interested in the capital of the Company, if he is holding shares of the Company not exceeding 0.5% of its paid-up share capital allotted to him under any scheme formulated for to employees or Employee Stock Option Scheme, or by way of qualification.
♥ The ambiguity regarding, what shall be the manner of determining the remuneration i.e. Ordinary Resolution or Special Resolution is being cleared by replacing the condition earlier clause (iii) of the respective proviso with the following clause-
“an ordinary or a special resolution, as the case may be, has been passed for payment of remuneration as per the limits laid down in item (A) or a special resolution has been passed for the payment of remuneration as per item (B), at the general meeting of the Company for a period not exceeding three years.”
It clearly states that-
♣ For determining the remuneration of the director which has not been appointed in professional capacity, shall be done in the following manner-
- In case the remuneration to be paid is in the limit specified in item (A), by way of ORDINARY RESOLUTION.
- In case the remuneration to be paid is double to the limit specified in item (A), by way of SPECIAL RESOLUTION.
♣ For determining the remuneration of the director which has been appointed in professional capacity, shall be done in the following manner-
- By way of SPECIAL RESOLUTION
♥ Resolution to the Company which has made default in payment of its debts, or debentures or interest payable thereon.
The MCA notification has eventually made the clarity regarding the situation in which the Company has made default in payment of its debts or debentures or interest payable thereon by revising the condition specified by way of clause (ii) of the respective proviso applicable to whole section (SP-II-V) od Schedule V. The revise clause (ii) is as under-
“the company has not committed any default in repayment of any of its debts (including public deposits) or debentures or interest payable thereon for a continous period of thirty days in the preceding financial year before the date of appointment of such managerial person and in case of a default, the company obtains prior approval from secured creditors for the proposed remuneration and the fact of such prior approval having been obtained is mentioned in the explanatory statement to the notice convening the general meeting;”
Now the Ministry has provided an incredible option to the Company i.e. by way of obtaining the prior approval of the secured creditors and if the Company is able to do so, then it does not require to obtain Central Government Approval.
COMPARISON OF OLD V. NEW SECTION-II OF PART-II OF SCHEDULE V
|S.No.||Particulars||Old Provisions||New Provisions|
(ITEM-A OF SECTION-II OF PART-II OF SCHEDULE V)
|Effective Capital and respective yearly remuneration- |
(i) Negative or less than 5 Cr. = 30 Lakhs
(ii) 5 Cr. and above but less than 100 Cr. = 42 Lakhs
(iii) 100 Cr and above but less than 250 Cr. = 60 Lakhs
(iv) 250 Cr. or more = 120 lakhs plus 0.01% of the effective capital in excess of 250 Cr.
(ITEM-B OF SP-II-V OF SCHEDULE V)
|2.5% of the current relevant profit |
Applicable to Managerial Person NOT being-
• a holder of security of the nominal value of less than INR 5 Lacs
• employee or director of the Company during last two year appointment
• related to any director or promoter during last two year prior to appointment.
|New Concept of Professional Director has been inserted. |
NO LIMIT on remuneration.
Employees holding upto 0.5% of the paid-up share capital of the Company allotted pursuant to any scheme or ESOPs or by way of qualification NOT to be considered as interested.
|4.||Scope Of ITEM-B of SP-II-V of SCHEDULE V||To the Company Only||Covers the Company and also its holding and subsidiaries.|
|5.||CG Approval||Required in the following cases- |
• Non-compliance of SP-II-V, and
• Payment of remuneration in excess of the double of the limits specified.
|6.||Directors covered for CG Approval, if remuneration is above the double the limit prescribed||ALL KINDS OF DIRECTOR||PROFESSIONAL DIRECTORS ARE EXEMPTED|
|7.||Eligibility criteria for Professional Director||NO CONCEPT WAS THERE||1. No interest in the capital of the Company, its holding or subsidiaries, either directly or indirectly, |
2. Not having any direct or indirect relation or interest to the company, its holding or subsidiaries in the last two years.
3. Possess Graduation as Qualification, and
4. Expertise and specialisation in the object of the Company.
|8.||Default making Company||Cannot Pay Remuneration in case of loss or inadequacy of profits, if defaulted in payment of debts or debentures and interest thereon.||Can pay Remuneration |
Subject to prior approval from Secured Creditors.
|9.||Kind of Resolution||SPECIAL RESOLUTION |
(Due to ambiguity discussed earlier)
|ORDINARY RESOLUTION OR SPECIAL RESOLUTION, as the case may be|
MCA has made the concept of payment of remuneration in case of loss or inadequate profit, very flexible and convenient for the Companies. Now the limits specified in item (A) of SP-II-V Schedule V are wider in itself and if Company wants to go beyond that limit it can double the limit by passing SPECIAL RESOLUTION. MCA has also made the clarity regarding the manner in which the remuneration is to be determined by this notification.
Now, the determination of remuneration for the managerial person in case of loss or inadequacy will not be that encumbrance process and the task can be done effectively and efficiently.
Disclaimer :- The above analysis are my personal views and shared only for professional discussions.
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