ACS Divesh Goyal

CS Divesh GoyalManaging Director is Key Managerial Personal of utmost importance. He is face of a company and its decision-making mechanism. A person gain significant advantages as Managing Director which may not be there, in case of his appointment as Manager or Chief Executive Officer. While Chief Executive Officer has no special advantage except his clubbing as Key Managerial Personnel with Manager and Managing Director, Manager has some. Their definitions speak themselves. Appointment of Managing Director, Whole – Time Director and Manager is governed by provision of Section 196 of the Act. They all are a different class of Key Managerial Personnel and has specific provision of appointment in addition of Section 203, will discuss in another post.

Note:

  • This Section is Applicable on Both Public and Private Company.
  • A company can appoint Either Managing Director or Manager not both.

Tenure:

  • Appointment of Managing Director, Whole – Time Director or Manager shall not for a term exceeding five years at a time. 

Re-appointment:

  • The company may re-appointment them for next term before expiry of their present term but not earlier than one year before expiry of the current term. This means, company may re-appoint them for next term in last one year of current term.

DISQUALIFICATION FOR APPOINTMENT OF MD, MANAGER OR MANAGER: No Company shall appoint or continue the employment of any person as

MD1

Explanation:

  • Words used in this Section are “shall appoint or continue the employment of”.  A company may appoint a person on these positions, who has attained the age of 70 years. By passing a Special Resolution. The explanatory statement annexed to the notice of such appointment shall justify such appointment.

CONDITIONS FOR APPOINTMENT OF MD, MANAGER OR WTD:

                                i.            By passing of Resolution in Board Meeting ( BOD decide Terns and Condition of such appointment) and

                              ii.            Approval of Shareholders by passing Resolution in Next General Meeting and

                            iii.            Appointment should accordance with the Section- 197 and Schedule- V.

                            iv.            If appointment is not accordance with the Schedule – V, Central Government permission require.

Explanation: The NOTICE convening Board or General Meeting for such appointment shall include terms and conditions of such appointment, remuneration  payable and other matter including interests of directors in such appointment.

*Subject to the provisions of this Act, 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.

MANAGERIAL REMUNERATION:

Managerial remuneration is one of major corporate governance issue in India. Promoters and controlling shareholders consider themselves owner of company and get maximum remuneration. Difference between corporate tax rate and income tax rate also priority to withdraw much money from “owned” company. Indian concept of “owned company” and corporate governance has co – existence in last two decades.

Note:

  • There is No Restriction relating to managerial remuneration for a Private Company.

 md2

Explanation:

  • If company wants to pay remuneration exceeding 11%, can pay by approval of Share holders in General Meeting with the Central Government Approval. (here only schedule- V require to follow or we have to take approval of CG)
  • The Percentage aforesaid shall be exclusive of SITTING FEES paid under sub Section- 5.
  • Net profit for this section shall be computed as per method given in Section 198. 
  • *In case of no profit or inadequate profit, the company shall pay remuneration to directors, Managing Directors, Whole Time Directors and Managers in accordance with Schedule V OR with previous approval of Central Government.
  • The remuneration payable to any director shall be determined either by articles of the company or by resolution or by special resolution passed by the company where its articles required for special resolution.
  • The remuneration payable to directors shall be inclusive of all remuneration payable to him for services rendered by him in any other capacity EXCEPT
  • Services rendered are of Professional In Nature and in opinion of Nomination and Remuneration Committee or of Board of Directors as the case may be, director has requisite qualification for practice of profession.

Sitting Fees to Directors:

  • Director may receive remuneration by way of fee for attending meetings of the Board or committee thereof. The amount of such sum as may be decided by the Board of directors thereof which shall not exceed one lakh rupees.
  • Provided that sitting fees to Independent Directors and Women Directors shall not be less than the sitting fee payable to other directors.
  • Manner of Payment of Remuneration: Remuneration of Director or Manager may be paid below mention ways

a)      Monthly Payment 

b)      Specified Percentage Of Profit

c)      Partly By One And Partly By Specified Percentage Of Profit

  • If any director receives directly or indirectly by way of remuneration any sum in excess of prescribed limit, he shall refund such sum. Until refund, he will keep this sum in trust for the company. Without Central Government permission, the company shall not waive recovery of any such sum.
  • Every listed company shall disclose Ration of Remuneration Of Each Director To The Median Employees’ remuneration and such other details as prescribed.
  • Where any insurance is taken by company for “Kay Managerial Personnel Liability Insurance” Premium of such insurance shall not be included to the remuneration of any key managerial personnel. However, if such person found guilty, such premium shall be treated as part of their remuneration.
  • Any director, receiving commission from the company and Managing Director or Whole Time Director may receive any remuneration or commission from holding company or subsidiary company. This information shall be disclosed by company in the Board’s Report.

SCHEDULE- V

Section 197 of the companied Act, 2013 in its sub section (3) and (11) say that in case of no profit or inadequate profit, the company shall pay remuneration to directors, Managing Directors, Whole Time Directors and Managers in accordance with Schedule V OR with previous approval of Central Government.

Part- I of Schedule- V

  • A person should satisfy following conditions for appointment as managerial person:
  1. He had not been sentenced to imprisonment for any period or to a fine exceeding Rs. 1000 for the conviction of an offence under 26 Acts listed in schedule.
  2. He had not been detained for any period under COFEPOSA, 1974.
  • *If he is a managerial person In More Than One Company, he draws remuneration from one or more companies subject to the ceiling provided in section V of Part II.

Example: {If a person is Managerial person in only Company ‘A’ and acco. To 197 he can take 20Lakh as Remuneration. And if he is Managerial person in Company ‘B” as per section 197 he can take 30lakh remuneration. But if same person is Managerial person in both Company A & B. Then maximum remuneration he can get all together is 30Lakh.}

  • He is resident of India.

a)      for taking up employment in India; or

b)      for carrying on a business or vacation in India

RESIDENT IN INDIA: Resident in India include a person who has been staying in India for a continuous period of not less than twelve months immediately preceding the date of his appointment as a managerial person .

A non-resident in India shall enter India only after obtaining a proper Employment Visa.

PART- II Section- II of SCHEDULE- V: Remuneration in case of inadequate or no profit

In case of inadequate or no profit, a company may pay to a managerial person without central government approval HIGHER OF THE FOLLOWING TWO OPTIONS (A or B):

A. As per following table with approval of company by Ordinary Resolution in General Meeting :

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

*IF, SHAREHOLDERS PASSES SPECIAL RESOLUTION THIS LIMIT WILL BE DOUBLE. 

B. The  managerial person who was Not A:

a)       Security Holder holding Securities of the company of nominal value of rupees five lakh or more or

b)      An employee or

c)      A director of the company or 

d)      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

*IF, SHAREHOLDERS PASSES SPECIAL RESOLUTION THIS LIMIT WILL BE DOUBLE.

CONDITIONS:

  1. This remuneration should be approved by resolution of Board of director and also by Nomination and Remuneration committee (where it is)
  2. The remuneration shall be approved by a resolution of shareholders in general meeting.
  3. The company has not made any default in repayment of its debt or debenture or interest thereon for a continuous period of 30 days in preceding financial year
  4. The approval of remuneration by special resolution should be for not more than three year. (SR is require only when we are giving remuneration double to limit mention.)
  5. The statement along with the notice of this resolution should provide information  mentioned in schedule.
  6. The Auditor or Company Secretary of company or company secretary in practice certify that the requirement of this Schedule have been complied with and such certificate shall be incorporated in the return filed with the Registrar.

PART- II Section- III of SCHEDULE- V: Remuneration in case of inadequate or no profit:

  In these cases, the company may pay remuneration in excess of section ii:

a)      Where Remuneration  in excess of these limit is Paid By  Any Other Company, Condition:

  • That other company is either a foreign company or has got the approval of its shareholders in general meeting to make such payment,
  • That other company treats this amount as managerial remuneration for the purpose of section 197.
  • The total managerial remuneration payable by such other company to its managerial persons including such amount or amounts is within permissible limits under section 197.

b)      In these cases, the company may pay remuneration in excess of Section II: where—

(i)             The company is a newly incorporated company, for a period of Seven Years From The Date Of Its Incorporation, or

(ii)            The company Sick Company within five years from sanction of scheme of revival.

c)       Where Remuneration exceeds the limit in section- II but Remuneration fixed by BIFR & NCLT.

d)      An unlisted company in SEZ may pay up to Rs. 240 Lakh yearly if, company has not raised any money by

  • Public issue of shares in India
  • Public issue of Debentures in India
  • Has not made any default in repayment of any of its debt or debenture or interest payable thereon for a continues period of 30 days

THE CONDITIONS FOR SECTION III ARE:

  1. An auditor or Company Secretary of the company or company secretary in practice has certifies that:
  2. All secured creditors and term lenders have stated in writing that they have no objection for the appointment of the managerial person as well as the quantum of remuneration and such certificate is filed along with the return as prescribed
  3. There is no default on payments to any creditors, and all dues to deposit holders are being settled on time.
  4. For Para (b) and (c), the managerial person is not receiving remuneration from any other company.

PART- II Section- IV of SCHEDULE- V: PERQUISITES NOT INCLUDED IN MANAGERIAL REMUNERATION

1. Managerial person shall be eligible for:

a)      Contribution to provident fund, superannuation fund or annuity fund to the extent these either singly or put together are not taxable under the Income-tax Act.

b)      gratuity payable at a rate not exceeding half a month’s salary for each completed year of service

c)       Encashment of leave at the end of the tenure

2. A expatriate managerial person shall be eligible for:

a)      Children’s education allowance

b)      Holiday package studying outside India or family staying outside India

c)       Leave travel concession

PART- II Section- V of SCHEDULE- V: REMUNERATION PAYABLE TO A MANAGERIAL PERSON IN TWO COMPANIES

A managerial person shall draw remuneration from one or both companies. The total remuneration drawn should not exceed the higher maximum limit admissible from any company of which he is a managerial person.

Author can be reached at csdiveshgoyal@gmail.com)

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27 responses to “Appointment And Remuneration Of Managerial Personnel: Companies Act 2013”

  1. Anu K S says:

    Sir, there are only 16 Acts and not 26 in Part I, right?

  2. Sunil Kashyap says:

    hlo all , My company is public unlisted company and it is having one managing director , one whole time director and two non – executive director then in this case what what maximum remunration it can pay to its directors

  3. mamta says:

    can a whole time director of a private company can work as a salaried employee in other listed company?

  4. Ashish Giniwala says:

    Hi,

    Company has appointed Managing Director and CFO on monthly remuneration and now subsequently company do not want to pay any remuneration to MD and CFO. can company do this? if yes, what is the procedure and under which section? if no, what is the conclusion.

  5. Nipa Verma says:

    Hi,
    Please advise that is it compulsory to pay remuneration to a Director who is appointed as whole time Director / executive in the unlisted public limited company.

    Please Reply.

    Thanking you.

    • Kapil Asnani says:

      The Act nowhere specify that managerial remuneration is mandatory to pay if your company has earn the profit or not as per sec 197.
      But if company’s policy or AOA has a provision to pay remuneration to Whole Time Director, than you have to pay.

    • Kapil Asnani says:

      Act says that restriction on managerial remuneration will be applicable only on Public Company.
      But it does not specify whether it applies to both closely held or largely held or any one one of them.
      So it applies to your company also.

  6. atul says:

    In case company has two whole time directors, three non-executive directors and two independent directors, whether it is permissible to give certain %age of profit to only two (out of three) non-executive directors.

  7. ruchita says:

    Dear writer, i believe section 197 & schd V is not applicable to pvt companies

    • Kapil Asnani says:

      There is no restriction on distribution of managerial remuneration in case of Pvt. Company.
      Therefore, you are correct Schedule V and Section 197 does not applies to Pvt. Companies.

    • Kapil Asnani says:

      Section 196iv) applies in case of appointment of WTD or MD or manager to Pvt. company also.

  8. AMIT says:

    please provide me format of certificate of Nomination & Remuneration Committee for appointment of MD of the Company. Same format is required to be attach in Form No. MR-1

  9. Akash says:

    If private limited company converted into public limited company in the month of February then conditions of director remuneration will apply from February itself ? or director have to refund the remuneration received in excess of public co. limitation ?

    • Kapil Asnani says:

      In case of conversion, director does not have to refund the remuneration, because as per companies act section 199 refund of Managerial remuneration by directors is only to be done when company is required to re-state its financial statements due to fraud or non-compliance with any requirement under this Act.

  10. Deepali Lakdawala says:

    if i want to close the my private limited company by FTE in july 2015, any my financial year ending 2014-15 turnover is nil then could i give 16.00 lacs remuneration to directors to make my balancesheet capital equal to loss.

  11. shubham says:

    notes on director remmuneration given by private company according to companies act 2013

  12. Shailendra Vijay says:

    Dear Sir,

    My query is that my client is public limited company having no MD, WTD or maager. Please sugget me that how much my client can pay to its directors as remuneration provided company is having net profit of Rs 35,00,000/-.
    Waiting for your reply.

  13. SATHYA says:

    Dear Sir,

    Will the above provisions applicable to a closely held public ltd company. ie.Public are not at all interested.Because my company is just the extension of a partnership firm which the other members are just my kith and kin.

    thank q

  14. Aradhana says:

    Dear sir,

    Is it mandatory to get approval from board of directors for increase in remuneration of whole time director for Private Limited Company?

    As per Section 196, sub sec(4), it is said that the provision of section 197 and Schedule V, a managing director, whole-time director or manager shall be appointed and the terms and conditions of such appointment and remuneration payable approved by the Board of Directors at a meeting which shall be subject to approval by a resolution at the next general meeting of the company and by the Central Government incase such appointment is at various to the conditions specified in that Schedule.

    But as per section 197, it is said that 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 11% of the net profits of that company for that financial year computed in the manner laid down in section 198….

    I request for your kind clarification.

  15. Gautami says:

    You will have to file an application with the Central Govt in Form MR-2 (When a foreign director is appointed on Board and he has been in India for less than 180 days in previous year)

  16. Manisha says:

    Actually my query is; Compaines Act 2013, Schedule V says for appointing a whole time director, person shud be resident of India for last twevle months. Right! one company has appointed foreginer director in company in sep 2014 and he was not staying.. So company has made a default. Now what will be the process??? And RoC se abhi tak koi notice bhi nahi aaya .[30/04 10:48 am] .: Actually my query is; Compaines Act 2013, Schedule V says for appointing a whole time director, person shud be resident of India for last twevle months. Right! one company has appointed foreginer director in company in sep 2014 and he was not staying.. So company has made a default. Now what will be the process???
    And RoC se abhi tak koi notice bhi nahi aaya hai
    Company has 3 directors!: Company has 3 directors!

  17. Jaisal Mohatta says:

    I had file resolution form for Managerial Remuneration in case of Inadequate profit for three years. Now I want to increase the existing limit of remuneration by suppressing the previous resolution just after 1 year from the date of previous resolution.

    Can I do it??

  18. CS Swarup Sarkar says:

    Can an individual be appointed as MD in more than one companies whether Pvt. or public or listed?

  19. Rahul Srivastava says:

    My question is Can a Company have 2 Managing directors

  20. M sreenivasulu Reddy says:

    Dear sir, very useful analysis, thank you very much for that. I have a doubt whether section 203 applies to private limited companies. Rule 8 of Appendix III on remuneration and appointment of Managerial personnel states that it applies to only public companies with paid up capital of 10 crores and listed companies but not private companies. But you have stated that section 196 and 203 apply to both private and public companies . Pl clarify

  21. anjali says:

    if a person is

    x company WTD
    y company Director

    can he get remunertaion from both the companies

  22. Nirmal says:

    Hi,
    it is very useful analysis. I only want know how the computation to be done under explanation VI(A) for current year profit.
    Suppose Mr. A- director has joined the company in February 2012 and upto March 2011 “excess expenditure over income” is Rs. 500 crore . Now FY 2011-2012, the company has earned profit of Rs. 1000 crore, then as per sec 198 profit is Rs. 1000 crore or Rs. 500 crore after adjustment of Rs. 500 crore expebses over income upto previous year?
    Many thanks in advnace

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