Appointment and remuneration of managing director and whole-time director under companies act 2013

A Managing Director and Whole-time Director have been categorised as Key Managerial Personnel under Section 203 of Companies Act 2013. Apart from playing a key role in the overall growth and administration of the company, the Companies Act 2013 contains elaborate provisions relating to their appointment, remuneration, duties and liabilities.

Following is a concise note on the procedure for Appointment, Tenure, Disqualification and Remuneration of Managing Directors (MD) and Whole-time Directors (WTD).

I. Schedule V

Applicable Provisions Section 196, Section 203 Companies (Appointment and Remuneration of Managerial Personnel) Rules 2014

II. Definitions

MD( 2(54)):

Managing Director” means a Director who, by virtue of the articles of a Company or an agreement with the Company or a resolution passed in its General Meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called.

WTD (Section 2(94):

Whole-time Director” includes a director in the whole-time employment of the company.

III. Applicability

1. All Listed Companies

2. Every Public Company having a Paid-Up Share Capital of Rs. 10 Crores or more

IV. Appointment

a) Appoint as Additional Director in BM.

b) Appoint as MD/ WTD in same or subsequent BM.

c) Resolution appointing as MD/ WTD to contain terms & conditions of appointment & remuneration.

d) File following e-forms.

e-form Time Period
DIR-12 Within 30 days of apt. as Additional Director
DIR-12 Within 30 days of apt. as MD/ WTD
MGT-14 Within 30 days of apt. as MD

(Not applicable to WTD)

MR-1 Within 60 days of apt. as MD/ WTD
MR-2 (CG approval) Within 90 days of apt. as MD/ WTD, if apt. in variance to Section 196 & Schedule V

e) Approve terms & conditions of appointment & remuneration in GM.

f) Notice convening BM & GM shall contain terms & conditions of appointment & interests of other directors in the said appointment

g) If appointment not approved at GM, prior act not deemed invalid.

V. Tenure

1. Not more than 5 years.

2. Reappointment made only or after 1 year left in his term.

VI. Ineligibility for appointment or continuance of appointment

1. Age less than 21 years or more than 70 years

Note: Person aged more than 70 years may be appointed by passing SR & explanatory statement accompanying notice states justification for appointment or,

By passing OR and obtaining CG approval

2. is an undischarged insolvent or has at any time been adjudged as an insolvent.

3. has at any time suspended payment to his creditors or makes, or has at any time made, a composition with them.

4. has at any time been convicted by a court of an offence and sentenced for a period of more than six months.

5. been sentenced to imprisonment for any period, or to a fine exceeding one thousand rupees, for the conviction of an offence under any of the laws enumerated under Schedule V Part I. (Approx. 14 to 18 laws have been specified)

6. been detained for any period under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974.

7. He is not resident of India.

Additional grounds

(as per Section 164)

1. is of unsound mind

2. an order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force

3. has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call

4. has been convicted of the offence dealing with related party transactions at any time during the last preceding five years

5. has not obtained DIN

6. directorships exceed the prescribed limits

VI. Ineligibilities for reappointment

Director in company which:

(a) has not filed financial statements or annual returns for any continuous period of three financial years; or

(b) has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more

VII. Restrictions

1. Company can’t appoint MD & Manager at same time.

2. The same person can’t be Chairman & MD/ CEO unless:

A) AOA of company provide otherwise.

B) Company does not carry multiple businesses.

3. Person if MD in one company, can be MD/ Manager of only 1 other company.

(Resolution approved by all the directors present at the meeting & specific notice given)

REMUNERATION

I. Applicable Provisions:

            Section 197

            Section 198

            Companies (Appointment and Remuneration of Managerial Personnel) Rules 2014

            Schedule V

II. Applicable to

Payment of remuneration to directors of a Public Company including MD, WTD, Manager

III. Limits

a) Overall limit- 11% of Net Profits

(includes Managing Director, Wholetime Directors, Managers)

b) Sub limits

Executive Directors

(i) 1 Executive Director (MD/ WTD/ Manager)- 5% of net profits

(ii) More than 1 Executive Director (MD/ WTD/ Manager)- 10% of net profits, to all taken together

              Non -Executive Directors

(i) 1% of net profits, if company has MD/ WTD/ Manager

(ii) 3% of net profits- in all other cases

C) Payment of Remuneration beyond aforementioned Limits

Company can pass SR in GM to:

1. Pay beyond 11% of net profit. (subject to Schedule V)

2. Supercede internal limits for different classes of directors

D) Preconditions for breaching limits

Default in payment of dues to bank/ public financial institution/ non-convertible debenture holder/ secured creditor- prior consent required

E) Matters not included in aforesaid limits

1. Fees paid for attending Board/ committee meetings.

2. Premium for Insurance taken by company for MD/ WTD/ CEO/ CFO/ Manager for indemnifying against liability in respect of any negligence, default, misfeasance, breach of duty or breach of trust

3. Premium part of remuneration if director/ CFO/CEO/ CS convicted of any offence.

F) Remuneration drawn in excess of limits

If remuneration drawn in excess of limits without approval:

1. Director to refund excess sum drawn within 2 years of receipt or within such lesser period as allowed by company.

2. Director to hold sum in trust for the company till amount refunded.

G) Waiver of refund o of refund of excess remuneration paid

1. Company can’t waive such refund except by SR.

2. SR shall be passed within 2 years of sum becoming refundable.

3. If company has committed default in payment of dues to bank/ public financial institution/ non-convertible debenture holder/ secured creditor- their prior consent required.

IV. Disclosure in Auditors’ report

1. Statement whether remuneration paid to the directors is in accordance with Section 197.

2. Whether remuneration is paid in excess of limits to any director.

V) Sitting Fees

A) Not included in limits of Section 197.

B) Not to exceed Rs. 1 lakh per Board/ Committee meeting.

C) Sum to be decided by Board of Directors.

D) Fees to Id/ Women Director not less than fees to other directors.

Author comment

As a convention and as part of better Governance, sitting fees are not paid to Managing Directors and Whole time directors, as they being whole-time employees of the company, attending Board and Committee meetings is a part of their obligations discharged towards the company, for which they are remunerated by the company. Moreover, under the erstwhile Companies Act 1956, when Central Government approval was obtained, the CG specifically restricted payment of sitting fees to Managing Directors.

VI. Disclosure in Board’s report

1. All Companies:

a) Names of top 10 employees in terms of remuneration drawn during the financial year.

b) Names of employees drawing aggregate remuneration not less than:

(i) One crore and two lakhs, if employeed throughout the year.

(ii) Eight lakh and fifty thousand per month, if employeed for part of the year.

(iii) Draws remuneration in excess of the amount drawn by the MD/ WTD/ Manager and holds either individually or together with spouse & dependent children, not less than 2% of equity shares of the company.

c) Contents of statement:

(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 and

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

d) If employees other than directors or their relatives posted in foreign countries, drawing more than 60 lakhs p.a or Rs. 5 lakhs p.m, not included in Board report circulated to the members but filed with ROC.

e) If any shareholder requests for the information stated in clause 2 before the AGM, the same to be provided in 3 days of such request.

f) If request made after AGM, information to be provided in 7 days. *

Author Comment

There are divergent views regarding compliance of the aforementioned provisions (as mandated under Rule 5(2) of Companies(Appointment and Remuneration of Managerial Personnel) Rules 2014) by all companies. In our opinion, taking a conservative view, it is recommended that it shall be complied by all companies.

2. Listed company:

a) Ratio of director’s remuneration to median employees’ remuneration for the financial year.

b) % Increase in remuneration paid to each Director, CEO, CFO, CS, Manager in the financial year.

c) % Increase in the median remuneration of the employees in the financial year.

d) of the employees on the roll of the company.

e) 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.

f) Affirmation that the remuneration is as per the remuneration policy of the company.

VII) Penalties

 a) Section 203:

1. Company- penalty- Rs. 5 lakhs

2. Director & KMP in default- Penalty- Rs. 50,000.

3. Continuing contravention-Penalty- Rs. 1000 per day up to max. Rs. 5 lakhs.

b) Section 197

1. Person contravening provisions- penalty of Rs. 1,00,000.

2. Company contravening provisions- penalty of Rs. 1,00,000.

C) Section 196:

No prescribed penalty, hence residual penalty.

1. Company contravening provisions- fine of Rs. 10,000

2. every officer of the company or other person fine which may extend to Rs. 10,000

3. Continuin contravention- fine of Rs. 1000 per day after day till default continues.

VIII. Important Points

1. Remuneration to a Director determined by provision in AOA or by OR/ SR appointing him.

2. Remuneration determined shall include compensation for services rendered in any other capacity.

3.  Compensation shall not be included, if:

a) Services rendered are of a professional nature.

b) Nomination & Remuneration Committee/ Board is of the opinion that director possesses requisite qualification.

4. Director can be paid by monthly payment and/ or % of net profits.

5. MD/ WTD receiving commission from the company can receive commission or remuneration from holding or subsidiary company subject to its disclosure in Board’s report.

6. Any application to CG before 12th September 2018 shall abate & company to comply with amended provisions within 1 year.

7. If financial statements restated, then MD/WTD shall refund excess remuneration received before restating.

8. MD/ WTD/ Manager only can be paid compensation for loss of office/ retirement.

9. Compensation not to be paid to MD/WTD/ Manager:

a) Resigns from office due to reconstruction/ amalgamation & he is appointed on same post in reconstructed/ amalgamated company.

b) Resigns from his office otherwise than on the reconstruction of the company or its amalgamation

c) Office vacated under Section 167(1).

d) Company wound up due to negligence of the director.

e) Guilty of fraud or breach of trust in relation to, or of gross negligence in or gross mismanagement of, the conduct of the affairs of the company or any subsidiary or holding company.

f) Director has instigated, or has taken part directly or indirectly in bringing about, the termination of his office

10. Compensation not to exceed remuneration for remaining term or remuneration for 3 years, whichever is less.

11. Remuneration calculated based on average remuneration earned in previous 3 years

IX. Remuneration in case of no profits/ inadequate profits

A) Factors to be considered

(a) The financial position of the company;

(b) The remuneration or commission drawn by the individual concerned in any other capacity;

(c) The remuneration or commission drawn by him from any other company;

(d) Professional qualifications and experience of the individual concerned;

B) Pre conditions

1. Payment approved by Board & NRC (if applicable).

2. Default in payment of dues to bank/ financial institution/ NCD holder/ secured holder- approval obtained

3. OR/ SR in GM for (A) of Section II of Part II of Schedule V.

4. SR for Part (B) of Section II of Part II of Schedule V (SR not exceeding 3 years).

5. Statement accompanying notice for GM contained prescribed information.

6. Disclosures in Board report:

(i) all elements of remuneration package such as salary, benefits, bonuses, stock options, pension, etc., of all the directors;

(ii) details of fixed component. and performance linked incentives along with the performance criteria;

(iii) service contracts, notice period, severance fees; and

(iv) stock option details, if any, and whether the same has been issued at a discount as well as the period over which accrued and over which exercisable.

(A):

(1) (2)
Where the effective capital is Limit of yearly remuneration payable shall not exceed (Rupees)
(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 crores:

*Pass SR to supercede aforesaid limits.)

B) For MD/WTD in professional capacity

Remuneration paid as above, if MD/WTD :

1. Does not have any interest in company/ holding/ subsidiary, directly or indirectly or through any statutory structures

2. Not related to promoters/ directors of company/ holding/ subsidiary within last 2 years.

3. Is a graduate

4. Possesses expertise in field of operation of company

(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 Employees Stock Option Plan or by way of qualification shall be deemed to be a person not)

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