“Discover the intricacies of Managerial Remuneration under the Companies Act, 2013. Learn about limits, approval processes, disclosures, and legal aspects. Demystify the complexities of compensating managerial personnel while maintaining regulatory compliance.”
In the corporate world, where profits drive business, incentives play a crucial role in motivating managers. Thus, managerial remuneration is an essential factor to consider in managing a business, particularly in a fiercely competitive environment. While it’s crucial to provide incentives to those performing the challenging role of managing companies, it’s equally important not to exceed reasonable limits with perks and pay.
To strike a balance between the need for incentives and the risk of excessive compensation, Indian law intervenes to regulate managerial remuneration. The law aims to prevent companies from squandering profits unnecessarily while ensuring that managerial personnel receives adequate and reasonable compensation. This balancing act helps to ensure that businesses thrive without exploiting their resources or employees.
Although the Companies Act, 2013 does not provide a definition for “Managerial Remuneration,” the term is commonly used to refer to remuneration paid to a managerial person. The Nomination and Remuneration Committee is responsible for developing the criteria for evaluating the qualifications, positive attributes, and independence of a director, as well as recommending policies regarding remuneration for directors, key managerial personnel, and other employees.
When formulating these policies, the NRC must ensure that the level and composition of remuneration are reasonable and sufficient to attract, retain, and motivate directors who possess the qualities necessary to run the company successfully. Additionally, the relationship between remuneration and performance must be clear and meet appropriate performance benchmarks. The remuneration paid to directors, key managerial personnel, and senior management should reflect a balance between fixed and incentive pay that reflects short- and long-term performance objectives appropriate to the company’s operations and goals.
Section 197(1) of the Companies Act, 2013 stipulates the upper limit of Managerial Remuneration that can be paid by a Public Company.
Section 197(1) of the Companies Act, 2013 establishes the maximum limit on the amount of Managerial Remuneration that a Public Company can pay. The total amount of Managerial Remuneration that a public company can pay to its directors, including managing directors and whole-time directors, and its manager, in any given financial year, cannot exceed 11% of the net profits of the company for that year, as calculated in the manner set out in Section 198 of the Act. However, it’s important to note that the remuneration of the directors cannot be deducted from the gross profits.
If a Public Company wishes to pay Managerial Remuneration exceeding the total limit of 11% of net profit, it may do so with the approval of its members at a general meeting, as per the provisions of Schedule V of the Companies Act, 2013, along with one should consider the following key points while computing the managerial remuneration.
Default in payment to secured creditors, Banks, Financial Institutions, and NCD holders by the Company:
According to the third proviso of Section 197(1) of the Companies Act, 2013, if a company has defaulted in paying its dues to a bank, public financial institution, non-convertible debenture holders, or any other secured creditor, it must obtain prior approval from the concerned bank, public financial institution, or creditor before seeking approval for payment of remuneration exceeding the prescribed limit in a general meeting.
Only to Public Limited Company:
Private Limited Companies are not subject to Section 197 of the Companies Act, 2013, which applies only to Public Limited Companies. This means that there is no limit on the remuneration that private companies can pay to their managerial personnel and they are not required to comply with the provisions of Section 197 and Schedule V of the Act.
Provisions for remuneration to non-executive directors, including independent directors, in the absence or inadequacy of profits:
Before the Companies (Amendment) Act, 2020, if a company did not make any profits or made inadequate profits, Managing Directors, Whole-time Directors, or Managers were permitted to receive sitting fees for attending board meetings under Section 197(5), and minimum remuneration as per Section 197(3), along with Schedule V of the Companies Act, 2013. However, Non-Executive Directors and Independent Directors could only receive sitting fees under Section 197(5) and were not eligible for any other compensation.
With the Companies (Amendment) Act, of 2020, changes were made to Sections 149 and 197 of the Companies Act, 2013 to allow for the payment of remuneration to non-executive directors, including independent directors, in case of no profit or inadequacy of profits, in a similar manner as executive directors, in accordance with the provisions of Schedule V of the Companies Act, 2013.
Furthermore, on March 18, 2021, the Ministry of Corporate Affairs (MCA) issued a notification amending Schedule V of the Companies Act, 2013 to specify the remuneration limits for non-executive directors, including independent directors, in situations where there are no profits or inadequate profits.
The payment of insurance premiums is not considered a component of remuneration::
Section 197(13) states that if a company buys insurance for its managing director, whole-time director, manager, Chief Executive Officer, Chief Financial Officer, or Company Secretary to protect them against any liability related to negligence, default, misfeasance, breach of duty, or breach of trust concerning the company, then the premium paid on the insurance will not be considered part of their remuneration. But, if any of these personnel is found guilty, the premium paid on such insurance will be treated as part of their remuneration.
Repayment of remuneration in specific circumstances:
Section 197(9) mandates that if any director receives remuneration directly or indirectly, exceeding the limit prescribed or without necessary approval under this section, they must refund such excess sums to the company within two years, or a shorter period as permitted by the company. The director must hold such excess sums in trust for the company until they are refunded. Section 197(10) prohibits the company from waiving off the recovery of any refundable sum under sub-section (9), except with the approval of shareholders by special resolution within two years from the date the sum becomes refundable. However, in case of a company’s default in payment of dues to any bank, public financial institution, non-convertible debenture holders, or any other secured creditor, the company must obtain prior approval from the relevant bank, public financial institution, non-convertible debenture holders, or other secured creditors before seeking a waiver.
Recovery of remuneration paid to managers in certain cases:
Section 199 of the Companies Act, 2013 outlines the recovery of remuneration, including stock options, received by the designated Managerial Personnel in cases where the benefits given to them exceed the amounts reflected in restated financial statements. The section states that, notwithstanding any liability incurred under the Companies Act, 2013, or any other applicable law, if a company is obligated to restate its financial statements due to fraud or non-compliance with any requirement under the Companies Act, 2013, and its associated regulations, the company must recover any excess remuneration inclusive of stock options from any current or former managing director, whole-time director, manager, or Chief Executive Officer (regardless of their title) who, during the period for which the financial statements are required to be restated, received remuneration in excess of what would have been payable to them according to the restated financial statements.
The SEBI (LODR) Regulations, 2015 mandates the disclosure of remuneration:
Regulation 17(6)(e) concerns the compensation that is required to be given to executive directors who are either member of the promoter group or are promoters themselves.
The listed entity is required to obtain shareholder approval by special resolution in a general meeting if the annual remuneration payable to an executive director who is a promoter or a member of the promoter group exceeds either Rs. 5 crores or 2.5% of the net profits of the listed entity, whichever is higher. If there is more than one such dirDemystifying Managerial Remuneration under the Companies Act, 2013ector, and the aggregate annual remuneration to such directors exceeds 5% of the net profits of the listed entity, shareholder approval by special resolution in a general meeting is also required. However, this approval is valid only until the end of the director’s term.
Special Resolution in case of remuneration payable to NED exceeds certain limit:
Every year, if the annual remuneration payable to a single non-executive director(NED) exceeds 50% of the total annual remuneration payable to all non-executive directors, the listed entity must obtain the approval of shareholders by special resolution, while providing details of the remuneration.
Disclosures in the Board of Directors Report:
The Board of Director’s report under the heading “Corporate Governance”, as per Schedule V of the Companies Act, 2013, requires disclosure of the following information
(i) The complete remuneration package, including salary, benefits, bonuses, stock options, pension, etc., for all directors.
(ii) Details of fixed components and performance-linked incentives, including performance criteria.
(iii) Information regarding service contracts, notice periods, and severance fees.
(iv) Details of any stock options, including whether they were issued at a discount and the period over which they accrued and can be exercised.
A comprehensive overview of the term “Remuneration”:
All directors of a company, excluding the managing or whole-time director or manager, are included in the term “remuneration payable to the directors.”
Section 2(78) of the Companies Act, 2013 provides a definition of the term “Remuneration,” which refers to any payment made to an individual in exchange for the services provided by them. This includes perquisites, as defined under the Income-tax Act, 1961.
Let’s analyze the detailed chart below to examine the prescribed individual limit for each director under section 197(1) and the Companies Act. We will also analyze the terms such as Effective Capital (including and excluding) and the computation of Net Profit Before Tax (NPBT) under section 198 of the Companies Act, 2013.
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