Director Remenuration Under Section 197 of Companies Act, 2013

Director remuneration is a critical aspect of corporate governance, governed by Section 197 and 198 of the Companies Act, 2013. This article delves into the regulations and restrictions surrounding the remuneration of different types of directors in various scenarios.

DIRECTOR REMENURATION

Section 197, 198 of the Companies Act, 2013 read with Schedule V.

As per Section 2(78) of the companies Act, 2013 Remuneration’ defined as any money or its equivalent given or passed to any person for services rendered by him and includes perquisites as defined under income tax Act, 1961.

Accordingly, any money paid in any form or by any name to a director for services rendered by him will amount to ‘remuneration’ and any benefit provided by company to a director will amount to ‘remuneration and monetary equivalent will have to be included in remuneration of the directors.

Managing Director – As per Section 2(54) of Companies Act, 2013, A managing director is a director who has been entrusted with substantial management powers of a company by virtue of the company’s articles of Associations, an agreement with the company, a resolution passed in the company general meeting, or by the Board of Directors.

Executive Director – An Executive Director is the company’s full-time working Director. They are in charge of the company’s affairs and are held to a higher standard. They must be diligent and cautious in all of their dealings.

Non- executive Director – A Non-Executive Director is not involved in the day-to-day operations of the company. They might take part in the planning or policy-making process and challenge the executive directors to make decisions that are best for the company.

As per the provisions of Companies Act, 2013, the restriction under Section 197 and Section 198 shall apply only when managerial remuneration or remuneration paid by a public Company. Hence, any remuneration paid or payable by a private company to its director shall be out of purview of the above said section and shall not be counted for the purpose of maximum remuneration payable by the company.

1) When the Company Makes Profit

The provisions is Section 197 and section of Part ii of Schedule V deal with the remuneration payable by a company making profit

2) When the Company makes no profit or it’s are inadequate

Section II and III of Part II of Schedule V deal

Overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits.

Section 197 of Companies Act, 2013

(1) 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 eleven per cent of the net profits of that company for that financial year computed in the manner laid down in section 198 except that the remuneration of the Directors shall not be deducted from the gross profits:

Provided that the company in general meeting may authorise the payment of remuneration exceeding eleven per cent of the net profits of the company, subject to the provisions of Schedule V:

Accordingly, a public company can pay remuneration to its directors including executive directors and non-executive directors within the limits of 11% of the net profits and this limits can only be exceeded

with the prior approval of the members of the company by an ordinary resolution. [First proviso to Section 197(1)]

Remuneration to Executive Directors In Case Company has Adequate Profits: According to second proviso to section 197(1)

(i) of the Act, except with the approval of the company in general meeting, the remuneration payable to any one managing director; or whole time director or manager shall not exceed 5% of the net profits of the company and if there is more than one such director remuneration shall not exceed 10% of the net profits to all such directors and manager taken together.

However, in case of these limits can be paid with the approval of the members of the company by passing a special resolution and prior approval of any bank or public financial institution or non-convertible debenture holders or any other secured creditor is also required in case of defaulting company, but subject to the upper limit of 11%.

(ii) The remuneration payable to Directors who are neither managing Directors nor whole-time Directors shall not exceed,—

(A) one per cent of the net profits of the company, if there is a managing or whole-time director or manager;

(B) three per cent of the net profits in any other case.]

However, as per the third proviso of Section 197(1) of the Companies Act, 2013, that if the company has defaulted in the payment of dues to any bank or public financial institution or nonconvertible debenture holders or any other secured creditor, the prior approval of the bank or public financial institution concerned or the nonconvertible debenture holders or other secured creditor, as the case may be, shall be obtained by the company before obtaining the approval in the general meeting.

(2) The percentages aforesaid shall be exclusive of any fees payable to Directors under sub-section (5).

Remuneration in case of Company has no or inadequate profits

Section 197(3) If, in any financial year, a company has no profits or its profits are inadequate to pay the remuneration fixed by the board, the company cannot pay to its directors (including any managing or whole time director or manager) remuneration except in accordance with the provisions of schedule V of the 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:

Provided that any remuneration for services rendered by any such director in other capacity shall not be so included if—

(a) The services rendered are of a professional nature; and

(b) In the opinion of the Nomination and Remuneration Committee, if the company is covered under sub-section (1) of section 178, or the Board of Directors in other cases, the director possesses the requisite qualification for the practice of the profession.

(6) A director may receive remuneration by way of fee for attending meetings of the Board or Committee thereof or for any other purpose whatsoever as may be decided by the Board:

(8) The net profits for the purposes of this section shall be computed in the manner referred to in section 198.

(9) If any director draws or receives, directly or indirectly, by way of remuneration any such sums in excess of the limit prescribed by this section or without approval required under this section, he shall refund such sums to the company, within two years or such lesser period as may be allowed by the company, and until such sum is refunded, hold it in trust for the company.

SCHEDULE V

Where in any financial year during the currency of tenure of a managerial person, or other director, a company has no profits or its profits are inadequate, it may, pay remuneration to the managerial person or other director not exceeding the higher of the limits under (A) given below:—

(A)

Provided that the remuneration in excess of above Limits may be paid if the resolution passed by the shareholders as special resolution.

Penalty for non-compliance

If any person makes any default in complying with the provisions of section 197, he shall be punishable with fine of one lakh rupees which may be extend to five lakhs rupees.

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