Overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits
♦ 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
♦ The percentages aforesaid shall be exclusive of any fees payable to directors under
|Particulars||% as per section 197|
|to any one managing director; or whole-time director or manager if there is more than one such director||shall not exceed 5% of the net profits of the company shall not exceed 10% of the net profits to all such directors and manager taken together|
|to directors who are neither managing directors nor whole-time directors||shall not exceed 1% of the net profits of the company, if there is a managing or whole-time director or manager 3% of the net profits in any other case|
The percentages aforesaid shall be exclusive of any fees (Sitting Fees) payable to directors.
In cases where Schedule V is applicable on grounds of no profits or inadequate
profits, any provision relating to the remuneration of any director which purports to increase or has the effect of increasing the amount thereof, whether the provision be contained in the company’s memorandum or articles, or in an agreement entered into by it, or in any resolution passed by the company in general meeting or its Board, shall not have any effect unless such increase is in accordance with the conditions specified in that Schedule and if such conditions are not being complied, the approval of the Central Government had been obtained.
Remuneration payable by companies having no profit or inadequate profit without Central Government approval
Where in any financial year during the currency of tenure of a managerial person, a company has no profits or its profits are inadequate, it may, without Central Government approval, pay remuneration to the managerial person not exceeding, the limits under (A) and (B) given below:-
|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:|
Provided that the above limits shall be doubled if the resolution passed by the shareholders is a special resolution.
Section 197(3) says
Notwithstanding anything contained in sub-sections 197(1) and 197(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.
Let us understand the same with the help of 3 examples
Case 1:- Adequate Profits
Example: ABC Ltd. is a public limited company with effective capital more than 5 crore but less than 100 crore. The Net profit (under section 198 of companies act) of company in FY 2016-17 is Rs 25 crores
– Now the company can pay maximum remuneration under section 197(1) amounting to Rs 2.75 crores p.a. i.e 11% of 25 crores.
Case 2:- Inadequate Profits
Example: ABC Ltd. is a public limited company with effective capital more than 5 crore but less than 100 crore. The Net profit (under section 198 of companies act) of company in FY 2016-17 is Rs 125 lakhs.
Maximum Remuneration calculated as per section 197(1) amounts to Rs 13.75 lakhs.
Now as per Section 197(3) ABC Ltd can pay remuneration not exceeding the limit prescribed under schedule V i.e Rs 84 lakh per annum in this case.
Case 3:- No Profits
Example: ABC Ltd. is a public limited company with effective capital more than 5 crore but less than 100 crore. The Net profit under section 198 of companies act) of company in FY 2016-17 is Rs -25 lakhs.
Remuneration under section 197(1) cannot be calculated since there is a loss in the financial year, as per section 197(3) the company can pay remuneration not exceeding the limit prescribed under schedule V i.e Rs 84 lakh per annum in this case.
|Adequate Profits||197(1)||11% of net profits|
|Inadequate Profits/ No profits||197(3) with schedule V||Limit prescribed as per schedule V|
Section 197(3) with schedule V comes in picture when there are inadequate profits or no profits.