The Companies Act 2013 requires companies to comply with Chapter XIII for appointment and payment of remuneration to managerial personnel.
♠ For payments of remuneration an understanding of the relevant sections of the Companies Act 2013 is important to identify the relevant conditions to be fulfilled. The computation of net profits of a company in the manner laid out under Section 198 and the eligible limits as stipulated in Schedule V are most critical for determination of remuneration payable. These provisions were elaborated further by the Companies (Appointment and Remuneration of Managerial Personnel) Rules 2014 released in March 2014.
♠ The key provisions in the sections 196 to 202, Schedule V and the Rules cover appointment of managing director, whole-time director or manager, overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits, computation of net profits, recovery of remuneration in certain cases, Central Government or company to fix limit with regard to remuneration, compensation for loss of office of managing or whole-time director or manager and appointment of key managerial personnel.
The new Act has introduced twenty new provisions in Chapter XIII and modified twenty two of the existing provisions which are quite significant for understanding and implementation. The new Act has also dropped six of the requirements which were stipulated in the earlier Act.
♠ Important new provisions are:
a. Conditions and stipulations for payment of remuneration under different circumstances
b. Disclosure requirements in Board’s report
c. Recovery of remuneration on restatement of financial statements due to fraud or non-compliance
d. Requirement of whole-time key managerial personnel based on thresholds
Senior executive compensation in a highly competitive corporate environment wherein governance is a supreme importance, managerial remuneration is an important aspect of enterprise management. It is critical to motivate the senior executive to perform well in their challenging role but it is equally necessary to ensure their compensation for their efforts and keep a check on the extravagant in their pay packages. It is important therefore to demonstrate discipline and fairness by checking objectivity in determining the remuneration package while striking a balance between the interest of the company and its stakeholders.
Managerial remuneration was covered in the publications of the Institute of Chartered Accountants of India, statement on auditing practices and guidance note on certification of corporate governance in addition to which there have been two expert advisory opinions in 1962 and 1992.
With a view to enhancing the understanding and application of the provisions relating to managerial remuneration and an application guide has been prepared for the use by the members of ICAI.
This guide has been published to give the members an authoritative guidance to the members on managerial remuneration, which has undergone significant changes in the new Companies Act
This guide includes the provisions of the Companies Act, Schedule V and Rules and provides application guidance on conditions eligible limits for remuneration and determination of profits for computing remuneration.
This guide is applicable for all companies for preparation of its financial statements from April 1, 2014.
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