Article explains Statutory provisions in relation to payment of managerial remuneration, Certain items excluded from calculation of managerial remuneration, Calculation of Net profit and Managerial Remuneration in case of loss or inadequacy of profits.

Statutory provisions in relation to payment of managerial remuneration

According to the provisions of Section 197 of the Companies Act 2013 the overall remuneration paid by the public company to its directors including managing director and wholetime director and its manager in relation to the financial year shall not exceed 11 % of net profits of the company.

Provided that remuneration payable to any one managing director or wholetime director or manager shall not exceed 5 % of the net profit of the company and if there are more than one such director then the remuneration shall not exceed 10 % of the net profit to all such directors taken together.

It also provided that the remuneration payable to directors who neither managing director or wholetime director or manager

  • One percentage of net profit, if there is a managing director or wholetime director or manager.
  • Three percentage of net profit, if there is no managing director or wholetime director or manager.

The company in general meeting may authorize the payment of managerial remuneration in excess of the limit specified under the Act after passing special resolution.

If the company made default in payment of dues to any bank or public financial institutions or non-convertible debenture holders or any other secured creditor then the prior approval of the bank or public financial institutions or non-convertible debenture holders or other secured creditor shall be obtained by the company before obtaining approval in the general meeting.

Certain items excluded from calculation of managerial remuneration :-

It is also provided that the sitting fee provided to the directors for attending meeting and also any insurance taken in the name of managing director, wholetime director or manager for indemnifying them against any liability in respect of any negligence, default, misfeasance ,breach of duty or breach of trust for which they have been guilty in relation to the company , the premium paid on such insurance shall not be treated as a part remuneration.

if such person is proved to be guilty then the premium paid on such insurance shall be treated as part of remuneration.

Calculation of Net profit

The Act says the remuneration payable to managing director or wholetime director or manager or any other director shall be up to the prescriber percentage on the net profit of the company. Section 198 of the Companies Act 2013 provides calculation of net profit of the company.

In computing the net profits of a company for the purpose of Section 197 of the Act the following points should be noted, Credit shall not given for the following items :-

  • The profit by way of premium of shares or debentures of the company which are issued or sold by the company.
  • Profit on sale by the forfeited shares.
  • Profit of a capital nature including profit from the sale of undertaking.
  • Profit from sale of any immovable property or fixed assets of acapital nature.
  • Any change in carrying amount of an asset or of a liability recognised in equity reserves.
  • Any amount representing unrealised gains , notional gains or revaluation of assets.

The following sums shall be deducted :-

  • All usual working charges.
  • Directors remuneration.
  • Bonus or commission paid or payable to any member of the company’s staff or to any engineer ,technician or any person employed by the company.
  • Any tax notifies by the Central Government as being nature of on excess of abnormal profit.
  • Any tax on business profits imposed for special reasons and notified by the Central government in this behalf.
  • Interest on debentures, mortgages and unsecured loans and advances.
  • Expenses on repairs whether to immovable or movable properties.
  • Contribution and depreciation.
  • The excess of expenditure over income, which had arisen in computing the net profits in accordance with this section in any year, in so far as such excess has not been deducted in any subsequent year preceding the year in respect of which the net profits have to be ascertained.
  • Any compensation or damages to be paid in virtue of any legal liability including a liability arising from a breach of contract.
  • any sum paid by way of insurance against the risk of meeting any liability such as is referred to in clause.
  • Debts considered bad and written off or adjusted during the year of account.

In making the computation aforesaid, the following sums shall not be deducted:-

  • Income-tax and super-tax payable by the company under the Income-tax Act, 1961.
  • Any compensation, damages or payments made voluntarily, that is to say, otherwise than in virtue of a liability.
  • loss of a capital nature including loss on sale of the undertaking or any of the undertakings of the company or of any part thereof not including any excess of the written-down value of any asset which is sold, discarded, demolished or destroyed over its sale proceeds or its scrap value.

Managerial Remuneration in case of loss or inadequacy of profits:- 

The company may pay remuneration to its Managing director, wholetime director, manager or to any other non-executive director in case of loss or inadequacy of profits subject to the fulfilment of conditions specified in the Schedule V of the Companies Act 2013.

The maximum remuneration payable in case of loss or inadequacy of profits is up to the limit provided in the Schedule V of the Companies Act 2013.

Provided that for the purpose of payment of managerial remuneration as per the situation discussed above, the company should complied with the following conditions :-

1. A resolution should be passed in the board meeting.

2. The company has not committed any default in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, and in case of default, the prior approval of the bank or public financial institution concerned or the non-convertible 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.

3. Ordinary resolution or in case if limit is exceeded special resolution is passed in the general meeting.

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