Section 196, Section 197 And Schedule V of Companies Act, 2013 Read with Companies (Amendment) Act, 2020
Section 196 of Companies Act, 2013
Appointment of Managing Director, Whole-time Director or Manager
Qualifications for appointment as Managerial Personnel U/S 196 of Companies Act, 2013:
Followings are considered as Managerial Personnel u/s 196 of the Companies Act, 2013:-
Managing Director as defined u/s 2(54) of Companies Act, 2013;
Manager as defined u/s 2(53) of Companies Act, 2013; and
Whole-time Director as defined u/s 2(94) of Companies Act, 2013;
The Company shall not appoint Managing Director and Manager at the same time. Also, the term of appointment of Managerial Personnel shall not exceed 5 years.
If a Company wish to re-appoint the same Managing Director/Manager for extended period they can do so by passing a resolution one year before the expiry of his/her term of appointment.
Disqualifications for appointment as Managerial Personnel U/S 196 of Companies Act, 2013:
a) No person who has attained the age of 70 years can be appointed as Managerial Personnel unless Special Resolution along with Explanatory statement is put in motion as members approve the same with proper justification for such appointment.
Further, in case no special resolution is passed but votes cast in favour of the said motion exceeds the votes, if any casted against the said motion in that case the Board may file an application with Central Government with reasons showing benefits of the said appointment for Company. If Central Government is of the opinion that such appointment is required and beneficial of the Company the appointment of the person who has attained the age of 70 years may be made.
b) is an undischarged insolvent or has at any time been adjudged as an insolvent
c) has at any time suspended payment to his creditors or makes, or has at any time made, a composition with them; or
d) has at any time been convicted by a court of an offence and sentenced for a period of more than six months.
Remunaration To Managerial Personnel
Adequate Profit
Section 197 and Schedule V deals with the remuneration to Managerial Personnel
Remuneration within Limits:
As per Schedule V Part II Section I – When Company is having adequate profits to pay remuneration such companies are subject to the provisions of Section 197(1) of the Companies Act, 2013 which says as under:
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.
The Net profit needs to be calculated as per Section 198 of the Companies Act, 2013 except that the remuneration of the directors shall not be deducted from the gross profits.
The criteria are further bifurcated as under:
i. 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.
ii. The remuneration payable to directors who are neither managing 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
Provided also that, where the company has defaulted in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, 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.
There are exclusions also for the calculation of the percentage mentioned above. The exclusions can be referred from Section 197.
Remuneration exceeding the Prescribed Limits:
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.
The company shall not waive the recovery of any sum refundable to it under sub-section (9) unless approved by the company by special resolution within two years from the date the sum becomes refundable.
Provided that where the company has defaulted in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, 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 approval of such waiver.
Inadeqate Profits
Part II Section II – as per the Schedule V of Companies Act, 2013
Where in any financial year during the tenure of a Managerial person or other Directors, a Company has no profits or its profits are inadequate, it may, pay remuneration to the managerial person or other Director, not exceeding, the limits under (A) and (B) given below-
| (1) | (2) | (3) | |
| Sr. No. | Where the effective capital (in rupees) is | Limit of yearly remuneration payable shall not exceed (in rupees) in case of a managerial person | Limit of yearly remuneration payable shall not exceed (in rupees) in case of other director |
| (i) | Negative or less than 5 crores. | 60 lakhs | 12 lakhs |
| (ii) | 5 crores and above but less than 100 crores. | 84 lakhs | 17 lakhs |
| (iii) | 100 crores and above but less than 250 crores. | 120 lakhs | 24 lakhs |
| (iv) | 250 crores and above. | 120 lakhs plus 0.01% of the effective capital in excess of Rs.250 crores: | 24 Lakhs plus 0.01% of the effective capital in excess of Rs.250 crores: |
Provided that the remuneration in excess of above limits may be paid if the resolution passed by the shareholders is a special resolution.
In this the words “other Directors” are included with reference to the Amendment under Schedule V of the Companies Act, 2013.
By including words Other Directors now provisions are also applicable to Non Executive Directors as well as Independent Directors.
As per Companies (Amendment) Act, 2020 which is effective from 18/03/2021:
Section 40 of Companies (Amendment) Act, 2020 – Amendment of Section 197(3) of Companies Act, 2013 says that:
Notwithstanding anything contained in sub-sections (1) and (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 or any other non-executive director, including an independent director, 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.
Section 32 of Companies (Amendment) Act, 2020 – Amendment of Section 149 of Companies Act, 2013 says that:
“Provided that if a company has no profits or its profits are inadequate, an independent director may receive remuneration, exclusive of any fees payable under sub-section (5) of section 197, in accordance with the provisions of Schedule V.”
Now hence we conclude that any other Director in this reference means including Non-Executive Directors and Independent Directors as well in the purview of Section 197 & Schedule V.
What is not included in the aforementioned limits for Remuneration?
Section 197(4)
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.
Section 197 (5)
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:
Provided that the amount of such fees shall not exceed the amount as may be prescribed:
Provided further that different fees for different classes of companies and fees in respect of independent director may be such as may be prescribed.
Part II Section III – as per the Schedule V of Companies Act, 2013
Remuneration payable by companies having no profit or inadequate profit in certain special circumstances:
Followings are the exceptions to the Section II of the Schedule V Part II i.e. circumstances in which Companies are allowed to pay remuneration exceeding the limits specified under Schedule V Part II Section II to Managerial Person or other Directors:
(a) where the remuneration in excess of the limits specified in Section I or II is paid by any other company and that other company is either a foreign company or has got the approval of its shareholders in general meeting to make such payment, and treats this amount as managerial remuneration for the purpose of section 197 and the total managerial remuneration payable by such other company to its managerial persons or other directors including such amount or amounts is within permissible limits under section 197.
(b) Where the company—
(i) is a newly incorporated company, for a period of seven years from the date of its incorporation, or
(ii) is a sick company, for whom a scheme of revival or rehabilitation has been ordered by the Board for Industrial and Financial Reconstruction for a period of five years from the date of sanction of scheme of revival, or
(iii) is a company in relation to which a resolution plan has been approved by the National Company Law Tribunal under the Insolvency and Bankruptcy Code, 2016 for a period of five years from the date of such approval, it may pay any remuneration to its managerial persons or other directors.
(c) Where remuneration of a managerial person or other director exceeds the limits in Section II but the remuneration has been fixed by the Board for Industrial and Financial Reconstruction or the National Company Law Tribunal:
Provided that the limits under this Section shall be applicable subject to meeting all the conditions specified under Section II and the following additional conditions:—
(i) except as provided in para (a) of this Section, the managerial person is not receiving remuneration from any other company;
(ii) the auditor or Company Secretary of the company or where the company has not appointed a Secretary, a Secretary in whole-time practice, certifies that all secured creditors and term lenders have stated in writing that they have no objection for the appointment of the managerial person or other director as well as the quantum of remuneration and such certificate is filed along with the return as prescribed under sub-section (4) of section 196.
(iii) the auditor or Company Secretary or where the company has not appointed a secretary, a secretary in whole-time practice certifies that there is no default on payments to any creditors, and all dues to deposit holders are being settled on time.
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