All we need to know about managerial remuneration

Vijaya Agarwala

1. Who are managerial personnel?

The term managerial personnel includes managing director, manager and directors (whole time or part time).

2. Who is a manager or a managing director?

A manager is defined under 2(53) of the Companies Act, 2013 (‘Act’), as an individual subject to the superintendence, control and direction of the Board of Directors, has the management of the whole, or substantially the whole, of the affairs of a company, and includes a director or any other person occupying the position of a manager, by whatever name called, whether under a contract of service or not.

A Managing Director (‘MD’), is defined under section 2(54) of the Act, to mean a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called.

However, a company can appoint either a MD or a manager at a time for a maximum term of 5 (five) years at a stretch.

3. Who is a whole time director?

A whole time director (‘WTD’) is an individual who assigns whole of his time towards the appointing company. Section 2(94) states, that a WTD includes a director in whole time employment of the company. Therefore, for the purpose of this Act, WTD and director in whole time employment are colloquially used terms.

4. Who can be a managerial personnel?

Schedule V of the Act clearly lays down the factors determining the eligibility criteria of a managerial personnel as stated below:

1. a resident of India[1] (a person who has been staying in India for a continuous period of not less than 12 months immediately preceding the date of his appointment as a managerial personnel and who has come to India for the purpose of :

a. taking employment in India[2], or

b. carrying on business or vocation in India

2. has completed the age of 21 years and not attained the age of 70 years;
3. has not been sentenced to imprisonment for any period or to a fine exceeding Rs.1,000/- for the conviction of offence under several Acts as mentioned in Schedule V;
4. has not been detained for any period under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 (52 of 1974);
5. where he is a managerial person in more than one company, he draws remuneration from one or more companies subject to the ceiling provided in Section V of Part II.

5. Are all KMPs managerial personnel?

No, managerial person forms only a subset of Key Managerial Personnel (‘KMP’), as Section 2(51) defines KMPs to mean:

i. the CEO or CFO or MD or manager

ii. company secretary

iii. whole time directors

iv. such other officers as may be prescribed

6.  Can a person who has not attained the age twenty one years be appointed as a managerial personnel?

No, any person who has not attained the age of twenty one (21) years cannot be appointed as a managerial personnel.

7. Can a person who is above seventy years of age be appointed as a managerial personnel?

Yes, as per the proviso to clause (c) of Schedule V, a person beyond the age of seventy years can be appointed as a managerial personnel subject to the approval of the shareholders in the general meeting by a special resolution.

8. Can a person who has either been convicted or detained under the specified Acts be appointed as a managerial personnel?

Yes, such a person may be appointed provided the Central Government (‘CG’) has given its approval for such appointment.

9. Can these managerial personnel be reappointed immediately after the expiry of the term?

No, managerial personnel can only be re-appointed after the expiry of 1 year (cooling period) from the termination of his office.

10. Whether Central Government is to be intimated on appointment of a managerial personnel?

Yes, a company is required to file a return of appointment of a MD, manager or WTD with the Registrar of Companies within 60 days of appointment in Form MR.1.

11. What does managerial remuneration mean?

It means the remuneration paid to all managerial personnel as referred to above.

12. What all add up to remuneration?

Section 2(78) of the Act, defines remuneration as “any money or its equivalent given or passed to any person for services rendered by him and includes perquisites as defined under the Income-tax Act, 1961”.

Remuneration incorporates all that the company pays to its managerial remuneration, including perquisites and anything which but for the company paying it would have been the personal expenditure of the employee. However, as per Schedule V, contribution towards provident fund (PF)/ Gratuity Fund or encashment of leave at the end of the tenure shall be not be considered as part of remuneration.

13. What is the prescribed ceiling of managerial remuneration?

Section 198 lays down the ceiling of total managerial remuneration payable by a company to its managerial personnel at 11% (eleven percent) of the net profits of the financial year before charging such remuneration.

Remuneration payable to part time directors shall not exceed 1% (one percent) of such profits. Where a company does not have a MD, WTD or a manager, overall remuneration payable to part time directors shall not exceed 3% (three percent) of such net profits.

14. Can a company pay remuneration to its managerial personnel in excess of the above limits?

Yes, a company may authorize to pay remuneration in excess of the limits specified in Section 197(1) with approval of the Central Government and in compliance of Schedule V of the Act.

15. Are the limits applicable to private companies as well?

No, limits under Section 197 are not applicable to private companies as Section I Part I of Schedule V refers to Section 197 which in turn exclusively mentions that the limits of sub section (1) shall apply to public companies only.

However, the other sub sections pertaining to sitting fees and payment of remuneration for services rendered in professional capacity shall apply to private companies as well.

Also, appointment of managerial personnel in private companies will be governed by section 196 of the Act.

16. What is the ceiling on payment of sitting fees?

A company may pay sitting fees to its directors for attending the meetings of the Board or Committees thereof subject to the maximum of Rs. 1,00,000/- (one lakh) per meeting to each director.

17. Can sitting fees be paid for adjourned meeting?

As per the language of Section 197(5) of the Act, sitting fees is to be paid for attending the meeting of the Board or Committee. Therefore, even if the meeting is not held for any reason whatsoever, sitting fees may be paid to the directors.

18. Whether sitting fees shall form part of remuneration?

No, sub- section (2) of section 197 clearly states that for the purpose of the maximum limits specified in 197(1), sitting fees shall not be considered.

19. Will remuneration for services rendered under professional capacity be included in managerial remuneration?

Proviso to section 197(4) allows a company to remunerate a director for services rendered in professional capacity. However, the same shall be approved by the Nomination and Remuneration Committee. Further, if the Committee deems that the services are rendered in professional capacity and the concerned director has requisite certificate of practice of the profession, then the same shall not be included in remuneration limits.

20. Will allowances be taken as part of managerial remuneration?

Allowances shall form part of remuneration provided the same is not limited to reimbursement of actual expenses only. Where a fixed sum of allowance is paid on a predetermined basis irrespective of the actual expense incurred, the same is not reimbursement but remuneration as it involves an element of profit and is hence not a reimbursement.

21. When is minimum remuneration paid to directors?

As per Section II of Part II of Schedule V, minimum remuneration may be paid to the directors, in case the Company has no profit or inadequate profits without CG approval based on effective capital of the Company. However, the same shall have to be approved by the shareholders in general meeting.

22. What is effective capital?

Effective capital is the aggregate of the paid-up share capital, credit balance of share premium account, reserves and surplus (excluding revaluation reserve), long-term loans and deposits repayable after one year (excluding working capital loans, over drafts, interest due on loans unless funded, bank guarantee and other short-term arrangements) as reduced by the aggregate of any investments (except in case of investment by an investment company whose principal business is acquisition of shares, stock, debentures or other securities), accumulated losses and preliminary expenses not written off

Effective capital = Paid up share capital+ Securities Premium+ Reserves & Surplus+ Long term loans- [Investment+ Accumulated losses+ Miscellaneous Expenditure]

23. What if effective capital is negative?

In the event of the Company having negative effective capital as calculated above, it may pay to its managerial person a minimum remuneration of Rs. 30 lakhs per annum as per table (A) of Schedule V. However, it shall require approval of the shareholders in the general meeting.

The limit can be doubled, if the resolution passed in the shareholders’ meeting is a special resolution.

24. Can remuneration above sixty lakhs be paid by a Company having negative effective capital?

Yes, payment of remuneration in excess of sixty thousand by a Company having negative effective capital can be made with prior approval of Central Government.

25. What is limit for minimum remuneration?

Section II, Part II of Schedule V, provides for the following limits of minimum remuneration that can be paid by a Company without CG approval.

The Company shall require to obtain shareholders approval in order to pay such minimum remuneration:

capital in excess of Rs. 250 crores

 The above limits shall be doubled, if the resolution passed by the shareholders is a special resolution.

However, in case of a managerial person who was not at any time during the two years prior to his appointment as a managerial person:

a) a security holder holding securities of the company of nominal value of rupees five lakh or more or

b) an employee or a director of the company or

c) not related to any director or promoter at any time during the two years prior to his appointment as a managerial person,

the above limits shall not apply and a minimum remuneration of upto 2.5% of the current relevant profit can be paid to him. The limit shall be doubled, if the resolution passed by the shareholders is a special resolution.

26. Can every Company pay minimum remuneration to its employees in event of inadequate profits?

A company may pay managerial remuneration as per section II, Part II of Schedule V, if and only the following conditions are met:

i. Such payment is approved by the Board of Directors as well as by the nomination and remuneration committee, if any;

ii. No default has been made by the Company in the repayment of its debt, interest on debt or deposits for a continuous period of 30 days in the immediately preceding financial year before the date of appointment of such managerial person;

iii. Special resolution has been passed by the shareholders in the general meeting[3] to this effect for a period of 3 years;

iv. The auditor or CS of the Company, or a PCS certifies that the requirements of this section have been complied with;

v. Company must have filed its Balance Sheet and Annual Return with the Registrar in due time.

27. Can excess remuneration be paid over and above the prescribed ceiling in Section II Part II of Schedule V?

Yes, provided either the Company obtains a special resolution in order to double the limits or seek CG approval to pay more than double.

28. How can an executive director draw remuneration from more than one Company?

A managerial person may draw remuneration from more than one company, provided that the total remuneration drawn from the companies does not exceed the higher maximum limit admissible from any one of the companies of which he is a managerial person.

For example: Lets say, Mr. A is an ED in 2 companies and following is the particulars of his remuneration-

Now, the maximum permissible limit of in this case is 5 lakhs, and actual total total remuneration drawn is 4.5 lakhs. So, there is no contravention. Mr. A may draw remuneration from the both the companies upto the maximum of Rs. 5 lakhs p.a.

29. What about managerial remuneration approved under Companies Act, 1956?

The MCA vide its circular[4] dated April 10, 2015 has clarified that managerial remuneration approved under the erstwhile Act can be continued to be paid as per Act, 1956 for appointment done before April 1, 2014 and will not require fresh approval from the shareholders under the Act.

However, as has been the usual trend, the MCA has clarified an already clear situation. Since as per Section 6 of the General Clauses Act, 1897, any new act shall not repeal or affect the previous operation of any enactment so repealed or anything duly done or suffered thereunder.

[1] The condition shall not apply to Companies in SEZ

[2] Has obtained an Employment Visa from concerned Indian mission abroad

[3] A detailed statement should be annexed to the notice of the general meeting

[4] http://www.mca.gov.in/Ministry/pdf/General_Circular_07_2015.pdf