WHO IS EMPLOYEE UNDER COMPANIES ACT 2013?

There are various provisions in the CA 2013 where employee word is used so who will be considered as employee under CA 2013.

For example Section 197(12) there we have to give difference between remuneration of Directors and employees and as per decided cases Executive Directors are also employees of the Company. For finding out meaning of any word used in Act, the General rule is: First refer to the definition of the word given in that Act. If it is not defined there, refer to the definition given in General Clauses Act 1897. If it is not defined there also, then refer to the dictionary meaning.

Only Executive Directors Are Employees as there will always be a binding contract between them and the company relating to the terms and conditions of their appointment such as tenure and terms of appointment and on remuneration and other benefits, which is not the case with non-executive directors.

REMUNERATION TO EXECUTIVE DIRECTOR: Private Company also comes within the ambit of these provisions.

197(1): Total Remuneration payable shall not exceed 11% of net profits for a financial year. The company can pay more than 11% if approved by shareholders & central government subject to applicability of schedule v.

Schedule V provides additional conditions under which remuneration can be paid beyond the prescribed limits without central government approval

Additional disclosures are to be made in explanatory statement where remuneration to be paid in schedule V.

SCHEDULE V

Section 197 of the companies Bill 2012 in its sub section (3) and (11) say that in case of no profit or inadequate profit, the company shall pay remuneration to directors, Managing Directors, Whole Time Directors and Managers in accordance with Schedule V or with previous approval of Central Government.

CONDITIONS OF APPOINTMENT (PART I SCHEDULE V):

A person should satisfy following conditions for appointment as managerial person:

  1. He had not been sentenced to imprisonment for any period or to a fine exceeding Rs. One thousand for the conviction of an offence under 26 Acts listed in schedule.
  2. He had not be detained for any period under COFEPOSA, 1974.(conservation of foreign exchange & prevention of Money laundering act 1974)
  3. He has completed the age of 21 years & has not attained the age of 70years

Central Government may permit to appoint any person as managerial person not satisfying these two conditions.

  1. He has completed the age of 21 years and not attained age of seventy years. However a person may be appointed as managerial person with Central Government permission.
  2. Where he is managerial person of more than one company ceiling under Section V of Part II will apply.
  3. He is resident of India. A resident in India include a person who has been staying in India for a continuous period of not less than twelve months immediately preceding the date of his appointment as a managerial person and who has come to stay in India,— (I) for taking up employment in India; or (ii) for carrying on a business or vacation in India. A non-resident in India shall enter India only after obtaining a proper Employment Visa.

REMUNERATION IN CASE OF INADEQUATE OR NO PROFIT (SECTION II PART II SCHEDULE V):

In case of inadequate or no profit, a company may pay to a managerial person without central government approval higher of the following two options (A or B):

  1. As per following table with approval of company by ordinary resolution in general meeting or double of these limit with approval by special resolution:

EFFECTIVE CAPITAL (EC)

Effective Capital Remuneration
Negative to Rs. 5 Crore Rs 30 Lakhs yearly
Rs. 5 crore to Rs. 100 Crore Rs. 42 Lakhs yearly
Rs. 100 crore to Rs.250 Crore Rs. 60 Lakhs yearly
Rs. 250 Crore and above Rs. 60 Lakhs + 0.01% of EC above these Rs. 250 Crore

 OR

In case of managerial person who was not a security holder holding securities of the company of nominal value of rupees five Lakhs or more or an employee or a director of the company or not related to any director or promoter at any time during the two years prior to his appointment as a managerial person, — 2.5% of the current relevant profit.

If, shareholders passes special resolution this limit will be double. This remuneration should be approved by resolution of Board of director and also by Nomination and Remuneration committee (where it is). The company has not made any default in repayment of its debt or debenture or interest thereon for a continuous period of 30 days in preceding financial year. The approval of remuneration by special resolution should be for not more than three years.

Careful reading of Second Proviso, which is applicable as second proviso to both part of This Section, suggests, there must be Special Resolution in all case to safeguard all possible interpretation.     

REMUNERATION IN CASE OF INADEQUATE OR NO PROFIT IN CERTAIN CIRCUMSTANCES (SECTION III PART II SCHEDULE V):

In these cases, the company may pay remuneration in excess of Section II:

1. Where remuneration in excess of these limit is paid by other company, which is within permissible limit under Section 197.

2. A company within seven year from its incorporation or a sick company within five years from sanction of scheme of revival may pay up to two times the amount permissible under Section II.

3. Remuneration fixed by BIFR or NCLT

4. An unlisted company in SEZ may pay up to Rs. 240 Lakhs yearly.

The conditions are:

1. An auditor or Company Secretary of the company or company secretary in practice has certifies that

a. All secured creditors and term lenders have stated in writing that they have no objection for the appointment of the managerial person as well as the quantum of remuneration and such certificate is filed along with the return as prescribed.

b. There is no default on payments to any creditors, and all dues to deposit holders are being settled on time.

2. For Para (b) and (c), the managerial person is not receiving remuneration from any other company.

PERQUISITES NOT INCLUDED IN MANAGERIAL REMUNERATION (SECTION IV PART II SCHEDULE V):

1. A managerial person shall be eligible for:

a. Contribution to provident fund, superannuation fund or annuity fund to the extent these either singly or put together are not taxable under the Income-tax Act.

b. gratuity payable at a rate not exceeding half a month’s salary for each completed Year of service; and

2. encashment of leave at the end of the tenure

3. A expatriate managerial person shall be eligible for:

  • Children’s education allowance
  • Holiday package studying outside India or family staying outside India.
  • Leave travel concession

REMUNERATION PAYABLE TO A MANAGERIAL PERSON IN TWO COMPANIES (Section V Part II Schedule V):

A managerial person shall draw remuneration from one or both companies. The total remuneration drawn should not exceed the higher maximum limit admissible from any company of which he is a managerial person.

GENERAL CONDITION (PART III SCHEDULE V):

  1. The remuneration shall be approved by a resolution of shareholders in general meeting.
  2. The Auditor or Company Secretary of company or company secretary in practice certifies that the requirement of this Schedule has been complied with and such certificate shall be incorporated in the return filed with the Registrar.

EXEMPTION BY CENTRAL GOVERNMENT (PART IV SCHEDULE V): The Central Government may, by notification, exempt any class or classes of companies from any of the requirements contained in this Schedule.

EFFECTIVE CAPITAL:

The aggregate of the paid-up share capital (excluding share application money or advances against shares); amount, if any, for the time being standing to the credit 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, etc., 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.

Where the appointment of the managerial person is made in the year in which company has been incorporated, the effective capital shall be calculated as on the date of such appointment. In any other case the effective capital shall be calculated as on the last date of the financial year preceding the financial year in which the appointment of the managerial person is made.

(Suyog S Kabra is  partner with White Collar Legal LLP and can be reached at whitecollarlegal@gmail.com)

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0 responses to “Note on Remuneration to Employees under Companies Act ,2013”

  1. Rakesh says:

    What if a pvt co is converted into a public company in January 2015 so while calculating the remuneration limit should we have to consider the remuneration paid during the tenure of Pvt ltd also or should we count only when the company was converted to public company.

  2. kamala raj says:

    sir, please can you explain clearly what is the amount payable for managerial remuneration for private companies which is not earning any profits or inadequate profits. is the limits of section-ii part-ii of schedule-v applicable

  3. Satish Nemani says:

    The absence of clear wording “a public company” in sub-section (3) of section 197 of the Companies Act 2013 in place of “a company” does not tantamount to make this section applicable to private company for paying managerial remuneration in case it has no profit or its profits are inadequate.

  4. Satish Nemani says:

    Section 197 of the Companies Act, 2013 regarding overall maximum managerial remuneration, etc. is not applicable to private limited company. Hence, private limited company can pay remuneration in excess of the upper limit laid down by section 197 of the Companies Act, 2013

  5. Ankit Agrawal says:

    A private Company can pay remuneration to its Executive director. such director need not be appointed as MD/WTD/manager.hence question of applicability of Sec 196 or Schedule V does not arise. Executive Director need not be always MD/WTD/Manager. take a example: a private company is having 5 directors responsible for 5 different activities. i.e marketing,purchase,personnel etc. All this 5 executive directors can get remuneration without any restrictions.

  6. B>K>Poddar says:

    As per provisions of Sec.203a person can draw remuneration only from one company.

  7. Suyog S Kabra says:

    Clearly, this excludes private company from purview of overall managerial remuneration. However, further said section frustrates the flow when in sub-section (3) its provides that “Notwithstanding anything contained in sub-section (1) and (2), but subject to the provision 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……”. The absence of clear wording “a public company” in sub-section (3) in place of “a company” tantamount to make this section applicable to private company for paying managerial remuneration in case it has no profit or its profits are inadequate.

  8. Suyog S Kabra says:

    The question to be determined here is the extent of applicability of provisions relating to remuneration to managerial personnel in case of a private company. There is no doubt that, as the law stands today, section 196 of CA, 2013 providing for appointment of managerial personnel is applicable to private companies as well. However, what is in question is applicability of sub-section (3) of section 197 of CA, 2013 which provides for provisions for remuneration to managerial personnel in case of a company which has no profits or its profits are inadequate. Earlier under corresponding provisions in Companies Act, 1956 (‘CA, 1956’) private companies were exempted from provisions relating to appointment and remuneration to managerial personnel. In light of the new provisions, the later question is being dealt with in preceding paragraphs:

    a) Sub-section (3) of section 196 of the CA, 2013 states that subject to the provisions of section 197 and Schedule V, managerial personnel shall be appointed and the terms and conditions of such appointment and remuneration payable be approved by the Board or shareholders as the case may be.

    b) Thus by virtue of the wordings “Subject to the provisions of section 197 and Schedule V”, it appears that appointment and remuneration of managerial personnel by a company including private company shall be “subject to” i.e. on the condition of the provisions of section 197 and Schedule V being observed or complied with. This phrase is used when, while complying with one statutory provision, another provision relating to the subject matter also must be complied with. Therefore, section 196 of CA, 2013 being clearly applicable to private company it could be construed that compliance with the provisions of section 197 of CA, 2013 is also applicable to private company.

    c) Now, section 197 of CA, 2013 provides for overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits. Sub-section (1) of said section states that “the total managerial remuneration payable by a public company….” makes it applicable only to public company.

  9. Mukesh Agarwal says:

    Subsection (1) of section 197 stipulates limits of 11% etc. of profits as managerial remuneration for PUBLIC COMPANIES companies. The rest of thesection uses the words “a company” hence lot of confusion.
    However since sub-section (1) applies to only to public companies there is no question of “inadequate” profits for companies other than public companies hence requirement of schedule V should not apply to a private company.
    Let us hope that the MCA issues a necessary clarifiation in this regard.

    Few days back ICAI issued a draft guidance note on managerial remuneration, on page 10 it notes that under the title “Limits on remuneration for Private Companies – there are no restrictions under the companies act for payment of remuneration to managerial personnel….”

  10. Ankit Agrawal says:

    Section 197 not applicable to Private companies. Private Company can pay any remuneration to its director

  11. BIPUL KUMAR says:

    Sir, Please give me your interpretation on applicability of Section 197 on Private Limited Company.

  12. ramani says:

    Section 197 / Schedule V applies to public companies. Private companies are excluded contrary to what is stated by the author.

  13. sridharan says:

    under REMUNERATION PAYABLE TO EXEC.DIRS. it is stated as if that applies to PVT, cos. also and in this onnection i wish o point out that sec. 197(1) of I.C.Act. 2013 starts with the words total remuneration “payable by a Public co.” which means it applies to Public co. alone i feel

  14. Santosh Ambre says:

    whether managerial remuneration % is applicable to Private limited company….

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