Remuneration is the way to return back the appropriate consideration of one’s service to his principal. The Companies Act, 2013 has made elaborate provisions to design and restrict the payment of Managerial Remunerations. According to Section 2(78) of the Act, “remuneration” means 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.
Core intention of making elaborate provisions for payment of managerial remuneration is to protect the long term interest of the company and hence restricts the un-accountable distribution of funds of the company to the powerful and authoritative person in the name of Managerial Remuneration and thereby jeopardizing the long-term interest of other stakeholders of the Company;
PAYMENT TO MD, WTD OR MANAGER:
A company can remunerate its Directors including Managing Director, Whole Time Director or Managers as below:
(1) By way of Salary either by monthly payment or by way of specified percentage of net profit or by partly one way or by partly other way;
(2) By way of profit percentage;
However, Fees payable for attending the Board Meeting will not form part of managerial remuneration.
Section 197 of the Act provides detail procedure for payment of remuneration to Managerial Persons and this section is applicable to a public limited company.
The procedure of payment of Managerial remuneration can broadly be divided into two categories:
(1) Public Company having generated sufficient profit;
(2) Public Company not having adequate profit;
(1) PUBLIC COMPANY HAVING SUFFICIENT PROFIT
(1.A) POWER OF BOARD OF DIRECTORS TO PAY MANAGERIAL REMUNERATION:
A public Company can make payment of Managerial Remuneration to its directors, including managing director and whole-time director and its manager in any financial year not exceeding eleven percent of the net profits of that company for that particular financial year.
Here, Net profit are required to be computed in the manner laid down in section 198 except that the remuneration of the directors shall not be deducted from the gross profits.
(1.B) POWER OF SHAREHOLDERS:
A Public Limited Company may after passing requisite resolution at its General Meeting and with the approval of the Central Government and subject to Schedule V of the Companies Act, 2013 may pay remuneration to its Directors more than 11% of its net profit.
In no case, except with the approval of the company in general meeting,—
(1) the remuneration payable to any one managing director or whole-time director or manager shall not exceed five per cent. of the net profits of the company and if there is more than one such director remuneration shall not exceed ten per cent. of the net .profits to all such directors and manager taken together.
(2) the remuneration payable to directors who are neither managing directors nor whole-time directors shall not exceed,—
- one percent of the net profits of the company, if there is a managing or whole- time director or manager;
- three percent of the net profits in any other case;
(2)PUBLIC COMPANY NOT HAVING SUFFICIENT PROFIT
If in any financial year a public limited company has no profit or has inadequate profit then it should not pay remuneration to its Directors more than the limit prescribed in Schedule V without previous approval of Central Government.
PUBLICATION OF ADVERTISEMENT:
Before making application for approval of Managerial Remuneration as above, the Company should publish an Advertisement with at least once in a newspaper in the principal language of the district in which the registered office of the company is situate and at least once in English in an English newspaper circulating in that district.
INSTANCES WHERE APPROVAL OF CENTRAL GOVERNMENT IS REQUIRED:
- Appointment or reappointment without complying with the Part I of Schedule V.
- Payment of remuneration exceeding 11 percent of Net Profit.
- Waiver of excess remuneration paid during a particular financial year.
- Payment of remuneration exceeding the limits provided in Schedule V.
IMPLICATION OF PAYMENT WITHOUT COMPLIANCE:
Payment of remuneration to a Director without appropriate compliance has grave consequences on the part of the Director concerned and to the Company. In case a Director receives remuneration from the Company without proper compliances of the Act, as discussed above, then the Director should return the such sums to the company and until he refund the same to the company he should hold the amount in trust for the Company;
Therefore, it is also the responsibility of the a Director to keep proper track the fact that his remuneration is in compliances of the Act;
A company has no power to waive the recovery of such sum, without approval of the Central Government;
PROCEDURE TO MAKE APPLICATION TO THE CENTRAL GOVERNMENT:
Application to the Central Government should be made through e-form MR-2.
Following documents to be attached along-with the application:
1. Copy of the calculation sheet of effective capital as computed under Schedule V to the Companies Act, 2013 as per previous year’s audited balance sheet;
2. Copy of the resolution of Board of directors;
3. Copy of the resolution of Nomination and Remuneration committee along with its composition and certificate by the said committee to the effect that the remuneration is as per remuneration policy of the company and designation;
4. Copy of resolution of shareholder(s) along with notice and explanatory statement;
5. Certificate from the auditor or company secretary or company secretary in practice with regard to the compliance of section 196 of the Act;
6. Certificate of no-default in repayment of debts(including public deposit or debentures or interest payable thereon) for a continuous period of thirty days in the preceding financial year before the date of appointment of the concerned managerial person;
7. No objection certificate from the financial institution(s) or bank(s) to whom the company has defaulted;
8. Copy of draft agreement between the company and the proposed appointee;
9. Newspaper clipping in which notices pursuant to section clause (b) of sub-section (2) of section 201 have been published;
10. Copy of employment visa/passport, in case the proposed appointee is a foreign citizen;
11. Copies of educational or professional qualification certificate;
12. Statement as per item (iv) of third proviso of section II of Part II of Schedule V to the Companies Act, 2013
13. Projections of the Turnover and net profits for next three years;
14. Calculation of estimated profit under section 198 of the Act;
15.Auditors Certificate pursuant to Section 164(2) of the Companies Act, 2013;
16. An application under Section 460 of the Act for condonation of delay;
17.Full and proper justification in favor of the proposal along with bio-data of the appointee;
18. Documentary proof regarding compliance of the provisions of Section 196 of the Companies Act, 2013 at the time of appointment/ re-appointment of the proposed appointee
19. Certificate by the secretary of the company or CA/CS in whole time practice to be notified erstwhile;
20. Details, if applicant company is a subsidiary of listed company;
Note: Here ‘Act’ means the Companies Act, 2013;
(Author is Associated with ‘RRR Compliance Services (A division of PJ LAW SOLUTION) and can be reached at firstname.lastname@example.org)