Section 197 of the Companies Act, 2013 Overall Maximum Managerial Remuneration and Managerial Remuneration In Case of Absence or Inadequacy of Profits

(1) Maximum amount of managerial remuneration

Total managerial remuneration payable by a public company, to –

  • its directors,
  • 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 computed in the manner laid down in section 198 except that the remuneration of the directors shall not be deducted from the gross profits.

S.NO CONDITIONS MAXIMUM REMUNERATION IN A YEAR
1 Overall limit on managerial remuneration 11% of the net profits of company
2 Company with one managing director/whole time director/manager 5% of the net profits of company
3 Company with more than one managing director/whole time director/manager 10% of the net profits of company
4 Remuneration payable to directors who are neither managing director nor whole time director 1% of the net profits of company if there is a managing director or whole time director
5 Remuneration payable to directors who are neither managing director nor whole time director 3% of the net profits of company if there is no managing director or whole time director

> However, a public company can pay managerial remuneration in excess of 11% by-

    • passing a special resolution approved by the shareholders and
    • subject to the compliance of Schedule V conditions

> In case company has defaulted in payment of dues to any

    • Bank or
    • Public Financial Institution or
    • Non- convertible debenture holders or
    • Any other secured creditor

prior approval of the same shall be obtained by the company before obtaining the approval in the general meeting.

> The percentages given above shall be exclusive of any fees payable under section 197(5).

(2) Remuneration by a Company having no profits / inadequate profits

If in any financial year, a company has no profits or inadequate profits, no amount shall be payable by way of remuneration, to its

  • Directors,
  • Managing director,
  • Whole time director,
  • Manager,
  • Non – Executive director,
  • Independent director

except in accordance with provisions of schedule V. However, there is no restriction on amount payable to directors under 197 (5)

Managerial Remuneration Under SCHEDULE V (Part II)

(i) Remuneration payable by companies having profits:

A company having profits in a financial year may pay remuneration to a managerial person or persons or other director or directors not exceeding the limits specified in section 197.

(ii) Remuneration payable by companies having no profit or inadequate profit:

Where in any financial year during the currency of tenure of a managerial person or other director, 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:-

(A)

Sl. No Where the effective capital (in Rs.) is Limit of yearly remuneration payable shall not exceed (in Rs.) in case of a managerial person Limit of yearly remuneration payable shall not exceed (in Rs.) 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

However, remuneration in excess of above Iimits may be paid if the special resolution has been passed by the shareholders.

(B)

In case of a managerial person or other director who is functioning in a professional capacity, remuneration as per item (A) may be paid-

  • if such managerial person or other director is not having any interest in the capital of the company or its holding company or any of its subsidiaries directly or indirectly or through any other statutory structures and
  • not having any direct or indirect interest or related to the directors or promoters of the company or its holding company or any of its subsidiaries at any time during the last two years before or on or after the date of appointment and
  • possesses graduate level qualification with expertise and specialised knowledge in the field in which the company operates.

> An employee of a company holding shares of the company not exceeding 0.5% of its paid up share capital under any scheme formulated for allotment of shares to such employees including Employees Stock Option Plan or by way of qualification shall be deemed to be a person not having any interest in the capital of the company.

Provided further that the limits specified under items (A) and (B) of this section shall apply, if-

(i) Payment of remuneration is approved by a resolution passed by the Board and by the Nomination and Remuneration Committee as the case may be,

(ii) 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.

(iii) An ordinary resolution or a special resolution, as the case may be, has been passed for payment of remuneration as per item (A) or a special resolution has been passed for payment of remuneration as per item (B), at the general meeting of the company for a period not exceeding three years.

(iv) A statement along with a notice calling the general meeting .

(3) Determination of Remuneration

The remuneration payable to the director shall be determined by:

  • The articles of the company or
  • A resolution or
  • Special resolution passed in the general meeting, if the articles require

> The remuneration payable shall also include the remuneration payable in any other capacity

> However, remuneration for services rendered in other capacity shall not be so included if-

  • the services are rendered in professional capacity and
  • nomination and remuneration committee or Board of directors believes that the director possesses the necessary qualification for the practice of the profession.

(4) Fees to directors

  • The directors may receive fees for attending meetings of board or committee and such fees cannot exceed One lakh rupees per meeting.
  • Different fees for different classes of companies and fees in respect of independent director may be such as may be prescribed.
  • Sitting fees paid to Independent directors and women directors shall not be less than the sitting fee payable to other directors.

(5) Method of payment

The fees can be paid:

a. Monthly or

b. As a Specified Percentage of the Net Profits of the company or

c. Partly by method (a) and partly by method (b)

(6) Remuneration Drawn / receives in excess of limit

If any director receives any remuneration in excess of the limit or without prior approval as required, the same shall be refunded to the company within 2 years or lesser period as allowed by company and keep it in trust for the company until it is refunded.

(7) Waiver of excess remuneration

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.

> In case company has defaulted in payment of dues to any

    • Bank or
    • Public Financial Institution or
    • Non- convertible debenture holders or
    • Any other secured creditor

prior approval of the same shall be obtained by the company before obtaining the approval of waiver in the general meeting.

(8) No significance of remuneration provisions

If schedule V is applicable on ground of no profits or inadequate profits, any provision contained in the company’s-

  • memorandum or
  • articles, or
  • Agreement or
  • Resolution passed in general meeting or its Board meeting

which purports to increase or has the effect of increasing the amount of remuneration, then those provisions shall not have any effect unless such increase is in accordance with the conditions specified in that Schedule.

(9) Disclosure by Listed Company

Every listed company shall disclose in board report the ratio of remuneration of each director to the median employee’s remuneration and such other details as may be prescribed.[Rule 5 of Companies ( Appointment & Remuneration of Managerial Personnel,2014 ]

(10) Insurance

When the company insures its-

  • Managing director,
  • Whole time director
  • Manager,
  • Chief Executive Officer,
  • Chief Financial Officer or
  • Company Secretary

for compensate them against any liability in respect of any negligence, default, misfeasance, breach of duty or breach of trust, the premium paid on such insurance shall not be treated as part of the remuneration except if such person is proved guilty.

(11) Remuneration from other company

Any managing director/whole time director receiving commission from the company may also receive a remuneration or commission from the holding or subsidiary of such a company provided the same is disclosed in the board’s report.

(12) PENALTY

Who makes default in complying with provisions Penalty
Person Rupees 1 Lakh
Company Rupees 5 Lakh

(13) Disclosure in Auditor Report

The auditor of the company shall make a statement in Auditor Report whether-

  • Remuneration paid by the company to its directors is in accordance with the provisions of this section,
  • Remuneration paid to any director is in excess of the limit.

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