Managerial Remuneration :
The section 197(1) of Companies Act 2013 puts a maximum limit on 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. The remuneration shall not exceed eleven per cent of the net profits of that company for the financial year computed as laid down in section 198 except that the remuneration of the directors shall not be deducted from the gross profits.
The company in general meeting may, with the approval of the Central Government, authorise the payment of remuneration exceeding eleven per cent of the net profits of the company, subject to the provisions of Schedule V.
Further that, except with the approval of the company in general meeting, –
(i) the remuneration payable to any one managing director; or whole-time director or manager shall not exceed five percent of the net profits of the company
(ii) If there is more than one managing director; or whole-time director or manager remuneration shall not exceed ten per cent of the net profits to all such directors and manager taken together;
(iii) the remuneration payable to directors who are neither managing directors nor whole-time directors shall not exceed one per cent of the net profits of the company, if there is a managing or whole-time director or manager;
(iv) the remuneration payable to directors who are neither managing directors nor whole-time directors shall not exceed three per cent of the net profits of the company, if there is no managing or whole-time director or manager;
(2) The percentages aforesaid shall be exclusive of any fees payable to directors for attending meetings of the Board or Committee thereof or for any other purpose whatsoever as may be decided by the Board.
(3) 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, by way of remuneration except in accordance with the provisions of Schedule V and if it is not able to comply with such provisions, with the previous approval of the Central Government. However, the company can pay fee for attending meetings of the Board or Committee thereof or for any other purpose whatsoever as may be decided by the Board.
(4) The remuneration payable to the directors of a company, including any managing or whole-time director or manager, shall be determined, in accordance with and subject to the provisions of this section, either by the articles of the company, or by a resolution or, if the articles, by a special resolution, passed by the company in general meeting and the remuneration payable to a director determined aforesaid shall be inclusive of the remuneration payable to him for the services rendered by him in any other capacity except for –
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 subsection
(1) of section 178, or the Board of Directors in other cases, the director possesses the requisite qualification for the practice of the profession.
(5) A director or manager may be paid remuneration either by way of a monthly payment or at a specified percentage of the net profits of the company or partly by one way and partly by the other.
(6) An independent director shall not be entitled to any stock option and may receive remuneration by way of fees provided under sub-section (5), reimbursement of expenses for participation in the Board and other meetings and profit related commission as may be approved by the members. Thus, under the Companies Act 2013, independent directors of a public company can be paid commission other than sitting fees and reimbursement of expenses for attending the meeting provided if the shareholders approval is available for the same.
(7) The net profits for the purposes of this section shall be computed as referred to in section 198.
(8) 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 the prior sanction of the Central Government, where it is required, he shall refund such sums to the company and the company cannot waive it and until such sum is refunded, hold it in trust for the company.
(9) The company shall not waive the recovery of any sum refundable to it under sub-section (9) unless permitted by the Central Government.
(10) In cases where Schedule V is applicable on grounds of no profits or inadequate profits, any provision
relating to the remuneration of any director which purports to increase or has the effect of increasing the amount thereof, whether the provision be contained in the company’s memorandum or articles, or in an agreement entered into by it, or in any resolution passed by the company in general meeting or its Board, shall not have any effect unless such increase is in accordance with the conditions specified in that Schedule and if such conditions are not being complied, the approval of the Central Government had been obtained.
(11) Every listed company shall disclose in the Board’s report, the ratio of the remuneration of each director to the median employee’s remuneration and such other details as may be prescribed.
(12) Where any insurance is taken by a company on behalf of its managing director, whole-time director, manager, Chief Executive Officer, Chief Financial Officer or Company Secretary for indemnifying any of them against any liability in respect of any negligence, default, misfeasance, breach of duty or breach of trust for which they may be guilty in relation to the company, the premium paid on such insurance shall not be treated as part of the remuneration payable to any such personnel: Provided that if such person is proved to be guilty, the premium paid on such insurance shall be treated as part of the remuneration. Thus any premium paid on the insurance policy to cover the risk for managing director or other directors or Company Secretary shall not form the part of the above limit.
(13) Any director who is in receipt of any commission from the company and who is a managing or whole-time director of the company shall not be disqualified from receiving any remuneration or commission from any holding company or subsidiary company of such company subject to its disclosure by the company in the Board’s report.
(14) If any person contravenes the provisions of this section, he shall be punishable with fine which shall not be
less than one lakh rupees but which may extend to five lakh rupees.
PART II of Schedule V
1. Remuneration payable by companies having profits: Subject to the provisions of section 197, a company
having profits in a financial year may pay remuneration to a managerial person or persons not exceeding the
limits specified in such section.
2. Remuneration payable by companies having no profit or inadequate profit without Central Government
approval: Where in any financial year during the currency of tenure of a managerial person, a company has no profits or its profits are inadequate, it may, without Central Government approval, pay remuneration to the managerial person not exceeding the higher of the limits under (A) and (B) given below: –
| Where the effective capital is | Limit of yearly remunerationpayable shall not exceed (Rupees) |
| 1. Negative or less than 5 crores | 30 lakhs |
| 2. 5 crores and above but less than 100 crores | 42 lakhs |
| 3. 100 crores and above but less than 250 crores 60 lakhs | 60 lakhs |
| 4. 250 crores and above | 60 lakhs plus 0.01% of the effective capital in excess of Rs. 250 crores |
The above limits shall be doubled if the resolution passed by the shareholders is a special resolution and for a period less than one year, the limits shall be pro-rated.
(B) In the case of a managerial person who was not a security holder holding securities of the company of nominal value of rupees five lakh 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. The above limits shall be doubled if the resolution passed by the shareholders is a special resolution.