Item: Key Provisions Relating to Managerial Remuneration
Author: Muhammed Fasil K

Key Provisions Relating to Managerial Remuneration

There is no restriction relating to managerial remuneration for a private company. [Section 197(1)]

Total managerial remuneration payable by a public company to its directors (including Managing Director and Whole Time Director) and Manager in a financial year shall not exceed eleven percent of net profit of the company. Manner of calculation is given in Section 198. [Section 197(1)] Any remuneration exceeding 11% of net profit limit may be payable subject to compliance of conditions given in Schedule V. In case these requirements of Schedule are not fulfilled, such remuneration will be subject to the approval of Central Government. [First Proviso to Section 197(1)]

The remuneration of any one Managing Director or Whole Time Director or Manager shall not exceed 5% of net profit. Where, there is more than one Managing Director or Whole Time Director, the overall limit is 10% of net profit. The remuneration may exceed this limit only after approval by company in general meeting and after satisfying the conditions given in this Section and Schedule V. [Second Proviso to Section 197(1)]

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):

A. 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)

Negative to Rs. 5 Crore Rs. 30 Lakh yearly

Rs. 5 crore to Rs. 100 Crore Rs. 42 Lakh yearly

Rs. 100 crore to Rs.250 Crore Rs. 60 Lakh yearly

Rs. 250 Crore and above Rs. 60 lakh + 0.01% of EC above these Rs. 250 Crore OR

B. In case of 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.

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. the statement along with the notice of this resolution should provide information like:

(I) General Information i.e. Nature of industry, commencement of production, Financial performance, Foreign investment or collaboration;

(II) Appointee information i.e. Background, past remuneration, recognition or award, job profile, suitability, proposed remuneration, comparative remuneration profile, Pecuniary relationship;

(III) Other information i.e. reason for loss or inadequate profit, step for improvement and expected increase.

(IV) Disclosure in Board of Director’s report under corporate governance i.e. remuneration package, fixed component and performance linked incentives, service contract, notice period, severance fee, stock options.

Remuneration in case of inadequate or no profit without central government approval in certain circumstances (Section III Part II Schedule V):

In these cases, the company may pay remuneration in excess of amount provided in Section I:

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

(b) 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.

(d) An unlisted company in SEZ may pay up to Rs. 240 Lakh yearly.

The conditions are:

i. An auditor or Company Secretary of the company or company secretary in practice has certifies that:- 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.

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

ii. 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):

A managerial person shall be eligible for:

1. 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.

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

3. Encashment of leave at the end of the tenure

A expatriate managerial person shall be eligible for:

1. Children’s education allowance

2. Holiday package studying outside India or family staying outside India.

3. Leave travel concession

These perquisites shall not be included in the computation of ceiling of Remuneration.

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.

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Key Provisions Relating to Managerial Remuneration