MAXIMUM MANAGERIAL REMUNERATION

SECTION 197 OF COMPANIES ACT 2013

Section 197 of the Act lays down the provisions relating to overall maximum managerial remuneration payable by every public company and the managerial remuneration payable by it in case of absence or inadequacy of profits. Section 197 read with Schedule V to the Companies Act, 2013 defines maximum remuneration payable to KMPs and other directors. This section does not apply to a private company. These provisions are discussed as under:

(I) Overall Maximum Managerial Remuneration [Section 197(1)]:

Section I of Part II of Schedule V headed as ‘Remuneration Payable by Companies having Profits’ states that ‘subject to the provisions of Section 197, a company having profits in a financial year may pay remuneration to a managerial personnel or persons or other director or directors not exceeding the limits specified in this section’. Accordingly, the overall managerial remuneration to the Directors including managing director, whole-time director, and manager in respect of any financial year is summarized as below:

Instances to Obtain Prior Approval in Case of Default:

It is to be noted that where the 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 such person (as applicable) shall have to be obtained by the company before obtaining the approval in the general meeting.

Exclusion of Sitting Fees: Section 197(2) provides that the above percentages shall be exclusive of any fees payable to directors under section 197(5).

Section 197(8) provides that the net profits shall be computed in the manner laid down in section 198. This stipulation is already covered by Section 197(1), which further provides that the remuneration of the directors shall not be deducted from the gross profits.

(II) No profits or Inadequate profits [Section 197(3) & (11)]:

(a) If in any financial year, a company has no profits or its profits are inadequate, the company shall not pay by way of remuneration any sum (exclusive of sitting fees) to its directors, including any managing or whole-time director or manager or any other non-executive director including an independent director, except in accordance with the provisions of Schedule V.

(b) In cases where Schedule V is applicable on grounds of no profits or inadequate profits, any provision relating to remuneration of any director which purports to increase or has any effect of increasing the amount thereof, shall not have any effect unless such increase is in accordance with the conditions specified in that schedule.

SECTION II OF PART II OF SCHEDULE V - Remuneration payable by companies having no profit or inadequate profit:

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 pay remuneration to the managerial person or other director not exceeding the limits under (A) and (B) given below:

Limits under (A):

However, the remuneration in excess of above limits may be paid if the resolution passed by the shareholders is a special resolution.

Explanation 1: For the purposes of Section II of this Part, “effective capital’ means 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.

Explanation 2:

a) 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;

b) 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.

Explanation 3: It is hereby clarified that for a period less than one year, the limits shall be pro-rated.

Thus, if a managerial person is employed for a part of the year, the remuneration payable to him shall be pro-rated.

Limits under (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 (i.e. does not hold any shares subject to the deeming provision below);

Note: “Statutory Structure” means any entity which is entitled to hold shares in any company formed under any statute.

. is 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;

. possesses graduate level qualification with expertise and specialized knowledge in the field in which the company operates:

Deeming provision as to the holding of shares: It is provided that any 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.

Applicable conditions for payment of remuneration: The limits specified under items (A) and (B) above shall apply, if-

(i) payment of remuneration is approved by a resolution passed by the Board and, in the case of a company covered under Section 178 (1), also by the Nomination and Remuneration Committee;

(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 referred to in clause (iii) is given to the shareholders containing the following information, namely: a statement along with a notice calling the general meeting referred to in clause (iii) is given to the shareholders containing the following information, namely:

I. General information:
(1) Nature of industry
(2) Date or expected date of commencement of commercial production
(3) In case of new companies, expected date of commencement of activities as per project approved by financial institutions appearing in the prospectus
(4) Financial performance based on given indicators
(5) Foreign investments or collaborations, if any.
II. Information about the appointee:
(1) Background details
(2) Past remuneration
(3) Recognition or awards

(4) Job profile and his suitability
(5) Remuneration proposed
(6) Comparative remuneration profile with respect to industry, size of the company, profile of the position and person (in case of expatriates the relevant details would be with respect to the country of his origin)
(7) Pecuniary relationship directly or indirectly with the company, or relationship with the managerial personnel or other director, if any.

III. Other information:
(1) Reasons of loss or inadequate profits
(2) Steps taken or proposed to be taken for improvement
(3) Expected increase in productivity and profits in measurable terms
IV. Disclosures: The following disclosures shall be mentioned in the Board of Director's report under the heading “Corporate Governance’, if any, attached to the Financial statement:
(i) all elements of remuneration package such as salary, benefits, bonuses, stock options, pension, etc., of all the directors;

(ii) details of fixed component and performance linked incentives along with the performance criteria;

(iii) service contracts, notice period, severance fees; and

(iv) stock option details, if any, and whether the same has been issued at a discount as well as the period over which accrued and over which exercisable.