Governing Sections:
Payment of managerial remuneration is governed by following provisions under Companies Act 2013
Section 196 -Appointment of Managing Director, Whole Time Director or Managers
Section 197 -Overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits
Section 198-Calculation of Profits to determine Net profit
Appointment and Remuneration of Director Rules 2014
MODE OF PAYMENT OF REMUNERATION
A director or a manger may be paid remuneration by way of monthly, partly or specified percentage of net profit.
NET PROFIT
The net profit for the purpose of calculating limit of managerial remuneration shall be calculated under Section 198.
DIRECTORS
Executive/non Executive Independent Director
FLOW CHART
Current Relevant Profit (B)
Every Director including Executive and Non-Executive can be paid remuneration except an Independent Director. In pursuance of Section 197(7) an Independent Director is not entitled for any Stock Options an Independent Director is entitled for following payments only
Related Articles
- a. Sitting fees
- b. Reimbursement of Expenses for participation in the Board Meeting and other meetings
- c. Profit related commission subject to the approval of member vis an Ordinary Resolution
- (A) Maximum Managerial Remuneration-In Case Of Adequate Profit Or The Remuneration Is Less Than The Net Profit Of Company
| S.No | Person | Limit |
| a. | For all the Directors together | 11% of the Net Profit of the company |
| b. | Individual Managing Director or Whole Time Director or Manger | 5% of the Net Profit of the company |
| c. | If there are more than such directors (for all the directors together) | 10% of the Net Profit of the company |
| d. | For a Director who is neither a managing or whole time director where there is a managing director or whole time director or manager (for all such director together) | 1% of the Net Profit of the company |
| e. | For a Director who is neither a managing or whole time director where there is no managing director or whole time director or manager (for all such director together) | 3% of the Net Profit of the company |
In case a Public Company require to pay a managerial remuneration in excess of 11% of the net profit of the company than company require approval of member via Ordinary Resolution and Central Government herein referred as “CG” Approval
In case a Public Company require to pay a remuneration in excess of limit from “Clause b to ClauseE” above approval of the member is required via Ordinary Resolution
TABULAR
Items not to be Included in Remuneration while calculating Limit
- Sitting Fees- upto INR 1 lakh shall not be included in above remuneration while determining the Limit.
- Remuneration for professional Services- any remuneration paid to Director for all the professional nature services shall not be included in the above limit
- Insurance premium for KMPs- Any insurance premium paid for Whole Time Director, Managing Directors, and Managers for indemnifying them against any liability for any negligence or default shall not be the part of remuneration if the KMP is not held quilty for any defaults.
- Other Services- Any remuneration payable to director in any other capacity or for rendering any services other than the services for professional nature will be the part of remuneration
- Insurance premium for KMPs- Any insurance premium paid for Whole Time Director, Managing Directors, and Managers for indemnifying them against any liability for any negligence or default shall be the part of remuneration if the KMP is found guilty for any defaults.
- (B). In Case of Inadequate Profit or No Profit
- In case there are inadequate profits or no profit, remuneration to any director shall be paid in compliance of Schedule V. In case the same is not under Schedule V, Central Government approval is required for same
Part II Schedule V deals with the remuneration of director in case of inadequate profits or no profits
Where companies do not have adequate profits, the remuneration payable is computed with reference to the remuneration computed using effective capital (A) and current relevant profit (B), whichever is higher.
Effective Capital (A)
Effective Capital=PUC + Reserves and Surplus+ Long Term Loans +Deposits Repayable After One Year +Accumulated Losses And Preliminary Expenses Not Written Off
Remuneration cannot be paid exceeding the following limits as under without the approval of the Central Government:
| Where the effective capital is | Limit of yearly remuneration |
| Negative or less than Rs 5 Cr | Rs. 30 Lakhs |
| Rs 5 Cr and above but less than Rs 100 Cr | Rs. 42 Lakhs |
| Rs 100 Cr and above but less than Rs 250 Cr | Rs. 60 Lakhs |
| Rs 250 Cr and above | Rs 60 lakhs + 0.01% of the effective capital in excess of Rs 250 Cr |
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 managerial person at any time during the two years prior to his appointment as a managerial person is eligible for 2.5% of the current relevant profit.
The limits, as stated above in both the situations (A) and (B), can be doubled through a special resolution passed by the shareholders
Perquisites -Following perquisites not be included in the above limit in case there are inadequate or no profit
(a) Contribution to provident fund, superannuation fund or annuity fund to the extent these either singly or puttogether are not taxable under the Income-tax Act, 1961 (43 of 1961);
(b) Gratuity payable at a rate not exceeding half a month’s salary for each completed year of service; and
(c) Encashment of leave at the end of the tenure.
Further for an expatriate there are certain other perquisites Children’s Education Allowance, Holiday Passage for Children and Leave Travel Concession
Procedure /Prerequisites to remuneration under Schedule V
- a. Board Resolution-Approval of remuneration
- b. Special Resolution-Payment of remuneration for a Period not exceeding 3 years
- c. No default in payment of debts including public deposits
- d. Special resolution- To pay above remuneration double the above limit.
- II. Payment of managerial remuneration in having no or inadequate profit without CG Approval in case of Special Circumstances
- a. Remuneration is paid by any other company- Remuneration is paid by any other company and that other company is either a foreign company or has got the approval of its shareholders in general meeting to make payment and treat this amount as total managerialremuneration payable by the other company to its managerial persons including the amount or amounts whichis within permissible limits under section 197
- b. Newly Incorporated Company- Remuneration up to two times the amount permissible can be paid in case of Company is newly incorporated and the period is less than seven years from the date of incorporation
- c. Sick Company- Remuneration up to two times the amount permissible can be paid in case of Company who is a sick company and a scheme of revival or rehabilitation has been ordered by the Board for Industrial and Financial Reconstruction or National Company Law Tribunal for a period of five years from the date of sanction of scheme
- a. Managerial person is not receiving remuneration from any other company except from a company which is a foreign company and has its approval from shareholders in a general meeting and the remuneration is within the allowable limits.
- b. The auditor or Company Secretary of the company or in his absence, a secretary in whole time practice certifies that all secured creditors and term lenders have stated in writing that they have no objection for the appointment of the managerial person and the quantum of remuneration
- Special Economic Zone – The Company in a special economic zone as notified by department of commerce from time to time and is a company:
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