In Today’s write-up we will get some extract from the section 197 and 198 of Companies Act, 2013 as practical implication of this section is really very different from the written language, even when organization has not incurred profits, managerial level is paid high remuneration irrespective of its burden on company financial conditions. Although there are many laws governing wages of blue collar workers, there is no specific law for remuneration or salary of top managerial level personnel.
Before Moving ahead –I would also explain what is Remuneration?
‘Remuneration’ means any money or its equivalent given to any person for services rendered by him and includes the perquisites mentioned in the Income-tax Act, 1961.
Managerial remuneration in simple words is the remuneration paid to managerial personals. Here, managerial personals mean directors including managing director and whole-time director, and manager.
The Managerial personnel are generally paid on the basis of their experience and their worth to management, so their remuneration package are generally high and consist of other perquisites also. There are many cases, where the top management have taken the advantaged of their place for their own personal benefit at the cost of company’s long run growth and functioning.
The Companies Act, 2013 has a provision to keep a tab on such type of malpractices under section 197 read with other applicable rules and schedule. Kindly note that this provision is applicable to only public companies. Now let us go through its important points to be noted and kept in mind while fixing a remuneration of managerial personnel:
What Section 197(1) Says ?
The total managerial remuneration payable by a Public Company, to its:
Managing Director and Whole-Time Director, and Manager
in respect of any financial year shall not exceed eleven per cent. 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.
If the company has Profits during the Financial Year: -
(A) 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 shall not exceed eleven per cent (11%). of the net profits of that company for that financial year computed in the manner laid down in section 198.
While computing Net Profits under section 198 except that the remuneration of the directors shall not be deducted from the gross profits for the purpose of limit of eleven per cent (11%).
(B) The company may by passing Special resolution in general meeting, the below given limits can be exceeded:-
the remuneration payable to any one managing director; or whole-time director or manager shall not exceed five per cent (5%). of the net profits of the company and if there is more than one such director remuneration shall not exceed ten per cent. of the net profits to all such directors and manager taken together.
the remuneration payable to directors who are neither managing directors nor whole-time directors shall not exceed,—
(A) one per cent (1%) of the net profits of the company, if there is a managing or whole-time director or manager;
(B) three per cent (1%) of the net profits in any other case.
Note:– For the purpose of Point (B), the prior approval before General Meeting, is required if company has defaulted in payment of dues any bank or public financial institution or non-convertible debenture holders or any other secured creditor.
(C) The remuneration payable to managerial personnel as per point (A) and (B) shall exclude the remuneration paid for services rendered by them in professional capacity and then again it is approved by Nomination and Remuneration Committee, if any.
(D) A director has to refund the sums of amount which he has received in excess of remuneration allowed under this provision within two years.
Provided further that this amount can be waived off if company has passed special resolution and also received the prior approval from bank public financial institution concerned or the non-convertible debenture holders or other secured creditor, if any default exists.
IN SIMPLE TERMS:-
Maximum Permissible Managerial Remuneration
Whole-Time Director (One)
Managing Director (One)
Whole-Time Director (more than one)
Managing Director (more than one)
Managing Director, Manager with one or more Whole-Time Director
Overall Limit for Total Managerial Remuneration to all Managerial Personnel
Part Time Director with one or more Whole-Time Director or Managing Directors
Part Time Director without Whole-Time Director or Managing Directors
Further, if a public company defaults in payment of dues to any bank / public financial institution / non-convertible debenture holders / any other secured creditor, such company would be required to obtain prior approval of such bank / public financial institution / non-convertible debenture holders / any other secured creditor, as the case may be, before obtaining the shareholders’ approval.
If the company has no or inadequate Profits during the Financial Year:-
During a financial year, if a company has no or inadequate profits in that case company need to prior approval from members of the company by way of ordinary resolution as below for payment of remuneration: -
Where the effective capital is
Remuneration payable shall not exceed (Rupees)
Negative or less than 5 crores
5 crores and above but less than 100 crores
100 crores and above but less than 250 crores
250 crores and above
120 lakhs plus 0.01% of the effective capital in excess of Rs. 250 crores
If a company wants to pay remuneration to managerial remuneration in excess of above limits given in table, it can by passing special resolution in general meeting and needs to be approved by Nomination and Remuneration Committee, if any.
These restrictions do not apply to the sitting fees of the directors (managing director, whole time director/manager).
PENALTY FOR THE AFOREMENTIONED SECTION’S NON-COMPLIANCE:-
If any person makes any default in complying with the provisions of this section, he shall be liable to a penalty of one lakh rupees and where any default has been made by a company, the company shall be liable to a penalty of five lakh rupees
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