Article. MCA relaxes controls on Managerial Remuneration: Professional Directors benefited. CS Aman Nijhawan

Transcription

1 MCA relaxes controls on Managerial Remuneration: Professional Directors CS Aman Nijhawan Vinod Kothari & Company Corporate Law Services Group September 12, 2016 (Updated on September 15, 2016) Check at: for more write ups. Copyright: This write up is the property of Vinod Kothari & Company and no part of it can be copied, reproduced or distributed in any manner. Disclaimer: This write up is intended to initiate academic debate on a pertinent question. It is not intended to be a professional advice and should not be relied upon for real life facts.

2 Introduction Section 197 of Companies Act, 2013(hereinafter referred to as Act, 2013) provides a ceiling limit on the overall managerial remuneration payable by the Company to its managerial personnel. Section II of Part II of Schedule V of Act, 2013 further provides for limits on managerial remuneration in case of absence or inadequacy of profits. In case the remuneration payable to managerial personnel exceeds the limits prescribed under Schedule V of Act, 2013, approval of Central Government is required pursuant to Section 197(3) of Act, Though the limits prescribed under the Schedule V Act, 2013 were relaxed as compared to Schedule XIII of the Companies Act, 1956, but the same were very low and insufficient to attract good managerial talent for turning around companies which are in stressed situation. Similar concern was raised by the 164 th Company Law Committee 1 in Para 13.4 of its report and recommended to do away with the requirement of obtaining approval of Central Government under the provisions of Companies (Amendment) Bill, 2016 ( Bill ) which is pending for approval in the Parliament. Pending approval of the Bill, Ministry of Corporate Affairs ( MCA ) vide its notification 2 dated September 12, 2016 amended Schedule V of the Act, 2013 through which limits of obtaining approval of Central Government in case of absence or inadequacy of profits are relaxed further. The said notification is effective from the date of its publication in official gazette, but considering the past experiences, date of publication in the official gazette is same as the date of placing the notification on the MCA website. Hence, one may assume that amended Schedule V of Act, 2013 will be effective from the date of the notification itself i.e. September 12, The text of the changes in Part I and Part 2 of the Schedule V of Act, 2013 through proposed amendments is given in Annexure. This article deals with the analysis of amendments made in Schedule V of Act, 2013 along with the impact of the same. Major Amendments Enhanced limits of remuneration payable without obtaining approval of Central Government Section II of Part II of Schedule V of Act, 2013 prescribes numerical limits of remuneration paid by the Companies having inadequacy of profits or loss without obtaining the approval of Central Government. With this proposed amendment, such limits have been doubled and now the Company may pay higher remuneration to its managerial personnel without obtaining approval of Central Government. Proposed limits stand as under:

3 Where the effective capital is Limit of yearly remuneration payable shall not exceed (Rupees) Existing Limits Proposed Limits Negative or less than 5 crores 30 lakh 60 lakh 5 Crore and above but less than 100 crore 42 lakh 84 lakh 60 lakh 120 lakh 100 crore and above but less than 250 crores 250 crore and above 60 lakh plus 0.01% of the effective capital in excess of Rs. 250 crore 120 lakh plus 0.01% of the effective capital in excess of Rs. 250 crore The aforesaid enhanced limits are effective from the date of notification i.e. September 12, Now, a question may arise whether the notification is applicable only for appointments, which are on or after the notification date or will it apply to appointment made before the date of notification? It is pertinent here to mention that in terms of Section 467 of Act, 2013, any alteration notified in the Schedule, though come into force on the date of such notification, but have effect as if enacted in the Act, Therefore, even where the appointment is made before the applicability of this notification, the Company would be able to take the benefit of enhanced limits under amended Schedule V of Act, Further, in case of existing application where are pending for approval before Central Government may also take the shelter of amended Schedule V of Act, 2013 if the remuneration payable is within the enhanced limits and may not wait for approval. Prior approval of secured creditors in case of default In case of loss or inadequate profit, existing Schedule V of Act, 2013, prohibits the Company to pay remuneration to managerial personnel where there is default in repayment of any debt (including public deposits), debentures or interest thereon for a continuous period of 30 days in the preceding financial year before the date of appointment. Now, under the amended schedule V, companies having such default may pay remuneration to its managerial personnel provided prior approval of secured creditors is obtained and such fact has been mentioned in the explanatory statement of the notice convening the general meeting.

4 Further, the Bill also proposes to withdraw the approval of Central Government by replacing it with special resolution and prior approval of the lender s (i.e. bank or public financial institution or non-convertible debenture holders or other secured creditor) of the Company, where a company has defaulted in its payments. However, the proposed text under the Bill gives a notion that the sanction of financial institutions was required irrespective of whether there is default or not. 3 Hence, the amended Schedule V of Act, 2013 seems to give a better picture of the provisions of prior approval of lender s i.e. approval is required only in case of default. Also, in case lender s approval obtained, explanatory statement annexed to notice shall disclose the same. No control of Central Government on remuneration of professional director Under the Companies Act, 1956 regime, MCA has issued a circular vide notification dated July 14, through which there was no control of Central Government on the limit of remuneration of professional directors subject to fulfillment of some conditions. Such exemption did not find place in the Act, Now, with the proposed amendment, MCA has restored the exemption i.e. remuneration of professional directors is now allowed free from control of Central Government. To be considered as functioning in professional capacity one must fulfill following criteria: 1. No 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. any entity which is entitled to hold shares in any company formed under any statue) at any time during the last two years before or on after the date of appointment; 2. No 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 after the date of appointment. 3. He should possess graduate level qualification with expertise and specialized knowledge in the field in which the company operates. Further, in case the managerial personnel holds shares of the Company not exceeding 0.5% of its total paid up share capital under (a) ESOP or (b) any other scheme formulated for allotment of shares to such managerial personnel or (c) by way of qualification shall be deemed to be a person not having any interest in the capital of the company. 3 We have analyzed the amendments in the Bill through our write up. Link here: 4

5 Offences under previous company law covered under eligibility criteria Under the amended Schedule V of Act, 2013, sub-para (vi) of para (a) of Part I of Schedule V of Act, 2013 has been amended by replacing the words Companies Act, 2013 with the words the Companies Act, 2013 (18 of 2013) or any previous company law. Till now, person who had been convicted with imprisonment or penalty under Companies Act, 1956 or any earlier company law was still eligible for appointment as a managerial person under Section 196 of the Act, But with the proposed amendment, scope of ineligibility has been widened to include the person who had been convicted under the Companies Act, 2013 or any previous company laws. Our Analysis Obtaining approval of Central Government is a time consuming process and therefore the proposed enhancement in the limits of the Schedule V of Act, 2013 would surely provide a big relief to most of the companies at this hour considering companies are approaching year end. Also, exclusion of remuneration of professional directors from the control of Central Government is a welcome step by the MCA and would help the companies to retain good managerial talent. However, it is important to mention that the strict criteria for being eligible as professional director, may hinder the relaxation provided by this notification, as generally promoter or person related to promoter group are being appointed as managerial personnel. Further, the amended Schedule V of Act, 2013 seems to give a better picture on the approval of secured creditors which is proposed under the Companies (Amendment) Bill, However, it is pertinent to mention that the approval of secured creditor is required prior to passing of special resolution. Therefore, clarity would be needed by MCA on the approval of secured creditor w.r.t. existing applications which have already passed special resolution and there is default in repayment of debts i.e. whether such defaulter companies can take approval of secured creditor post-facto or the same shall be prior to passing of special resolution. Also, the amended Schedule V requires prior consent of secured creditor in case of default in repayment of debt. Therefore, a question may also arise why the secured creditor would give his consent to the proposed remuneration in case of default in his repayment of debts. Thus, in our view, going forward it would be extremely difficult for defaulter companies to seek consent of lender s for payment of minimum remuneration to managerial personnel. Read articles on: 1. Read our FAQs on Amended Schedule V of Act, 2013 at: 2. Read other articles on Companies Act, 2013 at: 3. For our articles on various topics, click:

6 Annexure CONDITIONS TO BE FULFILLED FOR THE APPOINTMENT OF A MANAGING OR WHOLE-TIME DIRECTOR OR A MANAGER WITHOUT THE APPROVAL OF THE CENTRAL GOVERNMENT APPOINTMENTS No person shall be eligible for appointment as a managing or whole-time director or a manager (hereinafter referred to as managerial person) of a company unless he satisfies the following conditions, namely: (a) he had not been sentenced to imprisonment for any period, or to a fine exceeding one thousand rupees, for the conviction of an offence under any of the following Acts, namely: (i) the Indian Stamp Act, 1899 (2 of 1899); (ii) the Central Excise Act, 1944 (1 of 1944); (iii) the Industries (Development and Regulation) Act, 1951 (65 of 1951); (iv) the Prevention of Food Adulteration Act, 1954 (37 of 1954); (v) the Essential Commodities Act, 1955 (10 of 1955); (vi) the Companies Act, 2013; the Companies Act, 2013 or any previous company law;5 (vii) the Securities Contracts (Regulation) Act, 1956 (42 of 1956); (viii) the Wealth-tax Act, 1957 (27 of 1957); (ix) the Income-tax Act, 1961 (43 of 1961); (x) the Customs Act, 1962 (52 of 1962); (xi) the Competition Act, 2002 (12 of 2003); (xii) the Foreign Exchange Management Act, 1999 (42 of 1999); (xiii) the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986); (xiv) the Securities and Exchange Board of India Act, 1992 (15 of 1992); (xv) the Foreign Trade (Development and Regulation) Act, 1922 (22 of 1922); (b) (xvi) the Prevention of Money-Laundering Act, 2002 (15 of 2003); he had not been detained for any period under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 (52 of 1974): 5 Substituted vide notification dated September 12, 2016

7 Provided that where the Central Government has given its approval to the appointment of a person convicted or detained under sub-paragraph (a) or sub-paragraph (b), as the case may be, no further approval of the Central Government shall be necessary for the subsequent appointment of that person if he had not been so convicted or detained subsequent to such approval. (c) he has completed the age of twenty-one years and has not attained the age of seventy years: Provided that where he has attained the age of seventy years; and where his appointment is approved by a special resolution passed by the company in general meeting, no further approval of the Central Government shall be necessary for such appointment; (d) (e) where he is a managerial person in more than one company, he draws remuneration from one or more companies subject to the ceiling provided in section V of Part II; he is resident of India. Explanation I. For the purpose of this Schedule, resident in India includes a person who has been staying in India for a continuous period of not less than twelve months immediately preceding the date of his appointment as a managerial person and who has come to stay in India, (i) for taking up employment in India; or (ii) for carrying on a business or vacation in India. Explanation II. This condition shall not apply to the companies in Special Economic Zones as notified by Department of Commerce from time to time: Provided that a person, being a non-resident in India shall enter India only after obtaining a proper Employment Visa from the concerned Indian mission abroad. For this purpose, such person shall be required to furnish, along with the visa application form, profile of the company, the principal employer and terms and conditions of such person s appointment. PART II REMUNERATION Section I. 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. Section II. 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: (A): (1) (2) Where the effective capital is Limit of yearly remuneration payable shall

8 not exceed (Rupees) (i) Negative or less than 5 crores (ii) 5 crores and above but less than 100 crores (iii) 100 crores and above but less than 250 crores (iv) 250 crores and above 30 lakhs 42 lakhs 60 lakhs 60 lakhs plus 0.01% of the effective capital in excess of Rs. 250 crores: (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: (A): (1) (2) Where the effective capital is (i) Negative or less than 5 crores (ii) 5 crores and above but less than 100 crores (iii) 100 crores and above but less than 250 crores (iv) 250 crores and above Limit of yearly remuneration payable shall not exceed (Rupees) 60 lakhs 84 lakhs 120 lakhs 120 lakhs plus 0.01% of the effective capital in excess of Rs. 250 crores: Provided that the above limits shall be doubled if the resolution passed by the shareholders is a special resolution. Explanation. It is hereby clarified that for a period less than one year, the limits shall be pro-rated. (B) In case of a managerial person who is functioning in a professional capacity, no approval of Central Government is required, if such managerial person 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 and 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 and possesses graduate level qualification with expertise and specialised knowledge in the field which the company operates: 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 share to such employees

9 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; Provided that if the resolution passed by the shareholders is a special resolution, this limit shall be doubled: Provided further that the limits specified under this section shall apply, if Provided further that the limits specified under items (A) and (B) of this section 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 sub-section (1) of section 178 also by the Nomination and Remuneration Committee; (ii) the company has not made any default in repayment of any of its debts (including public deposits) or debentures or interest payable thereon for a continuous period of thirty days in the preceding financial year before the date of appointment of such managerial person; the company has not committed any default in repayment of any of its debts (including public deposits) or debentures or interest payable thereon for a continuous period of thirty days in the preceding financial year before the date of appointment of such managerial person and in case of default, the company obtains prior approval from secured creditors for the proposed remuneration and the fact of such prior approval having been obtained is mentioned in the explanatory statement; (iii) a special resolution has been passed at the general meeting of the company for payment of remuneration for a period not exceeding three years; an ordinary resolution or a special resolution, as the case may be, has been passed for payment of remuneration as per the limits laid down in 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: I. General Information: (1) Nature of industry (2) Date or expected date of commencement of commercial production (v) In case of new companies, expected date of commencement of activities as per project approved by financial institutions appearing in the prospectus (1) Financial performance based on given indicators (2) Foreign investments or collaborations, if any. II. Information about the appointee: (1) Background details (2) Past remuneration (3) Recognition or awards

10 (4) Job profile and his suitability (5) Remuneration proposed (vi) 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) (vii) Pecuniary relationship directly or indirectly with the company, or relationship with the managerial personnel, if any. I. 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. II. 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; (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. Explanation: For the purposes of Section II of this part, "Statutory Structure" means any entity which is entitled to hold shares in any company formed under any statue.