MANAGERIAL REMUNERATION

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Hilary Dean
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1 MANAGERIAL REMUNERATION

2 SECTIONS AT A GLANCE Section no. under Companies Act,2013 Provisions Date of Notification 2 (78) Meaning of remuneration 12 th Sept Overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits 198 Calculation of the managerial remuneration 1 st Apr st Apr 2014

3 MANAGERIAL PERSONNEL Managing Director Whole-Time Director or Manager Is Chief Financial Officer or a Company Secretary a Managerial Personnel? Remuneration paid to the Company Secretary and Chief Financial Officer being the Key Managerial is not a managerial remuneration

4 HOW DO I PAY MANAGERIAL REMUNERATION? Percentage out of Profits Shareholders Approval No Profit or Inadequate Profit WITHOUT CG Approval Shareholders Approval No Profit or Inadequate Profit WITH CG Approval

5 SEC. 197 (1)- OVERALL MAXIMUM MANAGERIAL REMUNERATION The TOTAL managerial remuneration payable by a public company, to its directors [Including MD and Whole-Time Director] and its manager in respect of any financial year shall not exceed 11% of the net profits of the company for that financial year. Such net profits shall be computed in a manner laid down under Section198, except that the remuneration of the directors shall not be deducted from the gross profit.

6 SEC. 197 (1)- OVERALL MAXIMUM MANAGERIAL REMUNERATION Company may pay any remuneration, by way of salary, dearness allowance, perquisites, commission and other allowances, which shall not exceed 5% of its net profits for one such managerial person, and if there is more than one such managerial person, 10% for all of them together. Remuneration payable to directors who are neither managing directors nor whole-time directors shall not exceed, (A) 1% of the net profits of the company, if there is a managing or whole-time director or manager; (B) 3% of the net profits in any other case.

7 NO PROFIT OR INADEQUATE PROFITS Section 197(3) provides that notwithstanding anything contained in sections 197(1) and 197(2), but subject to the provisions of Schedule V, if, in any financial year, a company has no profits or its profits are inadequate, the company shall not pay to its directors, including any managing or whole-time director or manager, by way of remuneration any sum exclusive of any fees payable to directors under section 197(5) hereunder except in accordance with the provisions of Schedule V and if it is not able to comply with such provisions, with the previous approval of the Central Government.

8 MEANING NO PROFIT OR INADEQUATE PROFIT If a company has suffered a loss or the profit of the company computed in manner laid down u/s 198 (except that the remuneration of directors shall not be deducted from the gross profit), is less than the overall managerial remuneration payable u/s 197 then, it shall be considered as no profit or inadequate profit. This literally means remuneration payable to managerial person is more than 5% of the net profit in case of one managerial person or more than 10% of the net profit in case of more than one managerial person.

9 EFFECTIVE CAPITAL Particulars Paid-up Share capital Exclusion(s) to be made Share application money or advances against shares Share Premium - Reserves and Surplus Long-term Loans and Deposits repayable after one year Aggregate of any investments Accumulated losses - Revaluation reserve Working capital loans, over drafts, interest due on loans unless funded, bank guarantee, etc., and other short-term arrangements) In case of investment by an investment company whose principal business is acquisition of shares, stock, debentures or other securities Preliminary expenses not written off -

10 HOW MUCH CAN I PAY WITHOUT SEEKING APPROVAL FROM CG? Sch. V Part II- Section II Effective Capital Limit of yearly remuneration payable shall not exceed (Rs.) Negative or less than 5 Crores 60 Lakhs 5 Crores and above but less than 100 Crores 100 Crores and above but less than 250 Crores 84 Lakhs 120 Lakhs 250 Crores and above 120 Lakhs % of the effective capital in excess of Rs. 250 Crores Substituted vide notification dated 12 th Sept 2016

11 CAN THE LIMITS SPECIFIED BE DOUBLED?

12 PROVIDED Payment of Remuneration approved by the Board of Directors and Nomination and Remuneration Committee, if applicable u/s 178 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 30 days in the preceding financial year before the date of appointment of such managerial person and in case of a 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 to the notice convening the general meeting; 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, at the general meeting of the company for a period not exceeding 3 years.

13 RELAXATION FOR PRIVATE COMPANY U/S. 196 (4) & (5) NOTIFICATION DATED 5 TH JUNE 2015 Subject to the provisions of Section 197 and Schedule V, a MD or WTD shall be appointed and the terms and conditions of such appointment and remuneration payable be approved by the Board at its meeting which shall be subject to approval by a resolution at the next general meeting and by the central government in case such appointment is at variance to the conditions specified in Schedule V

14 RELAXATION FOR PRIVATE COMPANY U/S. 196 (4) & (5) Appointment of MD, WTD or Manager & the terms and conditions of such appointment and remuneration payable need not be approved by the Board of Directors at its meeting Such appointment and remuneration payable shall not require approval of members by a resolution at the next general meeting of the company and Shall not be subject to section 197(overall managerial remuneration) and Schedule V(conditions to be fulfilled for appointment of MD/WTD without approval of the Central Government). Consequently, approval of Central Government would not be required.

15 QUICK SHOTS ON MANAGERIAL REMUNERATION Section 197 is not applicable to a Government Company The MCA vide Notification No. G.S.R.463(E) dated 5th June, 2015 has granted exemptions from Sec.197 to a Government Company. Sec.197 is not applicable to an unlisted public company which is licensed to operate by RBI or SEBI or IRDA from the International Financial Services Centre located in an approved multi services Special Economic Zone (Specified IFSC public company ) Notification dated 4 th Jan 2017 Managing or Whole-time director of holding or subsidiary company may receive commission from the company Independent Director is not entitled for stock options. However he can draw sitting fee, can be reimbursed for the expenses incurred for participating in the board or other meetings of the company and be paid profit related commission as may be approved by the Members. Ceiling on Sitting Fee: Shall not exceed Rs.1 Lakh per meeting per director of the Board or committee thereof.

16 PENSION PAID TO THE RETIRED DIRECTOR Is it a Remuneration?

17 WHETHER REMUNERATION TO DIRECTOR WORKING AS TECHNICAL ADVISER BE INCLUDED IN 11% MANAGERIAL REMUNERATION? If a DIRECTOR OF THE COMPANY is working as a technical adviser to the company and is paid remuneration by way of monthly salary, his salary will be included in the 11% managerial remuneration.

18 WHAT IS THE MAXIMUM REMUNERATION PAYABLE TO MANAGERIAL PERSON IN CASE HE IS A MANAGERIAL PERSONNEL IN TWO COMPANIES? Section V of Part II of Schedule V provides that subject to the provisions of Sections I to IV, a managerial person shall draw remuneration from one or both companies, provided that the TOTAL REMUNERATION DRAWN FROM THE COMPANIES DOES NOT EXCEED THE HIGHER MAXIMUM LIMIT ADMISSIBLE FROM ANY ONE OF THE COMPANIES OF WHICH HE IS A MANAGERIAL PERSON.

19 EXCESS REMUNERATION DRAWN BY A DIRECTOR? Section 197(9) provides that if any director draws or receives, directly or indirectly, by way of remuneration any such sums in excess of the limit prescribed by section 197(1) or without the prior sanction of the Central Government, where it is required, HE SHALL REFUND SUCH SUMS TO THE COMPANY AND UNTIL SUCH SUM IS REFUNDED, HOLD IT IN TRUST FOR THE COMPANY. Excess remuneration recoverable Can it be waived by the company? Section 197(10) provides that the company shall not waive the recovery of any excess remuneration paid and refundable to it under section 197(9) unless specifically permitted by the Central Government on application

20 Art of Reading for Examination You must select the books that are best for you and take them absolutely, not frittering your time upon books written about and around the best. The best books come first, and you may have no time left for the secondary second. -Nani Palkivala in Education and the Art of Reading

MANAGERIAL REMUNERATION SECTION AND SCHEDUL V- ANALYSIS

MANAGERIAL REMUNERATION SECTION 196 198 AND SCHEDUL V- ANALYSIS Sl Description Page No. No. 1 Conditions for Appointment of MD/Whole Time Director/ Manager 3 2 Extension to Age Limit 3 3 Appointment Procedure