MANAGERIAL REMUNERATION SECTION AND SCHEDUL V- ANALYSIS

Transcription

1 MANAGERIAL REMUNERATION SECTION 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 3 4 Filing with ROC 4 5 Limitations on the amount of remuneration- Applicable only to Public Companies 4 6 Remuneration where there is profits in the Company- Overall Limits 4 7 Remuneration to MD/Whole Time Directors/Manager 4 8 Remuneration to Directors other than MD/Whole Time Directors/Manager 5 9 Remuneration in Excess of the Limits-Overall Remuneration 5 10 Remuneration in excess of Limits to MD/Whole Time Directors/ Manager 5 11 Remuneration where there is no profits or Profits are inadequate 5 12 Remuneration to Independent Directors 5 13 Commission Received by MD/Whole Time Director 6 14 Sitting Fees 6 15 Insurance Premiums 6 16 Exclusion from Remuneration 6 17 Determination of Remuneration 7 18 Formation of Remuneration and Audit Committee 7 19 Mode of Payment of Remuneration 7 20 Refund of Remuneration Received in Excess 7 21 Applicability of Schedule V and Central Government s Approval 8 22 Disclosure by Listed Companies 8 23 Penalty for Contravention 8 24 Schedule V Conditions for Appointment of MD/WTD/ Manager without the Approval 8 of the Central Government 25 Schedule V-PART I- Appointment 8 26 Central Government s Approval for Appointment 9 27 Age Limit for Appointment 9 28 Managerial Position in more than one Company 9 29 Residential Status 9 30 Approval for Non Resident including NRI for taking managerial Appointments 9 31 Non applicability of Residential Status Schedule V Part II Section II Payment of Remuneration by Companies having no 10 Profits or Inadequate Profits without Central Government Approval 33 Procedure for payment of remuneration as per limits fixed as above 11

2 34 Schedule V Part II Section III- Payment of Remuneration in excess of limits fixed in 11 Part II Section II by a foreign Country or by passing Special Resolution 35 Part II Section III- Payment of Remuneration in excess of limits fixed in Part II Section 11 II certain class of Companies 36 Part II Section III Additional Conditions for payment of excess Remuneration Remuneration to Managerial Personnel in SEZ Perquisites Not included in Managerial Remuneration 12/13 39 Remuneration payable to Managerial Personnel in two companies Schedule V Part III- Provisions Applicable to Part I& II of Schedule V Section 198 Analysis on calculation of profits for the purpose of Remuneration Annexure I Information to be furnished in the notice for meeting for fixing managerial 17 Remuneration 43 Annexure II Effective Capital Annexure III Current Relevant Profits 19

3 Appointment and Remuneration of Managerial Personnel Appointment - There shall be either a Managing Director OR Manager - at any point in time and not both at the same time. Sec196 (1) - Appointment of MD/WTD/Manager shall be for a term of 5 years at a time - subject to reappointment for further term of five years which shall be - made no earlier than one year before the expiry of the current term. Sec 196(2) Conditions for Appointment of MD/WTD/Manager - MD/WTD/Manager shall be of the age of twenty one years and above and - not older than 70 years at the time of appointment. Sec 196(3) (a) - no company shall appoint an MD/WTD/Manager who is - an un discharged insolvent or has at any time been adjudged as an insolvent Sec 196(3) (b) - has at any time suspended payment to his creditors or makes, or - has at any time made, a composition with them; or Sec 196(3) (c) - has at any time been convicted by a court of an offence and - sentenced for a period of more than six months. Sec 196(3) (d) Exception to Age Limit - The upper age limit of 70 years can be relaxed by passing a special resolution - at the general meeting of the members of the company with justification - for the same in the explanatory statement attached to the notice of the meeting Proviso to Sec 196(3) Appointment Procedure - Subject to the provisions of section 197 and Schedule V, - an MD/WTD/Manager shall be appointed and the terms and conditions - for such appointment and remuneration payable shall be approved by - the Board of Directors subject approval by a resolution - at the next general meeting of the company and if such appointment

4 - is variance to the conditions specified in Schedule V - approval shall be obtained from the Central Government Sec 196(4) - a notice convening Board or general meeting for appointment of MD etc. - shall include the terms and conditions of such appointment, - remuneration payable and such other matters including - interest, of a director or directors in such appointments, if any Proviso 1 Sec 196(4) Filing with ROC - Provided further that a return in the form MR-1 shall be filed - within sixty days of appointment of MD/WTD/Manager/CEO/CS/CFO - with the Registrar of Companies. Proviso 2 Sec 196(4) Chap XIII Rule 3 - Subject to the provisions of this Act, where an appointment of - an MD/WTD/Manager is not approved by the company at a general meeting, - any act done by him before such approval shall not be deemed to be invalid. Sec 196(5) LIMITATION ON THE AMOUNT OF REMUNERATION- APPLICABLE FOR PUBLIC COMPANIES WHERE THERE IS PROFITS IN THE COMPANY Overall Limit on Managerial Remuneration - total Managerial Remuneration Payable by a PUBLIC COMPANY - to its directors, Including MD/WTD/Manager in respect of any financial year - shall not exceed eleven percent of the net profits of that company - computed in the Manner laid down in section 198 except that remuneration - of the directors shall not be deducted from the gross profit Sec 197(1) Remuneration to MD/WTD/Manager - the remuneration payable to any one MD/WTD/Manager - shall not exceed five per cent. of the net profits - if there is more than one such director remuneration shall not exceed 10% of - net profits to all such directors and manager taken together Proviso 2 sec 197(1)

5 Remuneration to Directors not being MD/WTD (Non-Executive Directors) - where there is no MD/WTD/Manager remuneration payable to - Non executive Director shall not exceed one per cent of the net profits - where there is an MD/WTD/Manager in the company, remuneration payable - shall not exceed three per cent of the net profits in any other case. Proviso 2(ii) to Sec 197(1) Remuneration In excess of Limits Fixed Overall Remuneration - the members of the company in general meeting - with the approval of central government may provide for - remuneration exceeding 11% subject to Schedule V. Proviso to Sec 197(1) - Remuneration to MD/WTD/Manager - any excess of remuneration over 5% or 10% of net profits fixed for - MD/WTD/Manager require approval of the company in general meeting Proviso 2 sec 197(1) WHERE THERE IS NO PROFITS OR INADEQUATE PROFITS IN THE COMPANY - Where a company has no profits OR its profits are inadequate - in any financial year the company shall not pay to its directors - Including MD/WTD/Manager remuneration any sum excluding sitting fee - except in accordance with the provisions of Schedule V - if it is not able to comply with such provisions, - with the previous approval of the Central Government. Sec 197(3) Remuneration to Independent Directors - an independent director shall not be entitled to any stock option and - may receive remuneration by way of sitting fees, reimbursement - of expenses for participation in the Board and other meetings and - profit related commission as may be approved by the members. Sec 197(7) - net profits for the purposes of this section shall be computed as per section 198. Sec 197(8)

6 Commission/ Remuneration Received by MD/WTD - any director who is a MD/WTD is in receipt of any commission - from the company shall not be disqualified from receiving any remuneration or - Commission from any of the company s holding or subsidiary company - Subject to its disclosure by the company in the Board s report. Sec 197(14) Sitting Fees - A director may receive remuneration by way of fee for attending meetings - of the Board or Committee thereof or for any other purpose decided by the Board. - the amount of such fees shall not exceed Rs.1 lakh vide CHXIII Rule 4 - different fees for different classes of companies and fees in - respect of independent director may be such as may be prescribed. Sec 197(5) Insurance Paid for negligence etc for MD/WTD/CEO etc. - Where any insurance is taken by a company on behalf of its - MD/WTD/Manager/CEO/CFO/CS for indemnifying any of them - against any liability in respect of any negligence, default, misfeasance, - breach of duty or breach of trust in relation to the company, the premium paid - on such insurance shall not be treated as part of the remuneration payable - if such person is proved to be guilty, the premium paid on such insurance - shall be treated as part of the remuneration. Sec 197(13) Exclusion from Remuneration - The percentages on net profits fixed for remuneration under section 197(1) - shall be exclusive of any fees payable to directors for attending - the meeting of the Board/ Committee there of or for any other purpose - as may be decided by the Board (sitting fee) Sec 197(2) Read with 197(5) - Remuneration does not include any amount paid/payable to - MD/WTD/Manager by way of services of a professional nature - and the Nomination and Remuneration Committee, where there is one OR - Board of Directors in other cases is of the opinion that such MD/WTD/Manager

7 - possesses the requisite qualification for the practice of the profession. Proviso 1(a) & (b) to Sec 197(4) Determination of Remuneration - The remuneration payable to the directors including MD/WTD/Manager- - shall be determined in accordance with and subject to - the provisions of this section, either by the articles of the company, or - by a resolution or, if the articles so require, by a special resolution, - and the remuneration so determined shall be inclusive of the - amount payable for the services rendered in any other capacity Sec 197(4) Formation of Remuneration and Audit Committee - Remuneration and Audit Committees u/s 178 CH XII Rule 6 is - required to be formed where the company is a - listed company OR a Public Company with a paid up capital of - 10 crores or more OR a turnover of 100 crores or more OR in aggregate - is having borrowing/debentures/deposits in excess of Rs.50 crores Mode Of Payment Of Remuneration - A director or manager may be paid remuneration either by way of - monthly payment OR at a specified percentage of the net profits OR - partly by one way and partly by the other. Sec 197(6) Refund of Remuneration Received In Excess - If any director draws or receives, directly or indirectly, by way of remuneration - any such sums in excess of the limit prescribed by this section 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 and Sec 197(9) - such refund of the amount shall waived if permitted by the central government. Sec 197(10)

8 Applicability of Schedule V & Central Government Approval - where Schedule V is applicable on grounds of no profits or inadequate profits, - any provision relating to the remuneration of any director which - purports to increase or has the effect of increasing the amount thereof, - contained in the company s memorandum or articles, or any agreement or - any resolution passed by the company in general meeting or board - shall not have any effect unless such increase is as per schedule V or if - Schedule V is not complied, only with central government approval Sec 197(11) Disclosure by Listed Companies - Every listed company shall disclose in the Board s report, - the ratio of the remuneration of each director to the median employee s - Remuneration and such other details as may be prescribed in Rules. Sec 197(12) Chap XIII Rule 5(1) Penalty for Contravention - one lakh rupees and up to five lakh rupees. Sec 197(15) SCHEDULE V (Sections 196 and 197) CONDITIONS TO BE FULFILLED FOR THE APPOINTMENT OF A MANAGING OR WHOLE-TIME DIRECTOR OR A MANAGER WITHOUT THE APPROVAL OF THE CENTRAL GOVERNMENT PART I Appointments Eligibility for Appointment as a MD/WTD/Manager Punishment for any offence and approval for appointment - (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 Acts, mentioned herein OR - (b) he had not been detained for any period under the Conservation - of Foreign Exchange and Prevention of Smuggling Activities Act, 1974

9 Central Government Approval for Appointment of Convicted Person - Where a person has been convicted of any offence under the above acts, - and he has not been convicted for any such offences thereafter and - central government has given approval for the appointment of such person - the company can appoint him as MD/WTD/Manager for any number of terms - as permitted by the act without further approval relating to this aspect. Age of Appointment - (c) he has completed the age of twenty-one years and has not attained - the age of seventy years: - where he has attained the age of seventy years and appointed as MD/WTD etc. - by a special resolution passed by the company in general meeting, - no further approval of the Central Government shall be necessary Managerial Position in more than one company - (d) 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; Residential Status - (e) he is resident of India. - 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, - for taking up employment in India; or - for carrying on a business or vacation in India. Approval for Non-Resident including NRI for taking managerial appointment - a person, being a non-resident in India shall enter India only after - obtaining a proper Employment Visa from the concerned Indian mission abroad. - - by duly furnishing, along with the visa application form, profile of the company

10 - principal employer and terms and conditions of his appointment. Non Applicability of Residential Status - The condition for residential status shall not apply to - the companies in Special Economic Zones as notified by - Department of Commerce from time to time: PART II- REMUNERATION PART II- SECTION I. REMUNERATION PAYABLE BY COMPANIES HAVING PROFITS: - As per section 197 above PART II- SECTION II- REMUNERATION PAYABLE BY COMPANIES HAVING NO PROFIT OR INADEQUATE PROFIT WITH OUT CENTRAL GOVERNMENT APPROVAL - Where in any financial year during the currency of tenure of a managerial person, - company has no profits or its profits are inadequate, it may, - it may pay remuneration without Central Government approval, - to the managerial person not exceeding the higher of the limits fixed below Effective capital* See Annexure 2 Maximum Remuneration Payable (Rs.) i) Negative or less than 5 crores 30 lakhs ii) 5 crores & above but less than 100 crores 42 lakhs iii) 100 crores & above but less than 250 crores 60 lakhs iv) 250 crores and above 60 lakhs plus 0.01% of the effective cap over 250cr. v) Where the position is held for a period less than one year Above slab on pro rata basis vi) Managerial person Not being a security holder or holding securities of the company of nominal value of Less than rupees five lakh or an employee or a director of the company not related to any director or promoter at any time during the two years prior to his managerial appointment if approved by a special resolution of members 2.5% of the current relevant profit Double of (i) to (vi) above

11 Payment of Remuneration as per Limits- Procedure - Limits specified under this section shall apply if, - payment of remuneration is approved by a resolution passed by the Board - and also by the Nomination and Remuneration Committee where applicable - 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; - a special resolution has been passed at the general meeting of the company - for payment of remuneration for a period not exceeding three years - in respect of special resolution passed as above a statement along with - a notice calling the general meeting is given to the shareholders - containing the information, contained in part II of the Schedule- Annexure I PART II- SECTION III. REMUNERATION PAYABLE BY COMPANIES HAVING NO PROFIT OR INADEQUATE PROFIT WITHOUT CENTRAL GOVERNMENT APPROVAL IN CERTAIN SPECIAL CIRCUMSTANCES OVER AND ABOVE THE LIMITS SET OUT IN SECTION II A) Excess Remuneration by a Foreign Company or by Passing Special Resolution - excess 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 such payment, and treats this amount - as managerial remuneration for the purpose of section 197 and - the total managerial remuneration payable by such other company - to its managerial persons is within permissible limits under section 197. B) Excess Remuneration above Section II Limits for Certain Class of Companies - a) where the company is a newly incorporated company, - for a period of seven years from the date of its incorporation, OR - b) is a sick company, for whom a scheme of revival or rehabilitation - has been ordered by the Board for Industrial and Financial Reconstruction

12 - or National Company Law Tribunal, for a period of five years - from the date of sanction of scheme of revival, - the companies may pay Remuneration up to two times - the amount permissible under Section II. - c) Remuneration fixed in excess of limits under Section II by BIFR/ NCLT - Note: Unlike category A, the managerial person shall not receive - remuneration from any other Company under this category. Additional Conditions for Paying Excess Remuneration Certificate by the Auditor/ Company Secretary - the auditor or Company Secretary of the company or where the company - has not appointed a Secretary, a Secretary in whole-time practice certifies that, - a) all secured creditors and term lenders have stated in writing that - they have no objection for the appointment of the managerial person - as well as the quantum of remuneration and such certificate is filed - along with the return in form MR-1 with ROC under section 196(4). - b) there is no default on payments to any creditors, and - all dues to deposit holders are being settled on time. Remuneration to Managerial Person by a COMPANY IN SPECIAL ECONOMIC ZONE - a company in a Special Economic Zone as notified by Department of Commerce - and which has not raised any money by public issue of shares or debentures - in India and has not made any default in India in repayment of any of its debts - (including public deposits) or debentures or interest payable thereon - for a continuous period of thirty days in any financial year, - may pay remuneration up to Rs. 2,40,00,000 per annum. PART II- SECTION IV Perquisites Not Included In Managerial Remuneration - Perquisites not included in calculating maximum managerial remuneration - Under Section II & III

13 Contribution to PF/Superannuation Fund/ Gratuity - Contribution to provident fund, superannuation fund or annuity fund - to the extent not taxable under the Income-tax Act, either singly or put together - Gratuity payable at a rate not exceeding half a month s salary for - each completed year of service and encashment of leave at the end of the tenure. Additional Perquisites Available to expatriate Managerial Personnel Including NRI s - Children s education allowance for children studying in or outside India, - up to a maximum of Rs. 12,000 per month per child or actual expenses incurred, - whichever is less admissible up to a maximum of two children. - Return Holiday passage for children studying outside India or family staying - Abroad once in a year by economy class or by first class once in two years - from the place of their study or stay abroad to India with the managerial person. - Leave travel concession: Return passage for self and family - in accordance with the rules specified by the company where it is proposed - that the leave be spent in home country instead of anywhere in India. PART II- SECTION V REMUNERATION PAYABLE TO A MANAGERIAL PERSON IN TWO COMPANIES - 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. PART III Provisions Applicable to Parts I and II of Schedule V - The appointment and remuneration referred to in Part I and Part II of Schedule V - shall be subject to approval by a resolution of shareholders in general meeting. - The auditor or the Secretary of the company or - where the company is not required to appointed a Secretary,

14 - a Secretary in whole-time practice shall certify that - the requirement of ScheduleV have been complied with and - such certificate shall be incorporated in the return filed with - the Registrar under section 196(4) PART IV The Central Government may, by notification, exempt any class or classes of companies from any of the requirements contained in this Schedule. Section 198 Analysis Calculation of Profit: - Give Credit to - Bounties and Subsidies received from the government or from any - public authority constituted or authorised in this behalf Sec 198(2) - Do not give credit to - Profits by way of premium on shares or debentures of the company - Issued or Sold by the company - Profits on sale by the company of forfeited shares. - Profits of capital nature including Profits from the - Sale of the undertaking or any of the undertaking or any part thereof - profits from the sale of any immovable property or fixed assets of -capital nature comprised in the undertaking or any of the - undertakings excluding sale in the routine business activity - Where the sale value of an asset is in excess of its WDV - excess of profit over and above the difference between - Original cost of fixed asset and its WDV - any change in the amount of equity reserves arising out of

15 - revaluation of any asset or liability at fair value Sec 198(3) 2. Deduct the following Amounts: - all the usual working charges; - directors remuneration; - bonus or commission paid or payable to any of the staff, or to any - engineer, technician or person employed or engaged by the company, whether on a whole-time or on a part-time basis; - any tax on excess or abnormal profits or business profits for - special reasons or on special circumstances - notified by the Central Government in this behalf; - interest paid or payable by the company on - debentures issued - mortgages executed - loans and advances secured by charge on fixed or floating assets - unsecured loans and advances - expenses on repairs, to immovable or to movable property, - other than repairs of Capital Nature - outgoings inclusive of contributions for charitable purpose u/s depreciation to the extent specified in section for declaration of dividend - the excess of expenditure over income arisen in computing the - net profits in accordance with this section which begins at or - after the commencement of this Act, in so far as such excess - has not been deducted in any subsequent year preceding the year - in respect of which the net profits have to be ascertained;

16 - any compensation or damages paid/payable in any - legal liability including a liability arising from a breach of contract; - sum paid for insurance against the risk of meeting any legal liability - debts considered bad and written off or adjusted during the year Do not Deduct the following Amounts - income-tax and super-tax payable under the IT Act, 1961, - or any other tax on the income not falling under sub-section (4) - any compensation, damages or payments made voluntarily, - not being a liability arising out of legal proceedings - loss of a capital nature including loss on sale of the undertaking or - any of the undertakings of the company or of any part thereof - other than loss represented by excess of WDV of an asset - sold/discarded/demolished/ destroyed - over its sale proceeds or scrap value - any change in carrying amount of an asset or of a liability - recognised in equity reserves including surplus in P&L account - on measurement of the asset or the liability at fair value.

17 Annexure 1 Information to be furnished in the notice for general meeting for payment of remuneration without central government approval I. General Information: - Nature of industry - Date OR Expected date of commencement of commercial production - In case of new companies, expected date of commencement of activities - as per project approved by financial institutions appearing in the prospectus - Financial performance based on given indicators - Foreign investments or collaborations, if any. II. Information about the appointee: - Background details - Past remuneration - Recognition or awards - Job profile and his suitability - Remuneration proposed - Comparative remuneration profile with respect to industry, - size of the company, profile of the position and person - in case of expatriates the relevant details with respect to the country of his origin - Pecuniary relationship directly or indirectly with the company, or - relationship with the managerial personnel, if any. III. Other information: - Reasons of loss or inadequate profits - Steps taken or proposed to be taken for improvement - Expected increase in productivity and profits in measurable terms. IV. Disclosures:

18 Disclosures to be mentioned in the Board of Director s report under Corporate Governance, if any, attached to the Financial Statement - all elements of remuneration package such as salary, benefits, - bonuses, stock options, pension, etc., of all the directors - details of fixed component and performance linked incentives - along with the performance criteria - service contracts, notice period, severance fees - stock option details, Including those issued at a discount - the period over which the same is accrued and exercisable. ANNEXURE 2 Effective Capital: Part II Section II - i) aggregate of the paid-up share capital - excluding share application money or advances against shares - ii) amount 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 - bank guarantee, etc., and other short-term arrangements - AS REDUCED BY - a) 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. - b) Accumulated losses and preliminary expenses not written off. Calculation of Effective Capital - 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; - In any other case effective capital as on the last date of the financial year

19 - preceding the financial year in which the appointment is made. ANNEXURE 3- Miscellaneous a) Factors to be considered by the Nomination and Remuneration Committee while approving the remuneration under Section II or Section III - Financial position of the company, trend in the industry, - appointee s qualification, experience, past performance, past remuneration, etc. - be in a position to bring about objectivity in determining remuneration package - while striking a balance between the interest of the company and shareholders. b) Current relevant profit - profit as calculated under section without deducting the excess of expenditure over income - referred to in sub-section (l) thereof in respect of those years - during which the managerial person was not an employee, director or - shareholder of the company or its holding or subsidiary companies. c) Remuneration - remuneration as defined in section 2(78) and includes - reimbursement of any direct taxes to the managerial person.