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APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL & KMPS 4th October, 2018 Nikita Snehil Vinod Kothari & Company Kolkata 1006-1009 Krishna Building 224 AJC Bose Road Kolkata 700017 Phone:033-22811276/ 22813742/7715 E: corplaw@vinodkothari.com New Delhi A/11, Hauz Khas, New Delhi 110016 Phone:011-41315340/ 65515340 E: delhi@vinodkothari.com www.vinodkothari.com Email: nikita@vinodkothari.com Mumbai 403-406, 175, Shreyas Chambers, D.N. Road, Fort, Mumbai 400 001 Phone: 022 22614021/ 62370959 E: bombay@vinodkothari.com
APPOINTMENT OF MANAGERIAL PERSONNEL
MEANING OF MANAGERIAL PERSONNEL Managing Director Whole-time Director Manager S. 2 (54) Managing director means a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its BoD, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called S. 2 (94) whole-time director includes a director in the whole-time employment of the company S. 2 (53) Manager means an individual who- subject to the superintendence, control and direction of the Board of Directors, has the management of the whole, or substantially the whole, of the affairs of a company, and includes a director or any other person occupying the position of a manager, by whatever name called, whether under a contract of service or not
APPLICABILITY & PRE-REQUISITE OF S. 196 Applicability to Cos Restrictions Maximum Tenure Private Co.; Public Co.; Private Co. which is a subsidiary of Public Co. (i.e., deemed public co.) No company shall appoint or employ at the same time a managing director and a manager; 1. No company shall appoint or re-appoint any person as its managing director, wholetime director or manager for a term exceeding five years at a time; 2. No re-appointment shall be made earlier than one year before the expiry of his term;
CONDITIONS FOR THE APPOINTMENT OF MANAGERIAL PERSONNEL No company shall appoint or continue the employment of any person as managing director, whole-time director or manager who -- is below the age of 21 years or has attained the age of 70 years* is an undischarged insolvent or has at any time been adjudged as an insolvent has at any time suspended payment to his creditors or makes, or has at any time made, a composition with them has at any time been convicted by a court of an offence and sentenced for a period of more than 6 months *appointment of a person who has attained the age of seventy years may be made by passing a special resolution in which case the explanatory statement annexed to the notice for such motion shall indicate the justification for appointing such person. Also, where no such SR is passed but votes cast in favour of the motion exceed the votes, if any, cast against the motion and the CG is satisfied, on an application made by the Board, that such appointment is most beneficial to the company, the appointment of the person who has attained the age of 70 years may be made.]
PROCESS OF APPOINTMENT BM GM CG Approval Filing of Return of Appointment The appointment and the terms and conditions of such appointment and remuneration payable has to be approved by the BoDs Post the BM, the appointment, along with the terms and conditions and remuneration payable has to be approved by the shareholders at the ensuing GM In case, the appointment is in variance to the conditions spe cified in Part I of Schedule V then the approval of Central Government shall also be required A return in the e-form MR-1, shall be filed within sixty days of such appointment with the Registrar The notice convening BM or GM for considering such appointment 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.
APPOINTMENT OF KEY MANAGERIAL PERSONNEL
KMP AS PER SEC. 2(51) Chief Executive Officer (means an officer of a company, who has been designated as such by it); Managing Director or Whole-time Director or Manager (definition provided in Slide 5); Company Secretary (means a company secretary as defined in the Company Secretaries Act, 1980 who is appointed by a company to perform the functions of a company secretary under this Act); Chief Financial Officer (means a person appointed as the Chief Financial Officer of a company); Such other officer not more than one level below the directors who is in whole time employment, designed as KMP by the Board; Such other officer as may be prescribed
APPOINTMENT OF KMP SECTION 203(1) For S. 203, KMP means Class of cos required to appoint a KMP u/s 203 (a) MD/ CEO/ Manager/ and in their absence, a WTD; (b)cs; (c) CFO (A) Every listed cos. (B) Public Cos. having a paid-up share capital of 10 crore rupees or more A co., other than (A) and (B), but having paid up share capital of Rs. 5 Crores or more shall have a whole time Company Secretary
IMP POINTS TO NOTE Every whole-time KMP of a co. shall be appointed by means of a resolution of the BoDs; o The BR should contain terms & conditions of the app and details of the remuneration. A Company shall not appoint or re-appoint an individual as chairperson and as a MD / CEO at same time unless its AoA provides for the same and Company does not carry on multiple businesses. o But company engaged in multiple businesses can appoint the same Individual as the Chairperson who is also MD or CEO if CEO s have been appointed for each separate business. Recently the SEBI has approved the recommendations of Shri. Uday Kotak s Committee on Corporate Governance for listed companies, wherein recommendations includes dividing the role of CEO/MD and Chairperson for the top-500 listed firms with effect from April 1, 2020. A whole-time KMP shall not hold office in more than one company except in its subsidiary company at the same time; o However, a KMP may be a director of any company with the permission of the Board; o A company may appoint or employ a person as its MD, if he is the MD or manager of one, and of not more than one, other company and such appointment or employment is made or approved by a resolution passed at a meeting of the Board with the consent of all the directors present at the meeting and of which meeting, and of the resolution to be moved thereat, specific notice has been given to all the directors then in India. If office of any whole-time KMP is vacated, the resulting vacancy should be filled up by the Board at its Meeting within 6 months.
MANAGERIAL REMUNERATION
WHAT ARE THE COMPONENTS OF REMUNERATION Definition of Remuneration As per Sec. 2(78), remuneration means any money or its equivalent given or passed to any person for services rendered by him and includes perquisites as defined under the Income-tax Act, 1961.
PROVISIONS GOVERNING MANAGERIAL REMUNERATION Managerial Remuneration S. 197 Schedule V Part I - Appointment Part II Remuneration Section I in case of profit Section II in case of no profit / inadequate profit 10/5/2018 VK & CO. 15
LIMITS OF MANAGERIAL REMUNERATION Managerial Remuneration - 197(1) Total remuneration inc. Managerial Personnel shall not exceed 11% of Net Profit Remuneration to Managerial Personnel Remuneration to dirs. other than Managerial Personnel i.e., NEDs If total rem exceeds 11% - shareholders approval req + payment should be subject to Sch. V The remuneration payable to any one MD/ WTD/ Manager should not exceed 5% of the net profits of the company If there is more than one such director remuneration shall not exceed 10% of the net profits to all such directors and manager taken together 1% of the net profits of the company, if there is a MD/ WTD/ Manager 3% of the net profits in any other case
SEC 197: APPROVALS FOR PAYMENT OF MANAGERIAL REMUNERATION Company Public Company Private Company Total Managerial Remuneration to dirs. inc. Managerial Per Individual Limits Provision of Section 197 not applicable Up to 11% of Net Profits of the company Exceeding 11% of Net Profits of the company Remuneration payable to MD/ WTD/ Manager Company has any one of MD/WTD/Manager Remuneration payable to other directors Company has more than one MD/WTD/Manager Remuneration payable to MD/ WTD/ Manager Remuneration payable to other directors where company has no MD/WTD/Manager Board Resolution OR, subject to the provisions of Schedule V + Prior approval of Banks, PFI, NCD holders or secured creditors (applicable in case of defaulting companies) Up to 5% of the Net Profits of the company Exceeding 5% of Net profits of the company Up to 1% of the Net Profits of the company Exceeding 1% of Net profits of the company Up to 10% of the Net Profits of the company Exceeding 10% of Net profits of the company Upto 3% of Net profits of the company Exceeding 3% of Net profits of the company Board Resolution (if within the prescribed limits) i.e. up to 5%, 1%, 10%, 3% as the case may be or 11% overall; (if exceeding the prescribed limits) SR + Prior approval of Banks, PFIs, NCD holders or secured creditors (applicable in case of defaulting companies) 17
IMP POINTS TO NOTE Section 197 applies only to Public Companies and hence private Companies are free to pay remuneration at any rate to such directors in case of adequacy or inadequacy of profits; A director or manager may be paid remuneration either by way of a monthly payment or at a specified percentage of the net profits of the company or partly by one way and partly by the other; An ID shall not be entitled to any stock option and may receive remuneration by way of: o sitting fees, o reimbursement of expenses for participation in the Board and other meetings; o profit related commission as may be approved by the members; The net profits for the purposes of this section shall be computed in the manner referred to in S.198 except that the remuneration of the directors shall not be deducted from the gross profits.
PROVISIONS OF SCHEDULE V Section I Managerial Remuneration payable by cos having adequate profits Schedule V Section II Section III Section IV Managerial Remuneration payable by cos having nil or in-adequate profits Managerial Remuneration payable in certain circumstances in case of nil or in-adequate profits Perquisites not included in managerial remuneration Section V Managerial Remuneration payable to Managerial Personnel in 2 cos.
RELAXATIONS IN MANAGERIAL REMUNERATION FOR CERTAIN CLASS OF COS. As per Rule 7 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, relaxation to the cos other than listed companies and its subsidiaries for paying managerial remuneration beyond the ceiling limit in Section II, Part II of Schedule V) in the event of no profit or inadequate profit subject to the following conditions: Approval of NRC should be obtained followed by board s approval with clear reason recorded in writing for payment of remuneration beyond the limit; No default in repayment of any of its debts including public deposit or debentures or interest payable thereon and dividend on preference shares for a continuous period of 30 days in the preceding FY has been made by the co. SR has to be passed in GM for the payment of managerial remuneration for a period not exceeding 3 years; oexplanatory Statement to the notice calling the general meeting should contain information referred to in Sch V, for the said purpose. The co. should hv filed the financial statement and Annual Return which are due to be filed with Registrar of Companies.
MANAGERIAL REMUNERATION IN CASE OF NO PROFITS/ INADEQUATE PROFITS if there are no profits or inadequate profits, remuneration to managerial personnel should be as per Schedule V Schedule V shall have overriding over MoA, AoA, agreement and general meeting resolution If company is unable to comply with provisions of Schedule V, then no remuneration can be paid to Managerial Personnel except sitting fee
MANAGERIAL REMUNERATION PAYABLE BY THE COMPANIES HAVING NIL OR INADEQUATE PROFITS (SECTION II OF PART II OF SCHEDULE V) (1/3) Remuneration to a Managerial Person shall not exceed limit under (A) and (B) given below (A) Where Effective capital is i) ve or < 5 crores 60 lakhs ii) >= 5 crores but <100 crores iii) >= 100 crores but <250 crores iv)>=250 crore (B) Limit of yearly remuneration payable shall not exceed (Rs) 84 lakhs 120 lakhs 120 lakhs plus 0.01% of the effective capital in excess of Rs. 250 crores. To pay more than the above mentioned limit, the co should obtain a special resolution by the shareholders.
MANAGERIAL REMUNERATION PAYABLE BY THE COMPANIES HAVING NIL OR INADEQUATE PROFITS (SECTION II OF PART II OF SCHEDULE V) (2/3) For managerial person who is functioning in professional capacity Remuneration as stated in the table shall be paid, if such person: is not having any interest in in the capital of the company or its holding company or any of its subsidiaries directly or indirectly or through any other statutory structures 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 2 years before or on or after the date of appointment during 2 years before appointment; possess graduate level qualification and specialisation in the field in which Company operates. *any employee of a co. holding shares of the co. not exceeding 0.5% of its paid up share capital under ESOP or by way of qualification shall be deemed to be a person not having any interest in the capital of the company
PRE-REQUISITES FOR THE PAYMENT (3/3) The limits specified in the table represented by (A) and (B) shall apply, if- 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 suction 178 also by the Nomination and Remuneration Committee The company has not committed any default in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, and in case of default, the prior approval of the bank or public financial institution concerned or the non-convertible debenture holders or other secured creditor, as the case may be, shall be obtained by the company before obtaining the approval in the general meeting An OR or a SR, as the case may be, has been passed for payment of remuneration as per item (A) or a SR 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. A statement along with a notice calling the general meeting referred above is given to the shareholders containing the detailed information as specified in the Schedule.
WAIVER OF EXCESS REMUNERATION (1/2) If any director draws or receives remuneration in excess of the limit prescribed in S. 197 or without approval required, the dir shall repay the excess remuneration to the company within a maximum period to 2 years. However, the company on passing of SR within 2 yrs from the date the amount becomes refundable may waive such recovery with prior approval of banks, financial institutions, non convertible debenture holders or secured creditors will be required, in case the company has defaulted in payment of their dues. Further, duty is casted on auditors to report payment of remuneration in conformity with the provisions of the Act and disclose any excess remuneration.
SEBI (LODR) (AMENDMENT) REGULATIONS, 2018 (1/2) As per the Amended Regulations, listed cos will have to comply with the following additional points: Regulation Amendments Applicability Actionables 17(6)(ca) Remuneration payable to a single NED Requirement to obtain approval of shareholders by special resolution every year, in which the annual remuneration payable to a single nonexecutive director exceeds fifty per cent of the total annual remuneration payable to all non-executive directors, giving details of the remuneration thereof. April 1, 2019; All equity listed entities As the word payable is not clear in case of remuneration payable for FY 2018-19 after April 1, 2019 shareholder s approval by special resolution seems to be required in FY 2019-20. However, if a company is sure on hitting the threshold, then the resolution can be passed in the AGM to be held in 2018 itself.
SEBI (LODR) (AMENDMENT) REGULATIONS, 2018 (2/2) Regulation Amendments Applicability Actionables 17(6)(d) Remuneration payable executive directors who are promoters or members of the promoter group Requires the company to obtain the approval of the shareholders by SR in GM in case of fees or compensation payable to executive directors who are promoters or members of the promoter group, if- (i) the annual remuneration payable to such ED exceeds rupees 5 crore or 2.5 per cent of the net profits of the listed entity, whichever is higher; or April 1, 2019; All equity listed entities As the word payable is not clear in case of remuneration payable for FY 2018-19 after April 1, 2019 shareholder s approval by special resolution seems to be required in FY 2019-20. However, if a company is sure on hitting the threshold, then the resolution can be passed in the AGM to be held in 2018 itself. (ii) where there is more than one such director, the aggregate annual remuneration to such directors exceeds 5 per cent of the net profits of the listed entity. Also, the approval of the shareholders under this provision shall be valid only till the expiry of the term of such director.
FEW QUESTIONS (1/10) Can a director who is MD/ WTD of a co., receive remuneration from its holding co. or subsidiary? A MD/WTD who is in receipt of remuneration from a company should be qualified to receive remuneration from its holding or subsidiary co., subject to the disclosure in Boards Report. Also, Part II of Section V of Schedule V provides that the managerial personnel may draw remuneration from one or more companies, provided the total remuneration drawn from the companies does not exceed higher maximum limit permissible from any one of the cos. in which he is a managerial personnel.
FEW QUESTIONS (2/10) Can the KMP of Holding Co. be appointed in only one subsidiary or in all subsidiaries of holding company at the same time? Ideally the KMP should be appointed in only one subsidiary, as appointing him in more than one subsidiary will only lead to the compliance of the statutory req, and suppressing the very intent of the provision.
FEW QUESTIONS (3/10) Is it mandatory to designate more officers as KMP under section 2 (51)(V)? As it seems from the Act that its upto the Board to designate additional KMP under the new clause. In case the Board doesn t designate other KMPs, can the Company may continue with earlier KMPs only. The Amendment Act, 2017 provides the discretion to appoint other officers as KMPs to the Board. However, when the Board decides to designate such an officer, all the provisions of the Act, 2013 except Section 203 (which is independent) is required to be complied with by the new KMPs and the Company w.r.t that person.
FEW QUESTIONS (4/10) Can a company by passing SR and as per the requirements of Schedule V read with the Rules provide remuneration without any ceiling limit and without CG approval? Yes, the approval of Central Government is restricted to Part I of Schedule V which deals only wrt the age and pre-requisites to be complied by the managerial personnel. Therefore, no CG approval is required to provide remuneration to the managerial personnel with due compliance of the provisions of Companies Act, 2013.
FEW QUESTIONS (5/10) Whether the default in payment should be subsisting or a continuing default? What if the company has made good such default? The language of the second proviso to sub-section (1) to section 197 is silent on the point that whether approval from only such financial creditors is required whose default is subsisting on the date of approval or from all the secured creditors is required, irrespective of whether the default is subsisting on the present date. However, a view may be taken that where a default is rectified, the approval of the financial creditors will not be required.
FEW QUESTIONS (6/10) Whether the payment of minimum remuneration is possible in case of a CEO? The remuneration payable to CEO is not governed by Section 197, unless the CEO can be regarded as the manager. Hence, the payment of minimum remuneration can be possible in case of CEO.
FEW QUESTIONS (7/10) If a company proposes to pay remuneration exceeding 5% to one MD or WTD but within the overall limit of 11%, is there a need to obtain shareholder s approval? The approval from the shareholder s is required by way of special resolution in case the limit whether 5%, 10% or 11% based on percentage of profits are exceeded.
FEW QUESTIONS (8/10) What is the meaning of prior approval for the above purpose? How will such approval be sought? Is it from each of the 4 categories of financial creditors, or from a majority of them at a meeting? The prior approval is needed only from such financial creditors, for whom a default is subsisting. The company should take approval from such creditors by calling a separate meeting or by taking written approval prior to the general meeting. However, in case of default towards non convertible debentures the terms and conditions will decide the manner of approval.
FEW QUESTIONS (9/10) Whether the default should be subsisting or continuing default? What if the company has made good such default? The language of the second proviso to sub-section (1) to section 197 is silent on the point that whether approval from only such financial creditors is required whose default is subsisting on the date of approval or from all the secured creditors is required, irrespective of whether the default is subsisting on the present date. However, a view may be taken that where a default is rectified, the approval of the financial creditors will not be required.
FEW QUESTIONS (10/10) What will happen to the existing applications pending processing with Central Government? With the enforcement of sub-section (17), all the existing application with Central Government shall stand abated and the companies will be required to comply with the revised provisions within 1 year of the enforcement of the provisions of the Amended Act, 2017 (i.e., Sept 12, 2018). However, the applications already approved by the CG shall not require approval again under the provision of the Amendment Act, 2017.
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