Remuneration to Directors- Applicability and Procedure
REMUNERATION TO DIRECTOR
| S. No. | QUESTIONS & ANSWERS |
| A. | Whether section- 197applicable on Private Limited Company? |
| Solu: | NO.Section 197(1) makes it clear that the limits on managerial remuneration are applicable only to public companies. While S 197(3) refers to “a Company” and not “Public Company” as referred in 197(1), the intention of the statues appears to be to cover only public companies u/ 197. |
| B. | Restriction on Private Limited Company. |
| · No restriction on remuneration in case of Private Limited Company.· Restriction in respect of age, disqualifications, residential status etc is applicable to private company also. | |
| C. | Whether Schedule V applicable on Private Limited Company? |
| Schedule V is applicable on private limited company in parts.· Part I of Schedule V applicable on Private Limited Company.· Other parts of Schedule V not applicable on Private Limited Company. | |
| D. | Whether a director can be appointed as KMP. |
| Yes,A Director may be appointed as CEO, manager, CS or CFO. | |
| E. | Whether he can sign in more than one capacity in Ques: B. |
| A director can’t sign or authorize a thing in two different capacities. | |
| F. | Time period to fill vacancy of KMP. |
| Any vacancy in post of Managing Director, CEO, Manager, WTD and CS should be filed within 6 (Six) month- Section 203(4).Means a company can work without above mentions for approx 6 month. | |
| G. | Whether a MD, CEO, Manager, WTD or CS can hold office in other Company. |
| A whole time KMP shall not hold office in more than ONE Company except in Subsidiary Company.A person holding position of KMP in Holding Company, along with holding company can hold office of KMP in subsidiary company also. | |
| H. | Whether a person can be appoint as MD more than one Company except subsidiary Company? |
| YESMD can appoint as MD in another company. Such appointment has to be made or approved at a meeting of Board of Directors with the consent of all Directors present. | |
| I. | Whether a person can be appoint as Whole Time Director more than one Company except subsidiary Company? |
| A person can’t appointed as “WTD” in more than one companies, as such person is expected to be either ‘whole time employee’ of one company or at least devote whole time to work of the company. | |
| J. | Whether remuneration to CEO, CFO or CS will be include in calculation of remuneration to managerial personnel? |
| CEO, CFO and CS are not a ‘Managerial Personnel’ for the purpose of restriction on remuneration u/s 197. Salary to CEO, CFO and CS is not considered for purpose of computation of ‘Managerial Remuneration’. | |
| K. | Whether company can appoint more than one Managing Director? |
| In my view, Company can’t appoint more than one Managing Director. | |
| L. | What is Age limit for Appointment of Managerial Personnel? |
| A person can be appointed as Managerial Personnel when he has attained age of 21 years but is less than 70 years of age.A person over 70 year of age can’t continue as Managerial personnel unless Special Resolution is passed in GM. | |
| M. | Whether a foreigner can be appoint as Managing Director? |
| NO,A person should be resident of India.(Resident in India includes a person who has been staying in India for a continuous period of not less than 12 months immediately preceding the date of his appointment as managerial personnel.)If condition not satisfied Central Government approval is required. | |
| N. | If a person is disqualified to appoint as director, then whether he continues as MD/WTD? |
| If he is disqualified as director, or if he ceases to be a director, he is automatically disqualified as MD. | |
| O. | When approval of Central Government is necessary for appointment of MD/WTD/ Manager. |
| Approval required only when the appointment or re-appointment is not according to terms and conditions specified in Schedule V of the 2013Act. | |
| P. | When government approval is not required even if remuneration exceed limit. |
| In case of companies other than Listed Company or Subsidiary of Listed Company remuneration beyond the limit specified in Section 197 and part II of schedule V can be paid without Central Government approval, if all of following conditions are satisfied.ü Remuneration approved by Board of Director.ü Company is not defaulter in any debts, public deposits, debenture, interest on public deposits, and dividend on preference shares for more than 30 days.ü Remuneration approved by special resolution in general meeting.
ü Explanatory statement with notice of GM should contain information as specified including reasons and justification. ü No default in filling financial statement and Annual return. |
|
| Q. | Whether Managerial Personnel can be appoint by Board of Director? |
| YES,Managerial personnel can be appointing by Board of Directors But “Subject to approval of Shareholder in next General Meeting by passing of Ordinary Resolution”. | |
| R. | Tenure for appointment of Managerial Personnel. |
| A person can be appointed as Managerial Personnel only for five year at a time. | |
| S. | Limit of Maximum Remuneration to MD and WTD when company is making profit. |
| ü If there is only one MD/WTD then shall not exceed 5% of Net Profit.ü If there is more than one MD/WTD then shall not exceed 10% of Net Profit. | |
| T. | Limit of Remuneration if person is MD/WTD in more than one Company. |
| A MD/WTD can draw remuneration from two companies, but total remuneration received by him shall not exceed the higher maximum limit admissible from any one of the Companies of which he is a managerial person. | |
| U. | If a company want to make payment of remuneration above the limit given in form no. IV below Whether is it possible or Not? |
| It’s Possible.The remuneration mentioned in question IV below can be increase upto double the amount if approved by Special Resolution passed in General Meeting. | |
| V. | For how much time special resolution passed will be effective. |
| Such Special resolution will be effective for period of three years. | |
| W. | Whether remuneration paid for services rendered in professional capacity will be include in calculation of Managerial personnel? |
| As per Section 197(4) Proviso: will not include.Remuneration for services of a director in a capacity other than director will not fall under the limit prescribed, if the opinion of the Board of Director, the director possesses the qualification for the practice of that other profession. | |
| X. | Whether in question “V” Section- 188 of Related party transaction attract or not? |
| Section 188 will attract in above transaction and necessary disclosure under AS-18 will also be required as per S. 177(4)(iv) if 2013.Where the transaction is at arm’s length and in the ordinary course of business and although approval of the board is not necessary, entry in the registered of contracts under Sec 189 of the Act, 2013 will be required unless the value of transaction is less than Rs. 5 lakhs. | |
| Y. | Whether payment of “SITTING FEE” will be include in calculation of Managerial Remuneration. |
| As per Section 197(2) Sitting fees will NOT form part of remuneration. | |
| Z. | Whether payment of “PREMIUM for insurance against Civil Liability” will be include in calculation of Managerial Remuneration. |
| Section 197(3) clarifies that premium paid on obtaining a policy of insurance against liability in respect of negligence, default, misfeasance, breach of duty and breach of trust in relation to the company, will not be treated as part of remuneration. | |
| AA. | Condition when “Premium” will be treated as part of remuneration. |
| If the MD/WTD is proved to be guilty, the premium paid on such insurance shall be treated as part of the remuneration. | |
| BB. | Whether Managerial personnel can get remuneration from Holding and Subsidiary Company? |
| A MD/ WTD of the company who is in receipt of any commission from the Company shall not be debarred from receiving remuneration or commission from any holding and subsidiary company of such company subject to necessary disclosure in Board’s report. | |
| CC. | What will be consequence if director got remuneration in excess of the limits of Sec- 197? |
| There are two conditions:1. If director received after approval from Central Government:In this situation no consequence, director can enjoy such remuneration.2. If director received without approval from Central Government.
In this situation director shall refund such excess to the Company. |
|
| DD. | Whether company can waive recovery of Excess amount form the Director? |
| The Company can waive recovery of any such refundable to it,Unless permitted by the Central Government. |
| S. No. | QUESTIONS & ANSWERS | ||||||||||
| I. | What is Effective Capital? | ||||||||||
| Effective Capital means Aggregate Of:ü Paid up Capital (Excluding Share application money or advances against shares)ü Amount in share premium account, if anyü Reserves and surplus (excluding revaluation reserve)
ü Long term loans and deposits repayable after one year (excluding working capital loans, overdrafts, interest due on loans unless funded, bank guarantee etc. and other short term arrangements) From the above following will be reduced to arrive at Effective Capital ü Investments (except in case of investment by an investment Company whose principal business is acquisition of shares, stock, debentures or other securities) ü Accumulated losses ü Preliminary expenses not written off v The Effective Capital will be calculated as on last date of financial year proceeding the financial year in which the appointment is made. v In case of appointment in the first year of incorporation, will be calculated as on date of appointment of the managerial person. |
|||||||||||
| II. | Things should not be covered while calculating effective capital. | ||||||||||
| Ø Share application moneyØ Advances against sharesØ Revaluation ReservesØ Working Capital Loans
Ø Interest due on Loans, unless funded i.e. converted into term loan repayable after one year Ø Overdrafts given by bank Ø Bank guarantees Ø Other short term arrangements. |
|||||||||||
| III. | What will be the effects of Increase and decrease in Effective capital on Remuneration of Managerial Personnel? | ||||||||||
| In case of Decrease:Once the appointment is made No change can be made in remuneration.In case of Increase:Remuneration can be increase prospectively, but again resolution in Board Meeting and Special Resolution in General Meeting will be required. | |||||||||||
| IV. | Normal Minimum Remuneration as per Part II | ||||||||||
|
|||||||||||
| V. | One Benefit for the Company. | ||||||||||
| A newly incorporate public Company may pay remuneration in excess of the limits under schedule V and this relaxation to pay remuneration up to two times the amount permissible under Section II of Schedule V is available for a period of seven years from the date of incorporation of Company. | |||||||||||
| VI. | Disclosures of Managerial Remuneration. | ||||||||||
| v Disclosure in Annual Return:Section- 92 provides that details of Key managerial personnel and remuneration payable to key Managerial Personnel shall be disclosed in the Annual Return.v Disclosure in Explanatory Statement:
Section- 102 inter alia stipulates that the explanatory statement to be annexed to the notice convening a General Meeting and with regards to matters to be transacted at such meeting, shall disclose the nature of concern or interest, financial or otherwise, if any, of every key managerial personnel.
v Register Containing particular of KMP: Section 170 cast an obligation on the Company to keep a register recording particulars of directors and key managerial personnel.
|
|||||||||||
| VII. | Whether Section- 197 of Companies Act, 2013 (Managerial Remuneration) Private Limited Companies or Not? | ||||||||||
| Discussed Below:v Requirement of Section 196 of the Companies Act, 2013 relating to appointment of Managing Director, Whole-time Director or Manager, are applicable on Private Limited Company.v But Provisions of Section 197 not applicable on Private Limited Company.
v Therefore, Private Company may pay remuneration in excess of 11% of net profit. v A private company is not required to have a nomination and remuneration committee.
AS PER “A RAMAIYA”
· Section 197(1) of the 2013 Act makes it clear that the limits on managerial remuneration are applicable only to public companies. · While section 197(3) of the 2013 Act refers to “a company” and not “public company “ as referred in s.197(1), the intention of the statute appears to be to cover only public companies under s. 197 and hence provisions of s. 197(3) refers to s.197(1) and (2) which refers to limits on remuneration and such limits on remuneration are applicable only to “companies”, but this can be understood as public companies. · Section 197(3) of the 2013 Act has raised a doubt as to whether schedule V of the 2013 Act shall be applicable to private company with no or inadequate profits. · This according to the editor does not appear to be the intention of the statute as s. 197 overrides s.197 (1) and (2) which only deal with Public Companies with adequate profits and not private companies. · Private companies are in any event outside the purview of public company with adequate profits and one with inadequate or no profits. Thus Schedule V is partly applicable to private companies (i.e. in relation to Part I that deals with appointment), and partly not applicable to private companies (i.e. Part II that deals with remuneration). Therefore, As per Clarification given above Conclusion is Section 197 (Managerial Remuneration) and Part II of Schedule V not applicable on Private Limited Companies. |
|||||||||||
| VIII. | Whether MD, WTD & Manager can be appoint as Director in any other Company | ||||||||||
| As per My View:As per Third Proviso Sub Section 3 of Section 203Sub Section 3 of Section 203:BARE ACT LANGUAGE:
“Nothing contained in this sub-section shall disentitle a Key Managerial from being a director of any Company with the permission of the Board.” AS PER MY KNOWLEDGE: As PER Sub Section 3 of Section 203: A Key Managerial Personnel can be appointing as Director in other Companies if he fulfill the Condition: § Before appointment as Director, KMP requires permission of Board of Directors of Company. § By passing of Board Resolution in the company in which he is KMP.
CONCLUSION: Therefore, it is clear from above clarification that “KMP CAN BE APPOINT AS POSITION OF DIRECTOR IN OTHER COMAPNIES” |
|||||||||||
| IX. | Can a person be Managing Director in two companies? | ||||||||||
| As per My View:As per 203 of Companies Act, 2013Sub Section 3 of Section 203:BARE ACT LANGUAGE:
A company may appoint or employ a person as its managing director, if he is the managing director 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. AS PER MY KNOWLEDGE: As PER Sub Section 3 of Section 203: A company may appoint or employ a person as its MD, if he is the MD or Manager of one and not more than one other company. {Such person should not be MD in more than one Company at the time of appointment, But he can be Director in any no. of Company as allowed by Companies Act, 2013. His Directorship in other Companies will not affect his appointment as MD in second Company.
· For Such appointment: § Specific Notice of Meeting has been given to all the directors then in India. § 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. (Unanimous Resolution) {Resolution by Circulation will not work in this situation.
CONCLUSION: Therefore, it is clear from above clarification that “A PERSON CAN BE A MANAGING DIRECTOR IN TWO COMPANIES”. |
INSTANCES WHERE CENTRAL GOVERNMENT AND SHAREHOLDER APPROVAL IS REQUIRED FOR INCREASE IN REMUNERATION:
| Condition/Case | Approval of Central Government | Approval of Shareholders |
| Remuneration exceeding 11% of net profits, but otherwise in compliance with Schedule V | Required | Required |
| Remuneration of any one MD or WTD or manager which is in excess of 5% net profits | Not Required | Required |
| Where remuneration of two or more MD/WTD or manager, when taken together exceeds 10% of net profits. | Not Required | Required |
| Remuneration to any other director (Other than WTD or MD) exceeding 1% (Where there is an MD/ WTD in the Company) | Not Required | Required |
| Remuneration to any other director (other than WTD or MD) exceeding 3% (In all other cases i.e. where there is no MD/WTD) | Not Required | Required |
| Where remuneration is paid (other than sitting fee) where company has no or inadequate profits and exceeds the limits in Schedule- V | Required | Requires |
[Author– CS Divesh Goyal is a Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com or 08130757966 ]
Responses