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The provisions of Companies Act, 1956 has some loopholes for dealing with the issue of Director’s remuneration. Director’s remuneration has been one of the ways for the management to extract funds from the company that belong to the shareholders and stakeholders. This has been a tricky issue in spite of the various circulars and notifications provided by the Ministry for providing clarity and ensuring transparency. The Companies Act, 2013 has now taken the responsibility to control the Director’s remuneration. Previously, the remuneration committees would constitute almost a team of Directors and shareholders had no standing. The new Act establishes the fact that the shareholders are the real owners of the company.

The Managerial Person covered are – Managing Director (MD), Whole-Time Director (WTD), Non- whole time/Part-time Director, Manager. As compared to various sections and chapters viz. 198, 309 etc. of previous Act which dealt with Managerial remunerations separately, the new Companies Act has solved this issue by consolidating all provisions under a single clause 197.

Some of the few highlights of the new Act are – all the managerial provisions are applicable to Public companies only. The stringent provisions are not applicable to private companies. However, the provisions will apply to a private company which is a subsidiary of public company as the subsidiary will be deemed to be a public company for the purpose of the Act. The sitting fees to be paid to Managerial Personnel would be outside the purview of the ceiling limit of 11%. As compared to earlier law, the new law empowers shareholders with the right to approve the terms and conditions for appointment of MD, WTD and Manager and the remuneration payable to them at a rate exceeding 5%. No approval is required to be obtained from Central Government for paying additional remuneration to Directors having professional qualification as per the new Act. The Companies Act, 2013 treats Managerial Personnel as an employee of the company and thus the listed companies will have to disclose the remuneration of each Director to the median employee’s remuneration. The independent directors shall not be entitled to any stock option and may be remunerated only by way of commission or sitting fees. The insurance on professional liability taken by the company on behalf of the managerial personnel shall not be treated as part of the remuneration payable to such personnel.

Thus the new Companies Act would help in maintenance of Corporate Governance and help regulate the aspects of managerial remuneration thereby enabling transparency and empowering shareholders.


Published by

Hetvi Sheth
Category Corporate Law   Report

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