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Summary

MCA has issued Notification on March 18, 2021 in relation to amendment in Schedule V of Companies Act, 2013.

Schedule V, states about the Remuneration to 'Remuneration to Managerial Person'. According to Schedule V, in case company has no profit or its profit are inadequate in such case Company can pay remuneration to the managerial person as per provisions of Schedule V.

Managerial Person means, Managing Director, Whole Time Director and Manager.

There was no provisions under Companies Act 2013 for payment to the Nonexecutive Director in case a company has no profit or inadequate profit. MCA took up this issue and made amendments in provisions of schedule V by this
notification.

In this editorial, the author shall discuss about the amendment made through this notification and the impact of such amendment on Companies.

Remuneration to Non-Executive and Independent Director

Provisions before amendment

PART II: REMUNERATION

Section I. Remuneration payable by companies having profits

Subject to the provisions of section 197, a company having profits in a financial year may pay remuneration to a managerial person or persons not exceeding the limits specified in such section.

Section II. Remuneration payable by companies having no profit or inadequate profit without Central Government approval

Where in any financial year during the currency of tenure of a managerial person, a company has no profits or its profits are inadequate, it may, without Central Government approval, pay remuneration to the managerial person not exceeding the higher of the limits as mentioned here in law ….

 

Amendment Made

(a) in Section I, in the first para, after the words "managerial person or persons", the words "or other director or directors" shall be inserted;

(b) in Section II, (i) after the words "managerial person", wherever occurred, the words "or other director" shall be inserted;

Provisions after amendment

PART II: REMUNERATION

Section I. Remuneration payable by companies having profits

Subject to the provisions of section 197, a company having profits in a financial year may pay remuneration to a managerial person or persons or other directors not exceeding the limits specified in such section.

Section II. Remuneration payable by companies having no profit or inadequate profit without Central Government approval

Where in any financial year during the currency of tenure of a managerial person or other director, a company has no profits or its profits are inadequate, it may, without Central Government approval, pay remuneration to
the managerial person or other director not exceeding the higher of the limits as mentioned here in law.

 

Question for discussion

As per provisions of Section 197, The total managerial remuneration payable by a public company, to its directors, including managing director and whole time director, and its manager in respect of any financial year shall not exceed eleven per cent. of the net profits of that company for that financial year.

Therefore, if Company wants to give remuneration to Managerial Person more than 11% of net profit they have to follow process mentioned under Schedule V.

Till now, there was no provision in the Companies Act that allowed a remuneration for the non-executive director if the company was in loss or had inadequate profits. only the executive director was entitled for a remuneration
in the event of a loss.

As corporates felt that due to the responsibilities of Non-executive directors, it was important that they were appropriately remunerated even in case of loss or inadequate profit.

Impact of Amendment

Note: Provisions relating to Part II of Schedule V is not applicable on Private Limited Company. Therefore, these amendments shall impact only to Public Limited Companies.

To read the full article, find the enclosed file

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