Computation of Net Profits

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Muralidharan (Querist)
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08 July 2009 ABC Limited is a closely held public limited company. During last year (2008) the company had re-appointed its MD for further period of three years. Suitable remuneration was recommended by Remuneration Committee. The remuneration was also approved by Board and Members. The remuneration to MD is Rs.3.00 lacs per month. Since the company had inadequacy of profits, it took the Schedule XIII route to pay remuneration of Rs.3.00 lacs per month.

The remuneration was approved under Sub Paragraph (B) of Section II of Part II to Schedule XIII (Remuneration payable by companies having no profits or inadequate profits) to the Companies Act, 1956. For effective capital of Rs.25.00 crore or more but less than Rs.50.00 crores, the company can pay maximum remuneration of Rs.3.00 lacs per month under schedule XIII

The remuneration paid to MD during the year is more than 5% of the Net Profits. However I am 100% sure that this is not a violation of the Act. This is due to the fact that the remuneration is being paid under Sub-Paragraph B of Section II of Part II of Schedule XIII, which permits companies with no profits or inadequate profits to pay such remuneration as laid down under Schedule XIII.

The accounts for year ended 31.03.2009 are being drawn for approval of Board / Members. In the Notes on Accounts the remuneration paid to MD during the year will be shown separately.

(1) Kindly advise whether it is mandatory for the company to prepare and include in the Notes on Accounts a statement containing “Computation of Net Profit as per Section 198, 309 and 349”.

(2) If the above said “computation” statement is mandatory, then what type of note should I provide in the Notes on Accounts, clarifying about the mismatch between the 5% net profits and actual remuneration paid.

(3) Whether MD remuneration to be disclosed and attached with Boards Report as per Section 217(2A) . Whether MD will be an employee of the company to be covered under Section 217(2A).

I look forward for kind advise

With regards

Muralidharan

CS Vivek Hegde

CS Vivek Hegde (Expert)
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09 July 2009 Dear Muralidharan

First two points i am not sure. But it is usually mentioned in the notes on acount.

I can clarify point no 3. MD is not an employee covered u/s 217(2A). Pls refer Ramaiya..

rgds

Vivek

Ankur Garg

Ankur Garg (Expert)
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09 July 2009 However as per my opinion the remuneration given to MD, being a contractual employee should be given in the director' report u/s 217(2A).

As a good corporate governance practice company should prepare and include in the Notes on Accounts a statement containing “Computation of Net Profit as per Section 198, 309 and 349”. However many companies are not following this practice as such disclosure is not statutory requirement.

Regards

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