Directors remuneration

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

17 July 2013 Hi
Our public limited company has paid remuneration to managing director more than 20% of its profit.
Can any one advice that waht will be adverse implication due to this and what steps company should take in future for not viloting sec 198 of the companies act.

Ajay Mishra

Ajay Mishra (Expert)
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19 July 2013 Hi

Total ceiling of managerial remuneration
Section 198(1) relates to overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits. The total managerial remuneration payable by a public company or a private company which is a subsidiary of a public company, to its directors and its manager in respect of any financial year shall not exceed 11% of the net profits of the company for that financial year. Such net profits shall be computed in a manner laid down under sections 349 and 350, except that the remuneration of the directors shall not be deducted from the gross profits.
Remuneration is payable to all the directors including managing and whole-time directors and in any capacity. Therefore, it includes the remuneration for services rendered by him in any other capacity other than that of a director.

Ajay Mishra

Ajay Mishra (Expert)
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19 July 2013 As per provisions of Section I of Part II of Schedule XIII to the Companies Act, 1956, subject to the provisions of sections 198 and 309, a company may pay any remuneration, by way of salary, dearness allowance, perquisites, commission and other allowances, which shall not exceed 5% of its net profits for one such managerial person, and if there is more than one such managerial person, 10% for all of them together. Section 309(3) provides that managerial personnel may be paid remuneration either by way of a monthly payment or at specified percentage of the net profits of the company or partly by one way and partly by the other. In case if remuneration exceeds 5% or 10% as the case may be, it cannot be paid without the approval of the Central Government.

Ceiling on remuneration of ordinary or non-executive directors
Sections 309(4) and 309(7) deals with remuneration payable to the part time directors, that is to say the directors who are neither in the whole-time employment of the company nor a managing director, within the overall limit stipulated in section 198(1) and further in section 309(4) itself.
Section 309(4) authorises payment of remuneration to part time directors in two alternative ways:—
(i) by way of monthly, quarterly or annual payment with the approval of the Central Government; and/or
(ii) by way of commission without the approval of the Central Government, subject to the approval of the members by way of special resolution.
Therefore, if the commission payable exceeds the limit, payment can be made only with the approval of the Central Government.

Ajay Mishra

Ajay Mishra (Expert)
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19 July 2013 The total remuneration received by director will return to the company with interest. if it is not paid in accordance with the provision of section 198, 309 and schedule XIII of the Companies Act, 1956.

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