Managerial Remuneration - A Bird's Eye View
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Mamta Binani, B.COM, FCS
Immediate Past Chairperson-EIRC of ICSI
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Remuneration payable as per Schedule XIII without the approval of Central Government:
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Situation 1
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Remuneration payable by companies having profits in a financial year - Section I:
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Steps to be followed:
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1) The remuneration should as far as possible be broken up under the following broad heads as per the requirements of Schedule VI to the Companies Act:-
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a) Salaries and allowances;
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b) Monetary value of various perquisites;
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c) Contribution to provident, superannuation and gratuity funds;
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d) Commission.
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2) Need to obtain and check the computation of net profit as per Section 349.
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(a) The various adjustments to arrive at the net profit needs to be correctly done.
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(b) The depreciation should be the same as that provided for in the accounts (as per Section 350). The difference in depreciation, if any, should be added (in case it is more than it should have been, the amount of difference) or subtracted (in case it is less than it should have been, the amount of difference), as applicable.
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3) The total remuneration should be expressed as a % of the net profits computed.
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4) The % should not exceed the following limits:-
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a) 5% of the net profits in case of remuneration to only one managerial person.
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b) 10% of the net profits in case of remuneration to more than one managerial person.
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c) 11% of the net profits in respect of the total remuneration to all managerial personnel (including the non-whole time directors).
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5) Board Meeting to be held for getting the approval for the remuneration payable to managerial personnel.
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Situation 2
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Remuneration payable by companies having no profits or inadequate profits in a financial year - Section II:
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Monthly Remuneration payable |
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Where the effective capital(1) of the company is: |
Not exceeding the ceiling limit of Rs. 24 lacs p.a. or Rs. 2 lacs p.m
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Not exceeding the ceiling limit of Rs. 48 lacs p.a. or Rs. 4 lacs p.m
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Not exceeding the ceiling limit of Rs. 48 lacs p.a. or Rs. 4 lacs p.m
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(i) less than Rs. 1 crore |
75,000 |
1,50,000 |
1,50,000 |
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(ii) Rs.1 crore or more but less than Rs.5 crores. |
1,00,000 |
2,00,000 |
2,00,000 |
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(iii) Rs.5 crores or more but less than Rs.25 crores. |
1,25,000 |
2,50,000 |
2,50,000 |
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(iv)Rs.25 crores or more but less than Rs.50 crores. |
1,50,000 |
3,00,000 |
3,00,000 |
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(v) Rs.50 crores or more but less than Rs. 100 crores. |
2,00,000 |
4,00,000 |
4,00,000 |
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OTHER CRITERIA/ REQUISITES |
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Board Meeting for calling Extra Ordinary Meeting. |
Required |
Required |
Required |
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Listed below are the conditions of Schedule XIII required to be fulfilled for paying remuneration in any of the categories: |
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a) Requirement of approval of general meeting by way of:- |
Ordinary Resolution
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Special Resolution |
Special Resolution |
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b)Approval by way of resolution passed by the Remuneration Committee(2):-
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Required |
Required |
Required |
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c) Company should not have committed any default in repayment of any debts (including public deposits or debentures or interest payable thereon) for a continuous period of 30 days in the preceding financial year before the date of appointment
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Applicable |
Applicable |
Applicable |
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d) Period of sanction of remuneration
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Not exceeding 5 years |
Not exceeding 3 years |
Not exceeding 3 years |
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e) A statement along with notice calling the general meeting of the shareholders containing:- I. General Information II. Information about the appointee III. Other Information IV. Disclosure |
Not required |
Required |
Required |
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f) Approval of Central Government for payment of Remuneration
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Not Required |
Not Required |
Prior approval required (3) |
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Provided Effective Capital of the company |
Should be positive |
Should be positive |
Is negative |
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Requirement of filing of Form No.25C with ROC within 90 days from the date of appointment, duly certified by a professional |
Applicable |
Applicable |
Applicable |
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Note: (Total 3 notes)
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(1) Calculation of Effective Capital:
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(To be made as on the last date of the financial year preceding the financial year in which the appointment of the managerial person is made. But if the appointment of managerial person is made in the year in which company is incorporated, the effective capital shall be calculated as on the date of such appointment).
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A quick format for facilitating calculation of effective capital:
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Particulars |
Amount (in Rs.) (inner column)
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Amount (in Rs.) (outer column)
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Paid up Share Capital
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Add:
1) Share Premium
2) Reserve & Surplus (excluding revaluation reserve) 3) 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).
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Less:
1) Aggregate of any investments (except in the case of investment by an investment company whose principal business is acquisition of shares, stock, debentures or other securities) |
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(2) Remuneration Committee:
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“Remuneration Committee” means a committee which consists of at least 3 non executive independent directors including nominee director or nominee directors, if any.
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As per Notification vide G.S.R. 70(E) dated 08.02.2011, the definition of Remuneration Committee has changed and stands as under:
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“Remuneration Committee” means:
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(i) in respect of a listed company, a committee which consists of atleast 3 non executive independent directors including nominee director or nominee directors, if any and
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(ii) in respect of any other company, a Remuneration Committee of Directors.
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The Remuneration Committee while approving the remuneration shall-
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a) take into account, financial position of the company, trend in the industry, appointee’s qualification, experience, past performance, past remuneration, etc.
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b) be in the position to bring about objectivity in determining the remuneration package while striking a balance between the interest of the company and shareholders.
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(3) Prior Approval required (mentioned in page 4)
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As per Notification vide G.S.R. 70(E) dated 08.02.2011 in Schedule XIII, Part II, Section II, in Sub Para (C) it is mentioned that:
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> The prior approval of Central Government is required to be obtained only if the company is listed company or subsidiary of listed company.
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> Unlisted companies (which are not subsidiaries of listed companies) shall not require prior Government approval for managerial remuneration provided they meet the other conditions stipulated in the Schedule.
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Further, as per Notification vide G.S.R 396(E) dated 23.05.2011 in Schedule XIII, Part II, Section II, Sub Para (C) it is mentioned that:
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> The prior approval of Central Government is not required for a subsidiary of a listed company, if-
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1. The Remuneration Committee and Board of Directors of the Holding Company give their consent for the amount of remuneration of the applicant and for the said amount to be deemed as remuneration paid by the Holding Company for the purpose of Section 198 of the Companies Act, 1956.
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2. The remuneration of the applicant is approved by the Holding Company in the general meeting.
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3. If the remuneration of the applicant is deemed to be remuneration paid by Holding Company.
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4. All the members of the subsidiary are bodies corporate.
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Provided that a listed company or a subsidiary of a listed company shall not require Central Government approval for payment of remuneration to its managerial personnel, if the remuneration is fixed by the Board of Industrial and Financial Reconstruction.
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As per Notification vide G.S.R 534(E) dated 14.07.2011 in Schedule XIII, Part II, Section II, Sub Para (C) it is mentioned that:
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The approval of Central Government is not required if the managerial person is not having any interest in the capital or its holding company, directly or indirectly or through any other statutory structures and not having any direct or indirect interest or related to the directors or promoters of the company or its holding company at any time during last two years before or on the date of appointment and having a graduate level qualification with expert and specialized knowledge in the field of profession.
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Section III
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This applies for: Remuneration payable to a managerial person in two companies subject to the provisions of Section I and II, a managerial person shall be eligible to draw remuneration from one or both companies subject to that the total remuneration drawn from the companies does not exceed the higher maximum limit admissible from any one of the companies of which he is a managerial person.
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Remuneration payable with the prior approval of Central Government:
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Situation 1.
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Requirement of approval of the Central Government for payment of remuneration to managerial person:-
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A Company which has no profits or has inadequate profits shall not pay to its directors, including any managing or whole-time director or manager, by way of remuneration a sum exclusive of any fees payable to directors under section 309(2), except with the previous approval of the Central Government.
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However, approval of the Central Government shall not be required for payment of remuneration to its managerial person if the appointment has been made in accordance with the provisions of section 269 read with Schedule XIII to the Act. [Section 198(4)].
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Situation 2.
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Compulsory requirement of approval of the Central Government for appointment of managerial personnel
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If the appointment and remuneration of a managerial person has not been made in accordance with the provisions of Schedule XIII, it shall be got approved by the Central Government.
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In order to obtain approval of the Central Government, application shall be made in the prescribed Form 25A within a period of ninety days from the date of appointment.
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