In Today’s write-up, we will get some extract from the section 197 and 198 of Companies Act, 2013 as a practical implication of this section is really very different from the written language, even when an organization has not incurred profits, the managerial level is paid high remuneration irrespective of its burden on company financial conditions. Although there are many laws governing wages of blue-collar workers, there is no specific law for remuneration or salary of top managerial level personnel.

Before moving ahead –I would also explain what is Remuneration?

‘Remuneration’ means any money or its equivalent given to any person for services rendered by him and includes the perquisites mentioned in the Income-tax Act, 1961.

Managerial remuneration in simple words is the remuneration paid to managerial personals. Here, managerial personals mean directors including managing director and whole-time director, and manager.

The Managerial personnel is generally paid on the basis of their experience and they’re worth to management, so their remuneration package is generally high and consists of other perquisites also. There are many cases, where the top management has taken the advantage of their place for their own personal benefit at the cost of the company’s long-run growth and functioning.

The Companies Act, 2013 has a provision to keep a tab on such types of malpractices under section 197 read with other applicable rules and schedules. Kindly note that this provision is applicable to only public companies. Now let us go through its important points to be noted and kept in mind while fixing remuneration of managerial personnel: –

What Says Section 197(1) ?

The total managerial remuneration payable by a Public Company, to its:

i. Directors, and

ii. Managing Director and

iii. Whole-Time Director, and

iv. Manager

 in respect of any financial year shall not exceed eleven per cent. of the net profits of that company for that financial year computed in the manner laid down in section 198 except that the remuneration of the directors shall not be deducted from the gross profits.

If the company has Profits during the Financial Year: –

(A)  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 percent (11%). of the net profits of that company for that financial year computed in the manner laid down in section 198.

• While computing Net Profits under section 198 except that the remuneration of the directors shall not be deducted from the gross profits for the purpose of limit of eleven per cent (11%).

• (B) The company may by passing Special resolution in general meeting, the below given limits can be exceeded:-

• the remuneration payable to any one managing director; or whole-time director or manager shall not exceed five per cent (5%). of the net profits of the company and if there is more than one such director remuneration shall not exceed ten per cent. of the net profits to all such directors and manager taken together.

• the remuneration payable to directors who are neither managing directors nor whole-time directors shall not exceed,—

(A) one percent (1%) of the net profits of the company, if there is a managing or whole-time director or manager;

(B) three percent (1%) of the net profits in any other case.

Note:– For the purpose of Point (B), prior approval before General Meeting, is required if the company has defaulted in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor.

(C)  The remuneration payable to managerial personnel as per points (A) and (B) shall exclude the remuneration paid for services rendered by them in a professional capacity and then again it is approved by the Nomination and Remuneration Committee if any.

(D) A director has to refund the sums of the amount which he has received in excess of remuneration allowed under this provision within two years.

Provided further that this amount can be waived off if the company has passed a special resolution and also received the prior approval from bank public financial institution concerned or the non-convertible debenture holders or another secured creditor if any default exists.

IN SIMPLE TERMS:-

Further, if a public company defaults in payment of dues to any bank / public financial institution / non-convertible debenture holders / any other secured creditor, such company would be required to obtain prior approval of such bank / public financial institution / non-convertible debenture holders / any other secured creditor, as the case may be, before obtaining the shareholders’ approval.

If the company has no or inadequate Profits during the Financial Year:-

During a financial year, if a company has no or inadequate profits in that case company need prior approval from members of the company by way of ordinary resolution as below for payment of remuneration: –

If a company wants to pay remuneration to managerial remuneration in excess of the above limits given in the table, it can by passing a special resolution in a general meeting and needs to be approved by the Nomination and Remuneration Committee, if any.

Please Note:

These restrictions do not apply to the sitting fees of the directors (managing director, whole-time director/manager).

PENALTY FOR THE AFOREMENTIONED SECTION’S NON- COMPLIANCE: –

If any person makes any default in complying with the provisions of this section, he shall be liable to a penalty of one lakh rupees, and where any default has been made by a company, the company shall be liable to a penalty of five lakh rupees,