AMENDMENT IN LIMIT OF MANAGERIAL REMUNERATION

In a recent notification notified on 18th March 2021, the Ministry of Corporate Affairs (MCA) has notified an amendment in section 197 of the Companies Act 2013. This announcement seeks to revise the permissible limits of remuneration to a managerial person under Schedule V of the Companies Act, 2013.

Before discussing this amendment further, let’s discuss a little about the remuneration and other related provisions to the former described under the following heads-

1. Meaning of “Remuneration”

Section 197 of the Companies Act 2013 along with Schedule V of the Act prescribes the limits of permissible remunerations for the managing director, whole-time directors, and manager. It’s a known fact that a company is a legal entity that has no abilities of its own, and the directors play a chief role acting as the eyes and brain of the company. Thus, it is justified that such individuals should be made such payments for their contribution for making crucial decisions for the company. Thus, they need to make continual and collective efforts while ensuring the best interest of the shareholders and stakeholders. 

Managerial Remuneration means the pecuniary or related benefits in the form of salary or similar payments made to an individual in pursuance of the services received from him and includes the perquisites mentioned in the Income-tax Act, 1961. Since, the responsibility to decide the affairs in the interest of the company, it is important for the management of the company to make reasonable decisions regarding the appointment, payment terms, and other related matters carefully taking note of their abilities. 

2. What is the Permissible limit of Managerial Remuneration under section 197?

Section 197 of the Companies Act, 2013 prescribes the “maximum permissible limits for authorized remuneration payments by a public company to its managing director whole-time director and manager”. According to this, the permissible limits of remuneration in a year should not exceed 11% of the net profit of the company and such calculation of net profits shall be in accordance of the provisions of section 198 of the Act excluding the condition that the remuneration payable to such directors shall not be deducted from the gross profits”.The company in general meeting may, with the approval of the Central Government, authorize the payment of remuneration exceeding 11% of the net profits of the company, subject to the provisions of Schedule V. 

Where the permissible limit for the remuneration payable to any one managing director/ whole-time director/ manager of the company is up to the limit of 5% of the net profits of the company, on the other hand, and the company shall be allowed to pay up to 10% of the total net profits for a financial year in a case where there are more than one such director/ manager.

3. Is a company authorized to pay remuneration to the Directors/Managers/Whole-Time Directors in the event where adequate profits are not available for payments?

In the event, where the company has insufficient profits to pay remuneration to its whole-time directors/ managing director/managers, the company shall not pay to its directors, including managing or whole-time director or manager, any remuneration exclusive of any fees payable to directors except with the strict adherence to the provisions of Schedule V.

A company holding adequate profits for making remuneration payments to such directors or managers for a financial year may make payments to them within the limits prescribed under section 197 of the Act as above-mentioned. Whereas, where the company is having losses or inadequate profits for payment to its managerial persons in accordance with Section 197 is required to make payments in adherence to Schedule V of the Act.

Further, in such cases where Schedule V is applicable for reasons of the company having losses or inadequate profits in any financial year any provision that intends to increase directly or indirectly to have the effect of increasing the permissible limits of remuneration, will bear no practical effect on increasing the same and were deliberately applied will be liable to penal provisions under clause (15) of section 197, for the officers as well as for the company.

Where the company is not able to comply with the requirements of Schedule V, the Company shall be required to pay such remuneration with prior approval of the Central Government.

Before the Amendment, the following were the permissible limits of remuneration for whole-time directors/managing directors/managers, applicable under Schedule V of the Act 2013-

The recent amendment under Schedule V provides the following-

After the words “managerial person or persons”, the words “or other director or directors” shall be inserted and wherever the words “managerial person” have been used, the same shall be substituted with “other director” shall be inserted.

Now, the revised limits of managerial remuneration provide for the following limits-

Conclusion 

Managerial remuneration is an important provision under the Companies Act 2013 that provides encouragement to the companies to pay adequately and recognize their contribution in the progress of the company on one side and to further curb the dishonest practices of receiving payments without any limits. The recent revision of the permissible limits of remuneration will enhance transparency and provide encouragement to increase flexibility.

Author:

eStartIndia Team