Directors and Managerial Remuneration under the Companies ...

Directors and Managerial Remuneration under the Companies

Act, 2013

Key Managerial Personnel

• Sec.2(51) – Key Managerial Personnel in relation to a company means-

• (i) the Chief Executive Officer or the Managing Director or the Manager;

• (ii) the Company Secretary;

• (iii) the whole-time director;

• (iv) the Chief financial Officer; and

• (v) such other officer as may be prescribed

Officer who is in default

• Sec.2(60) - “Officer who is in default” for the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any penalty or punishment by way of imprisonment, fine or otherwise, means any of the following officers of a company, namely-

• (i) whole-time director; • (ii) Key managerial personnel; • (iii) where there is no key managerial personnel such

director or directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified;


• (iv) any person, who under the immediate authority of the Board or any key managerial personnel, is charged with any responsibility including maintenance, filing or distribution of accounts or records, authorities, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default

• (v) Any person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act, other than a person who gives advice to the Board in a professional capacity;


• (vi) every director, in respect of a contravention of any provision of this who is aware of such contravention by virtue of receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same, or where such contravention had taken place with his consent or connivance;

• (vii) in respect of the issue or transfer of any shares of a company, the share transfer agents, registrars and merchant bankers to the issue or transfer

Filing of forms

• A listed company has whole time key managerial personnel at the commencement of the 2013 Act, and they have some residuary period of tenure

• Whether form MR1 required to be filed

• Whether DIR 12 required to be filed

• Whether MGT 14 required to be filed

Directors/Board of Directors

• Sec. 2(34) – Director means a director appointed to the Board of a company

• Sec.2(10) – Board of Directors or Board, in relation to a company, means the collective body of directors of the company;

Managing Director/Manager

• Sec.2(53) – “Manager” means an individual who, subject to the superintendence, control and direction of the Board of Directors, has the management of the whole or substantially the whole, of the affairs of a company, and includes a director or any other person occupying the position of a manager, by whatever name called, whether under a contract of service or not;

• Sec. 2(54) – “managing director” means a director, who, by virtue of the articles of the company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of a company, and includes a director occupying the position of managing director, by whatever name called.

Whole-time Director/CEO/CFO

• Sec.2(94) – “whole-time director” includes a director in the whole-time employment of the Company

• Sec.2(18) “Chief Executive Officer” means an officer of a company, who has been designated as such by it;

• Sec.2(19) – “Chief Financial Officer” means a person appointed as the Chief Financial officer of a company;

Number of Directors

• Sec.149 (1)

• Public company – minimum three directors

• Private company – minimum two directors

• One person Company – minimum one director

• Maximum 15 directors (increased from 12)

• This can be increased by passing a special resolution. No need to go to Central Government

Classes of Directors

• Resident Director - Sec. 149(3)

• Woman Director - Sec.149(1) proviso

• Independent Director – Sec.149(4)

• Small Shareholders’ Director – Sec. 151


• Resident Director – Sec.149 (3) Every company shall have at least one director who has

stayed in India for a total period of not less than one hundred eighty-two days in the previous calender year;

• Circular 25/2014 dated 26/06/2014 • Existing companies shall have resident director who stayed

in India exceeding 136 days during the year 2014 • Companies incorporated between 1.4.2014 and 30.9.2014

shall have resident director at the time of incorporation or within six months of their incorporation

• Companies incorporated after 30/09/2014 shall have resident director at the time of incorporation itself.


• Woman Director – Sec.149(1) further proviso provided further that such class or classes of companies as may be prescribed shall have at least one woman director; • Rule 3 of Companies (Appointment and qualification of

Directors) Rules, 2014 - Every listed company -Every other public company having paid up capital of 100 crore rupees or more; or turnover of three hundred crore rupees or more; Proviso – company incorporated under the Act shall comply with the provisions within 6 months from the date of incorporation • Vacancy – shall be filled by the Board


• Woman Director in Listed Companies • SEBI vide Circular No.CIR/CFD/POLICY CELL/7/2014 dated

15/09/2014 specified that appointment of woman director as provided in Clause 49(II)(A)(1) shall be applicable with effect from 01/04/2015.

• Vide above said circular SEBI has exempted certain listed companies from compliance with Clause 49

• Companies having paid up equity share capital not exceeding Rs.10 Crore and Net worth not execeeding Rs.25 Crore as on the last day of the previous financial year

• Where clause 49 later becomes applicable within 6 months shall comply

• Companies whose equity share capital is listed exclusively on the SME and SME-ITP Platforms.


• Independent Directors

• Sec.149(4) Every listed public company shall have at least one-third of the total number of directors as Independent Directors and the Central Government may prescribe the minimum number of independent directors in case of any class or classes of public companies

Classes of directors

• Independent Directors • Rule 4 • Public Companies having paid up share capital of ten

crore rupees or more; or • Public Companies having turnover of one hundred

rupees or more; or • Public Companies which have, in aggregate

outstanding loans, debentures and deposits, exceeding fifty rupee crore rupees;

-Shall have at least two independent directors • Vacancy



• Qualifications to become an independent Director

• Sec.149(6)

• Listed Companies - SEBI Circular No.CIR/CFD/POLICY CELL/7/2014 dated 14/07/2014 as amended by 15/09/2014


• Listed Companies – Independent Directors additional qualification

• Who, neither himself nor any of his relatives is a material supplier, service provider or customer or a lessor or lessee of the company

• Who is not less than years of age • Apart from receiving director’s remuneration has or

had no material pecuniary relationship with the Company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year


• Listed Companies – Independent Directors • SEBI vide Circular No.CIR/CFD/POLICY

CELL/7/2014 dated 15/09/2014 • Clause 49 (II) (A) • Composition of Board • Optimum combination of executive and non-

executive directors with at least one woman director and not less than fifty per cent of the Board of Directors comprising non-executive directors


• Listed Companies – Independent Directors • Where the Chairman of the Board is a non-executive

director, at least one-third of the Board should comprise independent Directors and in case the company does not have a regular non-executive Chairman at least half of the Board should comprise independent directors;

Provided that where the regular non-executive Chairman is a promoter of the Company or is related to any promoter or person occupying management positions at the Board level or at one level below the Board, at least one half of the Board of the company shall consist of independent directors



• Whether independent directors can be appointed as additional directors

• Whether independent directors can be appointed in casual vacancy

• Whether independent directors can be replaced by alternate directors

Small shareholders’ Director

• Sec.151

• Rule 7 of Companies (Appointment & Qualification of Directors) Rules, 2014.

Managerial Personnel

• Managerial person – Part – I of Schedule V

• Key Managerial personnel – Sec. 2(51)

• Whole-time Key Managerial personnel – Sec.203

Managerial personnel

• Sec.203(1) - Every company belonging to such class or class of companies as may be prescribed shall have whole time key managerial personnel

- Managing Director or Chief Executive Officer or Manager and in their absence a whole-time director;

A Company Secretary; Chief financial Officer. • Draft Rule 13.6 – every listed company and every other company

having a paid up capital of Rs.5 Crores or more shall have whole-time key managerial personnel

• Rule 8 of Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 – every listed company and every public company having a paid up capital of ten crore Rupees or more shall have whole-time key managerial personnel

Managerial Personnel

• A Private Company simpliciter need not have whole-time key managerial personnel including Managing Director or whole-time Director or Manager;

• A Private Company, If it opts to have M.D., WTD or Manager u/s.196(4), the appointment and remuneration shall have to be approved by the Board and next General Meeting;

• In case approval is not given by General Meeting de-fact doctrine will govern;

• Within 60 days of appointment return in MR-1, U/R 3 shall be filed

Remuneration to Managerial Personnel

• Sec. 197 (1) – 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


• Companies other than listed companies and subsidiary of a listed company may pay remuneration where there no profits or inadequate profits beyond the limits specified in Schedule V without approval of Central Government subject to complying with conditions laid down in Rule 7(2)

- Board Resolution and Resolution by Nomination and Remuneration Committee (companies covered by Sec.178)

- not defaulted in re-payment of debts (including deposits), debentures or interest payable thereon, preference shares or dividend on preference shares for a continuous period of thirty days in preceding financial year before the date of payment to such managerial personnel

- special resolution by shareholders for payment not exceeding three years

- Notice of General Meeting shall contain a statement - filed all the Balance Sheet and Annual Return due to be filed


• The company in general meeting may with the approval of the Central Government, authorise the payment of remuneration exceeding eleven percent of the net profits of the Company, subject to the provisions of Schedule V; Sec.197 (1) proviso;

• This read with Rule 7(2) makes clear that a listed company and a subsidiary of a listed company can pay remuneration beyond the limits specified in Schedule V, only with the approval of the Central Government


• Remuneration to CEO, Company Secretary and CFO does not fall under Remuneration to Managerial Personnel though they are whole time key managerial personnel under Sec.203(1) of the Act

Managerial Remuneration

• The moment there is no profit or inadequate profits, Schedule V squarely applies;

• In case of listed company and subsidiary of a listed company

• Where the managerial remuneration is beyond Schedule V, the same can be made only with the prior approval of the CG – Sec.197(3)

• Increase in remuneration – if the increase is not in accordance with Schedule can be made only with the approval of CG – Sec.197(11) – for the increase even if the increase is beyond Schedule V, the Act does not contemplate prior approval


• High Court of Judicature for Rajasthan Vs. P.P. Singh and another AIR 2003 SC 1029

when an approval is required an action holds good. Only if it is disapproved it looses its force. Only when a permission is required, the decision does not become effective till permission is obtained

• The prohibition and Excise Supdt., A.P. and Ors Vs. Toddy Tappers coop. Society, Marredpally and others MANU/SC/0942/2003


• Sec.197(2) – percentages of remuneration shall be exclusive of fees paid under Sec.197(5) i.e., sitting fees

• Under 1956 Act, the sitting fee being part of 5%, 10% or 1% or 3% or 11% of the remuneration for any increase of sitting fees beyond the amounts laid down in Rule 12B of Companies (Central Government’s) General Rules and Forms, 1956, C.G. can be approached

• Now the sitting fee does not form part of of 5%, 10% or 1% or 3% or 11% of the remuneration. Hence CG cannot be approached for increase in sitting fees


• Sitting fees for attending Board Meeting or committee meeting or for any other purpose whatsoever as may be decided by the Board Sec.197 (5)

• Rule 4

• May be decided by the Board – shall not exceed the sum of Rupees One Lakh per meeting of the Board or Committee thereof

• No discrimination as against woman director and independent director


2013 ACT

• Overall managerial remuneration shall not exceed 11% of net profits exclusive of sitting fees – Sec. 197(1)

• Sitting fees can be paid to managerial persons

1956 ACT

• Overall managerial remuneration shall not exceed 11% of net profits inclusive of sitting fees.

• If the remuneration is under Schedule XIII sitting fees cannot be paid at all to managerial persons Letter No.3/1/90-CL-V dated 18/07/1990 addressed to Maharashtra Chamber of Commerce and Industries


2013 Act – remuneration for one managerial person

• Sec.197(1) • Shall not exceed 5% of the net profits • with the approval of the Company in

General Meeting -Can be increased up to 11% • Beyond 11% one should see whether

remuneration falls within limits of Schedule V

-If it is above Schedule V, with the approval of General Meeting (unlisted companies) subject to compliance with conditions laid down in Rule 7(2 )

- If it is above Schedule V only with the approval of the C.G. (listed and subsidiary of listed Company)

1956 Act – remuneration for one managerial person

• Sec.309(3)

• Except with the approval of the Central Government remuneration shall not exceed five percent of net profits for one such director

• Can be increased above 5% but the same shall be within Schedule XIII (beyond Schedule XIII only with the approval of the Central Government in case of listed and subsidiary of listed companies (notification dated 08/02/2011)


2013 Act-remuneration to two or

more managerial persons • Sec.197(1) • Remuneration shall not exceed 10% of

net profits • With the consent of general meeting it

can be increased up to 11% • Beyond 11% one should see whether

remuneration falls within limits of Schedule V

-If it is above Schedule V, with the approval of General Meeting (unlisted companies) subject to compliance with conditions laid down in Rule 7(2 )

- If it is above Schedule V only with the approval of the C.G. (listed and subsidiary of listed Company)

1956 Act-remuneration to two or more managerial persons

• Sec.309(3) • Except with the approval of the

Central Government remuneration shall not exceed ten percent of net profits for all managerial persons

• Can be increased above 10% but individually for each managerial personnel, the same shall be within Schedule XIII (beyond Schedule XIII only with the approval of the Central Government in case of listed and subsidiary of listed companies (notification dated 08/02/2011)


2013 Act – remuneration to ordinary directors

• May be paid monthly remuneration or percentage of net profits and a combination

• Payment up to 1% or 3% can be made even without approval of General Meeting

• Approval of the General Meeting is required when the remuneration exceeds 1% or 3% as the case

• In case of listed company and its subsidiary as well as unlisted public company, with the approval of CG can exceed 11% of the net profits as Schedule V does not cover remuneration to ordinary directors

1956 Act – Remuneration to ordinary directors

• May be paid monthly, quarterly or annual payment with the approval of CG or by way of commission by special resolution

• Can exceed 1% or 3% as the case may be only with the approval of the C.G or where it exceeds 11% can be made only with the approval of CG, where the company has one or managerial personnel

• Schedule XIII does not cover remuneration to ordinary directors


• National Engineering industries Limited and another Vs. The Secretary, Ministry of Law, Justice & Company Affairs, New Delhi & Others MANU/WB0611/1990

• Sought that Sec.310, 637A, 637 AA of the 1956 Act against Article 19 and Sec.310 ultra vires Article 14

• Dealt with payment of remuneration to ordinary directors who were drawing sitting fee


• The remuneration payable to the directors of a company including any managing or whole-time director or manager shall be determined in accordance with and subject to the provisions of this section, either by the articles of the company, or by a resolution or, if the articles so require, by a special resolution, passed by the company in general meeting and the remuneration payable to a director determined aforesaid shall be inclusive of the remuneration payable to him for the services rendered by him in any other capacity - Sec.197(4) almost worded on the lines of Sec.309(1)


• Proviso to sec.197(4) -remuneration for services rendered by any such

director shall not include if -in the opinion of the Nomination and

Remuneration Committee if the Company is covered under Sec.178(1) or the Board in other cases, the director possess the requisite qualification for the practice of the profession

• Opinion of the Central Government has been replaced by Nomination and Remuneration Committee


Rule 6 of The Companies (Meetings of Board and its Powers) Rules, 2014

-Every listed company -All public companies with a paid up capital of Rs.10 Crores or more; having turnover of Rs. 100 Crore or more; having, in aggregate, outstanding loans or

borrowings or debentures or deposits exceeding Rs. 50 Crores or more.

-shall have an Audit Committee and a Nomination and Remuneration Committee


• Suessen Textile Bearings limited Vs. Union of India (1984) 55 Comp. Cas. 492

- Guarantee commission paid to a director for giving guarantee on behalf of the Company cannot be said to fall “remuneration payable to him for the services rendered by him in any other capacity”


• Subject to the provisions of this Section, a managing director or whole time director of the company who is in receipt of any commission from the company can receive any remuneration or commission from any holding company or subsidiary companies subject to its disclosure by the company in the Board’s Report – Sec.197(14)


• Independent director shall not be entitled to receive any stock option

• Can receive sitting fees and re-imbursement of expenses for participation in Board and other meetings

• Can be paid profit related commission with the approval of the members

Insurance for indemnification 2013 Act

• Sec.197(13)

• Does not render void

• Such premium shall not be treated as part of remuneration

• If the whole time key managerial personnel is proved guilty then the premium will be part of the remuneration.

1956 Act

• The provision if any contained is void – Sec.201(1)

• The company may indemnify where the relief is granted by the court u/s.633 of the Act

• Premium cannot be paid at all as the same is void

Managerial remuneration

• Under the 1956 Act, When a company pays remuneration in excess of 5% of net profit to a managerial personnel or in excess of 10% of net profit for more than one managerial personnel, it should be deemed that the company has inadequate profits. ( Circular No.

• Now inadequacy of profits shall have to be construed if the remuneration exceeds 11% of net profits for the purpose of approaching C.G.


• Schedule V

• Parts I, II and III


• Part –I

• Clause (a) contains negative qualification – should not have been sentenced to imprisonment for any period or fined exceeding one thousand rupees under any of the sixteen Acts mentioned therein. The companies Act, 1956 is not included

• Mere detention under COFEPOSA is enough and not conviction, 1974 Clause (b)

• Not completed the age of 21 years and not attained the age of 70 years – attained the age of 70 years special resolution is required – Clause (c )


• Part – I

• Clause (d) where managerial personnel in more than one company draws remuneration from one or more company subject Section – V


• Clause (e) Resident in India Explanation I. for the purposes of Schedule V For the purpose of

this Schedule, resident in India includes a person who has been staying in India for a continuous period of not less than twelve months immediately preceding the date of his appointment as a managerial person and who has come to stay in India,—

• (i) for taking up employment in India; or • (ii) for carrying on a business or vacation in India. Explanation II …… • Provided that a person, being a non-resident in India shall enter

India only after obtaining a proper Employment Visa from the concerned Indian mission abroad. For this purpose, such person shall be required to furnish, along with the visa application form, profile of the company, the principal employer and terms and conditions of such person’s appointment.


• Sec.2(v) of FEMA 1999 • Person resident in India means- (i) a person residing in India for more than one hundred

eighty two days during the course of preceding financial year but does not include

(A) ……. (B) a person who has come to or stays in India, in either

case, otherwise than (a) for or taking up employment in india or (b) …… ( c)…….


• “Includes” used in Part –I of Schedule V whether it is used with an intention to give the meaning “means”

• The South Gujarat Roofing Tiles Manufacturers Association and Anr. Vs. The State of Gujarat and Anr. (1976) 4 SCC 601

• Commercial Taxation Officer, Udaipur v. Rajasthan Taxchem Ltd.: 2008[12]S.T.R.660

• It is imperative that the managerial person should be also the resident of India during the tenure also.


• A company appointed a whole-time director in charge of its overseas operations and applied for permission under Schedule XIII.

• MHA Faqs

• Visas two types – employment visa and business visa


• Part – II contains Sections I, II, III, IV and V

• Section I deals payment of remuneration in a financial year when it having profits

• Section II and III deal with payment of remuneration when there is no profits or inadequate profits

• Remuneration shall have to be reckoned for each financial year;


• Sec.II contains paragraph A and B • Paragraph A contains graded remuneration relating to the same to effective

capital less than 5 crores 30 lakhs 5 Crores and above but 42 lakhs less than 100 Crores 100 crores and above but less than 250 crores 60 lakhs 250 Crores and above 60 lakhs plus 0.01% of the effective capital in excess of Rs.250 Crores • This limit is doubled if shareholders pass special resolution


• Paragraph B

In the case of a managerial personnel who was not a security holder holding securities of the company of nominal value of rupees five lakh or more or an employee or a director of the company or not related to any director or promoter at any time during the two year prior to his appointment as a managerial person - 2.5% of the current relevant profit

• If the shareholders pass special resolution, this can be doubled

• Will never be able to use this paragraph


• Payment is approved by the Board and Nomination and Remuneration Committee where sec.178(1) applies;

• Not defaulted in payment of debts, debentures and interest thereon for a continuous period of thirty days in the preceding financial year before the appointment

• A special resolution is passed in general meeting for payment of remuneration not execeeding three years


• Sec.III • para (a) Payment by a foreign company or the company gets

approval from its shareholders and treats the remuneration as its remuneration u/s.197 and the overall remuneration does not exceed the limits laid down u/s.197

• para (b) - Where the company is a newly incorporated company seven

years from incorporation - Where the company is a sick company, and a scheme is approved

by BIFR and NCLT for a period of five years from the date of sanction of the scheme – two times the amount specified in section II

• para (c ) - Where remuneration exceeds the limits specified in Sec.II but

fixed by the BIFR or NCLT


• Sec.III

• The managerial personnel does not receive any remuneration from any other company save para (a)

• Auditor or CS or PCS certifies that all the secured and term lenders have given no objection for appointment and payment of remuneration

• Auditor or CS or PCS certifies that the company has not defaulted in payment to any creditor and depositor and the dues are settled in time.


• para (d )

special Economic Zone

remuneration upto Rs.2,40,00,000.00 per

annum

• No condition, no special resolution


• Sec. IV

• Perquisites not to be included – This itself applies only when the remuneration is paid on the ground no profits or inadequacy of profits.

• If remuneration is paid under the limits i.e., 5% or 10% then these perquisites shall be included.


• Sec.V

• Shall draw remuneration from one or both companies provided the total remuneration drawn shall not exceed the higher maximum permissible limit in respect of one company


• Part – III

• Appointment and remuneration shall be subject to approval by a resolution of the shareholders in general meeting;

• Auditor or CS or PCS certifies that the requirement of schedule has been complied with and such certificate shall be incorporated in the return filed

• Return shall be filed in 60 days instead of 90 days.

Recovery of Remuneration

• Re-statement of financial statements due to fraud or non-compliance with the requirement under the Act or rules, excess remuneration paid to him on re-statement of accounts shall be recovered – Sec.199


• Contravention

• Under 1956 Act, CG has to make a reference to CLB and the CLB has to give a decision whether there is contravention or not

• Under 2013 Act, no such mechanism

Boards’ Report

• Rule 5(1) Every listed Company shall disclose • The ratio of remuneration of each director to the median

remuneration of the employees of the company for the financial year;

• The percentage increase in remuneration of each director, CFO, CEO, Co.Secy.. Or Manager in any financial year;

• The percentage increase in median remuneration of employees in any financial year;

• The no. of permanent employees on the rolls of the Company; • The explanation on the relationship between average increase in

remuneration and company performance; • Comparison of the remuneration of the Key Managerial Personnel

against the performance of the Company;

Board’s Report

• Rule 5(1) • Variation in the market capitalisation of the company, price

earnings ratio as at the closing date of the Current financial year and previous financial year and percentage increase over decrease in the market quotations of the shares in the company in comparison to the rate at which the company came out with the last public offer in case of listed companies and in case of unlisted companies, the variations in the net worth of the Company as at the close of the current financial year and previous financial year

• Average percentile increase already made in the salaries of employees other than the managerial personnel in the last financial year in comparison with the percentile increase in the managerial remuneration and justification thereof and point out if there are any exceptional circumstances for increase in managerial remuneration

Board’s Report

• Comparison of each remuneration of KMP against the performance of the company;

• The key parameters for any variable component of remuneration availed by the directors;

• The ratio of remuneration of the highest paid director to that of the employees who are not directors but receive remuneration in excess of the highest paid director during the year;

• Affirmation that the remuneration is as per remuneration policy of the company;

Board’ Report

• Rule 5(2) the Board’s Report shall include a statement showing the name of every employee of a company

• ….

• …..

Directors and Managerial Remuneration under the Companies ...

Documents

Transcript of Directors and Managerial Remuneration under the Companies ...