Remuneration to Director of Diverse Company

Remuneration of Just as profits motivate business, incentives drive the managers of the business. Not surprisingly then, during a fiercely competitive corporate environment, managerial Remuneration to Director is a crucial piece in the management puzzle.  While it’s important to make a balance between incentivizing the workforce to perform the challenging role of managing companies and not going overboard with the perks and the pay. 

In India, to keep a check on unnecessary profit squandering by companies on managerial remuneration and, at the same time, to ensure competent and reasonable compensation to managerial personnel, the Companies Act intervenes to do the balancing act.

In layman's Language, Remuneration means an amount of money that is paid to someone for the service they have provided; reward; or compensation. Section 2(78) of the Companies Act, 2013 defines Remuneration as “any money or its equivalent given or passed to any person for services rendered by him and includes perquisites as defined under the income tax Act, 1961”.

However the term Managerial Remuneration is not defined in the Companies Act, 2013, the term ‘remuneration’ is used interchangeably with remuneration to a managerial person. 

Accordingly, any amount of money paid to a director for services rendered by him in any form or by any name will amount to ‘remuneration’ and also any benefit provided by the company to a director will amount to ‘remuneration.

The relationship between remuneration and performance is clear and meets appropriate performance benchmarks; and remuneration to directors, key managerial personnel (KMP), and senior management involves a balance between fixed and incentive pay reflecting short-term and long-term performance objectives appropriate to the working of the company and its goals.

Who Is Eligible For Managerial Remuneration to Director?

• Managerial Personnel as mentioned in Section 197(1)
• Non-Executive Directors 
• Independent Directors 

Remuneration to Director Payable By Private Company 

The restriction and limitations provided under Section 197 and Section 198 of the Companies Act, 2013 shall apply only when managerial remuneration or remuneration paid by a public Company. 

Hence, any Remuneration to Director payable by a private company to its director shall be out of the scope of the above-said section and shall not be counted for maximum remuneration payable by the company.

Remuneration payable by a private company to the managing director or whole-time director or manager or another director as per provision Article of Association or Board resolution passed for that purpose, but section 197 of Act is not applicable.

Remuneration to Director Payable By Public Company 

1. Limit of remuneration in case of Profit 
2. Limit of remuneration in case of No Profit or Inadequate Profit 

Limit of remuneration in case of profit

Section 197 of the Companies Act, 2013 provides that 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

Point To Be Remembered:

1. The aforesaid percentages shall be exclusive of any fees payable to Directors for attending meetings of the Board or Committee.
2. The remuneration payable to a director determined aforesaid shall be inclusive of all services rendered by such director in any other capacity.
3. However, any remuneration for services rendered are professional by any such director shall not be so included if the Nomination and Remuneration Committee shall have the opinion that the director possesses the requisite qualification for the practice of the profession.
4. A public company may make payment of remuneration exceeding eleven percent. of the net profits, if it is authorized in the General Meeting and subject to the provision of Schedule V.

Limit Of Remuneration In Case Of No Profit Or Inadequate Profit 

If in any financial year, a company has no profits or its profits are inadequate, the company shall pay remuneration to Director, including any managing or whole-time director or manager or any other non-executive director, an independent director following the provisions of Schedule V.

Overriding effect of Schedule V of the Companies Act, 2013

Section 197 (11) of the Companies Act, 2013 prescribes that if any provision contained in MOA or AOA or agreement entered in with by Company or Resolution passed in the General meeting or its Board Meeting relating to increasing in Remuneration to Director amount, shall not have an any effect unless such increase is as per the conditions specified in Schedule V.

Schedule V has an overriding effect over MoA, AoA, agreement, and general meeting resolution. Hence, if a Company is not able to comply with provisions of Schedule V, then no remuneration can be paid to Managerial Personnel except sitting fees.

Remuneration to Director Payable By Public Companies In Case Of No Profit Or Inadequate Profit:

If any financial year, a company has no profits or its profits are inadequate, it may pay remuneration to the managerial person or another director not exceeding, the limits under (A) and (B) given below:

(A)

Note:  Company shall make payment of managerial remuneration more than the above-mentioned limit, If the same has been approved by passing of “Special Resolution” in the General Meeting of the Company and for a period less than one year, the limits shall be prorated.

(B) If managerial personnel or another director of the company is functioning in a professional capacity, remuneration as per item (A) may be paid subject to the following conditions:

1. They are not having any directly or indirectly interest through any other Statutory structures in the capital of the company or its holding company or any of its subsidiaries

2. They are not related to the directors or promoters of the company or its holding company or any of its subsidiaries at any time during the last two years before or on or after the date of appointment

3. Possesses graduate-level qualifications with expertise and specialized knowledge in the field in which the company operates.

Managerial Remuneration Shall Be Payable As Per The Above Items (A) And (B) Subject To The Following Conditions:

1. Payment of managerial Remuneration to Director is approved by the Board resolution passed and also approved by the Nomination and Remuneration Committee in the case of a company covered under section 178(1) of the Act.
2. The company has not made any default in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, and in case of default, the prior approval of the bank or public financial institution concerned or the non-convertible debenture holders or another secured creditor, as the case may be, has been taken by the company before obtaining the approval in the general meeting.
3. A special resolution has been passed at General Meeting, for payment of remuneration as per item (B) or special or ordinary resolution, as the case may be passed at General Meeting for payment of remuneration as per the limit laid down in item (A) for a period not exceeding three years.

Remuneration To Director Received By A Managerial Person From Two Companies:

A managerial person receives remuneration from one or both companies, provided that the total remuneration drawn from the companies does not exceed the higher maximum limit permissible from any one of the companies of which he is a managerial person.

Sitting Fees Paid To Directors For Attending The Meetings:

A director may receive a sitting fee for attending the Board meetings or Committee meetings or for any other purpose as may be decided by the Board, but the number of such fees shall not exceed Rs One Lakhs.

Sitting fees of Independent and Women Directors shall not be less than the sitting fees payable to other Directors.

A director receives remuneration by way of a fee for attending the Board/Committee

The meeting shall not include a limit prescribed in section 197 of the Act.

Insurance Premium Not Part Of Remuneration U/S 197 Of The Act

If any insurance is taken by a company on behalf of its MD, WTD, manager, CEO, CFO, or Company Secretary for indemnifying them against any liability in respect of any negligence, default, breach of duty, or breach of trust, the premium paid on such insurance shall not be treated as part of the remuneration.

Refund Of Managerial Remuneration to Director 

Section 197(9) of the Companies (Amendment) Act, 2013 prescribed that if any director directly or indirectly receives remuneration of any such amount over the limit prescribed under section 197(1) or without approval required under this section, he shall refund such amount to the company, within two years or such lesser period as may be allowed by the company, and until such sum is refunded, hold it in trust for the company.

The company shall not waive the recovery of any sum refundable unless such waiver has been approved by shareholders by passing a special resolution within 2 years from the date the sum becomes refundable.

The Company before obtaining approval of the such waiver, takes approval of bank or public financial institution or non-convertible debenture holders or any other secured credit, if the company has defaulted in payment of dues toward them.

Remuneration Paid To The Chief Financial Officer And Company Secretary, Not Managerial Remuneration As Per Section 197 Of The Act.

Any Remuneration to Director paid by a public company to its company secretary or chief financial officer even though they are considered as key managerial persons, but the restriction under sections 197 and 198. 

Regarding managerial remuneration or Remuneration to Director paid by a public company to them shall be out of the scope of the above-said section and shall not be counted for maximum remuneration payable by the company.

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