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Managerial
Remuneration
Thoughts shared by:
P C Agrawal
B.Com., LL.B., CAIIB, FCS
[email protected]
Managerial
Remuneration
Managerial
persons
Managing
Director
11-01-2017
Remuneration
Types
Appointment
Whole Time
Director
Manager
Meaning
Managerial Remuneration - P C Agrawal
Ceiling &
Computation
Mode of
payment
2
Managing Director
Section 2(26) defines Managing Director as under:
“Managing Director” means a director, who, by virtue of an agreement with the company, or of a resolutio
passed by the company in general meeting or by its Board of Directors or, by virtue of its memorandum o
articles of association, is entrusted with substantial powers of management which would not otherwise b
exercisable by him, and includes a director occupying the position of managing director, by whatever nam
called.
Provided that the power to do administrative acts of a routine nature when so authorised by the Board such a
the power to affix the common seal of the company to any document or to draw and endorse any cheque on th
account of the company in any bank or to draw and endorse any negotiable instrument or to sign any certificat
of share or to direct registration of transfer of any share, shall not be deemed to be included within substanti
powers of management:
Provided further that a managing director of a company shall exercise his powers subject to th
superintendence, control and direction of its Board of Directors.
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Whole Time Director
As per Explanation to Section 269, a whole-time
director includes a director in the whole-time
employment of the company.
Hence a WTD of a company cannot accept the
position of WTD in any other company.
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Manager
Section 2(24) defines Manager as under:
“Manager” means an individual (not being the managing agent)
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, and whether under a
contract of service or not.
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Appointment of Managerial Person
in a public company
Appointment whether
mandatory
a) Yes – if public company with paid up capital of
Rs.5 crores or more
b) No – in other cases
Disqualifications
(Sections 202, 203 & 267)
-
Appointment of Manager
(Section 386)
A person can be appointed as Manger if he is
Manager/MD of not more than one other company.
However, CG can permit if he is Manager of more
than 2 companies.
Undischarged insolvent
Fraudulent person
Suspension of payment to creditors
Offence involving moral turpitude
Whether CG approval required? a) Yes – if Schedule XIII is not complied with
b) No – if Schedule XIII is complied with
Procedure for CG approval
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- Publish notice in newspapers
- Apply in Form 25A within 90 days of
appointment
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Appointment of Managerial Person Contd…
Can CG reject application?
Yes – if he is not a fit & proper person or it is not in
public interest or the terms & conditions are not
fair and reasonable.
Consequence of rejection of
application
- Office to be vacated from the date of
communication of decision
- Remuneration already received need not be
refunded
Requirements of Schedule-XIII
-
Returns to be filed
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Not penalised for economic offences under any of
15 Acts
Not detained under COFEPSA Act 1974
Condition of age (25 to 70 years)
Resident in India
If appointed in two companies, can draw
remuneration from one or both (max. higher limit)
Approval of members
- Form 23 (only for MD or variation of his terms)
- Form 32 (for first appointment or change of
designation)
- Form 25C (if Sch. XIII complied with)
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Appointment of Managerial Person Contd…
Further action to be taken - Forward abstract to members u/s 302
- Inform stock exchanges (in case of listed companies)
- Make entry in register of directors
Other points
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- MD can be appointed for maximum 5 years at a time
- MD/WTD should be a director first.
However,
Manager may or may not be a director.
- MD & Manager cannot be appointed simultaneously
- Company can have two MDs
- MD/WTD can also be liable to retire by rotation even if
appointed for fixed period
- Resignation should be effective from date of
acceptance
- Managerial person can waive his right to get
remuneration at any time
- Office of managerial person is not an office or place of
profit u/s 314.
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Checklist for appointment of managerial person in
public company
Check if conditions of Part I of Sch XIII are complied
If yes -> CG Approval not reqd.
1. Board/RC resolution
2. GM Resolution
3. Form 23/32/25C
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If no -> CG approval is reqd.
1. Board Resolution
2. GM Resolution
3. Notice in newspaper
4. Form 25A
5. Form 23/32
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Remuneration
Includes:
- Salary, DA, perquisites, commission & other allowances
- Any other benefit free of charge or at concessional rate
- Any expenditure for personal liability
- Life insurance premium for self, spouse or child
- Remuneration for services rendered in other capacity
(except professional services by qualified persons)
Excludes:
- Interest on loans taken from directors
- Guarantee commission
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Ceiling on remuneration in case of profit
1 Managerial Person
>1 Managerial Persons
• 5% of net profit
• 10% of net profit
Ceiling on remuneration in case of inadequate or no profit (Sch.XIII – Part II)
Effective capital
Monthly remuneration (Rs.in lacs)
Para A
Upto
Para B
Upto
Para C
i) < Rs.1 crore
0.75
1.50
ii) >Rs.1 crore <= Rs.5 crores
1.00
2.00
iii) >Rs.5 crores <= Rs.25 crores
1.25
2.50
Exceeding
limits given in
Para B
iv) >Rs.25 crores <= Rs.50 crores
1.50
3.00
v) >Rs.50 crores <= Rs.100 crores
1.75
3.50
vi) >Rs.100 crores
2.00
4.00
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Conditions on remuneration in case of inadequate or
no profit (Sch.XIII – Part II)
Para A
Para B
Para C
i) Remuneration Committee resolution
√
√
√
ii) No default in repayment of debt for 30 days in
last financial year before the date of appointment
√
√
√
iii) Special resolution for payment of remuneration
maximum upto 3 years
N.A.
√
√
iv) Statement giving specified details in notice for
GM to shareholders
N.A.
√
√
v) Prior approval of CG in case of listed companies
No
No
Yes
Constitution of Remuneration Committee:
Listed companies: Minimum 3 non-executive independent directors
Unlisted companies: Any two directors min. (need not be independent)
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Ceiling on remuneration Contd…
Mode of payment
a) Monthly payment; and/or
b) Specified percentage of NP
Perquisites not included in the ceiling
a) Contribution to PF & specified funds
b) Gratuity payable (upto ½ month salary
in a year)
c) Encashment of leave at the end of the
term
In case excess amount is drawn
Excess to be refunded to the company.
Recovery cannot be waived without CG
approval.
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Effective Capital
Effective capital means aggregate of:
• Paid-up share capital (excluding share application money)
• Share Premium Account
• Reserves & Surplus (excluding revaluation reserve)
• Long term loans & deposits repayable after one year (excluding working capital
loans, overdrafts, interest due on loans unless funded, bank guarantee etc. and
other short term arrangements)
as reduced by aggregate of:
• Any investments (except in case of investment co. having principal business of
acquisition of securities)
• Accumulated losses
• Preliminary expenses not written off
Effective capital shall be calculated as on the last date of the financial year preceding
the financial year in which the appointment of the managerial person is made (except
in case of appointment in the year of incorporation when effective capital is to be
calculated as on the date of such appointment).
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Computation of net profit u/s 349
Profit before tax as per P&L Statement
Add: the following items if debited to P&L Statement before arriving profit before tax
Managerial remuneration
Provision for doubtful debts
Provision for doubtful advances
Loss on sale/disposal/discarding of assets
Loss on sale of investments
Write off of investments
Provision for diminution in the value of investments
Unserviceable fixed assets written off
Fall in the value of foreign currency monetary assets
Loss on cancellation of foreign exchange contracts
Provision for contingencies and unascertained liabilities
Provision for loss of subsidiary companies
Lease premium written off
Provision for warranty spares/supplies
Infructuous project expenses written off
Provision for redundancy in stores/spares/finished goods
Provision for anticipated loss in case of contracts
Loss on sale of undertaking
Provision for wealth tax
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Voluntary compensation paid under VRS
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Less: the following if credited to P&L statement for arriving at profit before tax:
Net profit u/s 349
Capital profit on sale/disposal of fixed assets
Capital profit on sale of immovable assets (unless it is company’s business)
Profit on sale of any undertaking or part thereof
Profit on buy back of shares
Profit/discount on redemption of shares or debentures
Profit on sale of investments
Compensation received on non-compete agreements
Write back of provision for doubtful debts
Write back of provision for doubtful advances
Appreciation in value of investments
Compensation received on surrender of tenancy rights
Profit on sale of undertaking
Consideration received on assignment of operating licences
Write back of provision for contingencies
Write off bad debts against the provision created earlier
Write back of provision for diminution in the value of investments
Excess of expenditure over income, i.e. loss of earlier years computed in accordance with Section 349
Profit on sale of forfeited shares
Depreciation as provided in books
Profit on sale of shares of subsidiary/associated companies
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Net profit u/s 349
Besides the above:
a) Certain extraordinary items as required under
Accounting Standard-5 are shown after arriving
at profit before tax, such items also need to be
considered for arriving at the profit u/s 349
b) Bounties and subsidies received from any
Government or any public authority constituted
or authorised by any Government shall also be
added notwithstanding the fact that they may
have been directly credited to capital reserve.
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Professional directors in listed
companies
In case of listed companies approval of CG is not required if the
managerial person is not having any interest in the capital of the
company 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 2 years
before or on the date of appointment and is having a graduate
level qualification with expert and specialised knowledge in the
field of his profession. (MCA circular dated 14th July 2011)
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Companies in SEZ areas
As per Para D, companies in notified SEZ areas
can pay remuneration upto Rs.20 lacs p.m. if
these companies have not raised any money by
public issue of shares/debentures in India and
have not defaulted in India in repayment of any
of its debts (including public deposits) or
debentures or interest payable thereon for
continuous period of 30 days in any financial
year.
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Checklist for managerial remuneration in profit making public company
Calculate net profit u/s 349
Calculate ceiling on remuneration
(@ 5% or 10% of NP)
Work out proposed remuneration for the year
If proposed remuneration is within
the ceiling, CG approval not required
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If proposed remuneration is in excess of
ceiling, CG approval is required
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Checklist for managerial remuneration in loss making public company
Work out effective capital
Work out proposed remuneration for the year
Check if Sch. XIII can be complied with
If yes, CG approval not required
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If no, CG approval is required
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Remuneration to ordinary directors
Maximum remuneration without
CG approval
a) 1% of NP – if co. has MD/WTD/ Manager
b) 3% of NP – if co. does not have any of these
Mode of payment
Can be paid as commission if special resolution is
passed (valid for maximum 5 years at a time)
Maximum remuneration with CG
approval
No limit.
Can be paid monthly, quarterly or yearly.
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Sitting fees
Whether included in
remuneration?
No
Eligibility
- Payable only to ordinary directors
- Payable for attending meetings of Board or Committee
thereof
- Can be paid for meeting adjourned for want of quorum
Maximum fee payable
Rs.20,000/a) if aggregate of paid-up capital & free reserves is Rs.10
crores or more; or
b) if turnover is Rs.50 crores or more
Rs.10,000/- in other cases
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Increase in remuneration
Whether CG
approval
required
a) Increase in sitting fee if within prescribed limit
No
b) Increase in remuneration of managerial person within limits
prescribed u/s 198, 309, 387 or Schedule-XIII
No
c) Increase in remuneration of non-executive directors within
prescribed limit
No
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Provisions applicable to private companies
Whether
applicable
1
Section 267: Disqualifications for appointment of MD/WTD
Yes
2
A person cannot be WTD in two companies and hence
cannot draw remuneration from 2 companies
Yes(?)
3
If a director starts taking salary, he becomes WTD and Form
32 needs to be filed for change of designation from
‘director’ to ‘WTD’
Yes(?)
4
Section 269: Mandatory appointment of managerial person No
(even if paid-up capital is Rs.5 crores or more)
Cannot pay remuneration without CG approval unless
Sch.XIII is complied with
5
Section 316: A person cannot be appointed as MD if he is
MD or Manager of any other company
No
6
Section 317: MD cannot be appointed for more than 5
years at a time.
No
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Mode of payment of managerial
remuneration
Category of directors
Mode of payment (Section 309)
MD or WTD
a) Monthly payment; or
b) At specified %age of net profit as per
Sec.198; or
c) Partly by one way & partly by other.
Director (other than MD or WTD)
a) Monthly, quarterly or annual payment
(with approval of CG); or
b) By commission if special resolution is
passed.
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Foreign directors
Whether CG
approval
required
CG approval is mandatory in case he is not resident in India.
However, this condition is not applicable to companies in notified
SEZ provided that a non-resident shall enter India only after
obtaining proper employment visa.
Additional
perquisites
applicable
A) Children’s education allowance: In case of children studying in or outside India, an
allowance limited to a maximum of Rs.5,000/- pm. Per child or actual expenses incurred,
whichever is less. -- Maximum for 2 children.
B) Holiday passage for children studying outside India/family staying abroad: Return holiday
passage once in a year by economy class or once in 2 years by first class to children and to the
members of the family from the place of their study or stay abroad to India if they are not
residing in India with the managerial person.
C) Leave travel concession: Return passage for self and family in accordance with the rules
specified by the company where it is proposed that the leave to be spent in home country
instead of anywhere in India. (Here ‘family’ means spouse, dependent children and
dependent parents of the managerial person.)
RBI permission
for remittance
RBI has granted general permission to companies in India to make
payments in Indian rupees to non-whole time directors resident
outside India and are on a visit to India for company’ work.
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P C Agrawal
[email protected]