Managerial Remuneration under the Companies Act 2013¶
Managerial remuneration refers to the compensation paid to the managerial personnel of a company, which includes directors, managing directors (MD), whole-time directors (WTD), and managers. This remuneration is a critical aspect of corporate governance as it aims to attract, retain, and motivate the key management personnel responsible for the strategic direction and management of the company. The Companies Act 2013 lays down specific provisions regarding the limit and conditions under which this remuneration can be paid.
Limits on Managerial Remuneration¶
The total remuneration payable by a public company to its directors, including the managing director, whole-time director, and its manager, in respect of any financial year, is subject to certain limits:
- For a company with one MD/WTD/Manager: The maximum remuneration should not exceed 5% of the net profits of the company.
- For companies with more than one MD/WTD/Manager: The remuneration should not exceed 10% of the net profits of the company.
- For other directors (who are neither MD nor WTD): The remuneration should not exceed 1% of the net profits of the company if there is a managing or whole-time director or manager, and 3% of the net profits if there are no such managerial personnel.
These limits are exclusive of the sitting fees payable to the directors for attending the meetings of the Board or committees thereof. It's noteworthy that the net profits for these calculations are computed in the manner prescribed under Section 198 of the Companies Act, 2013.
Approval for Exceeding the Limits¶
A company may opt to pay remuneration exceeding these limits under certain conditions: - The company must obtain approval from its shareholders in a general meeting. - In cases where the remuneration exceeds 11% of the net profits, specific approval from the Central Government is no longer required, provided the payment is approved through a special resolution by the shareholders.
Remuneration in Case of Loss or Inadequate Profits¶
The Act also addresses scenarios where a company faces inadequate profits or incurs losses: - Under Schedule V of the Act, specific limits are set for remuneration that can be paid in such situations, varying according to the company's effective capital. For example, companies with negative or less than 5 crores in effective capital can pay up to 60 lakhs per annum, and these limits increase with the increase in effective capital. - Even in loss scenarios, companies are allowed to pay remuneration within these prescribed limits without needing to obtain approval from the Central Government, subject to compliance with the specified conditions and shareholders' approval.
Penalty for Non-Compliance¶
Any person contravening these provisions related to managerial remuneration faces a penalty ranging from 1 lakh to 5 lakhs INR. This emphasizes the importance of adherence to the legal framework governing remuneration payments.
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