Section 197 of the Companies Act, 2013 (2013 Act) prescribes the conditions for overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits. The Schedule V to the 2013 Act provides certain conditions to be fulfilled by a company to pay managerial remuneration. Schedule V consists of following four parts:
On 30 June 2016, the Ministry of Corporate Affairs (MCA) amended certain provisions relating to the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. These amendments are based on the recommendations in Companies Law Committee (CLC) report.
On 12 September 2016, the central government notified amendments to Section II of Part II of the Schedule V of the 2013 Act. The notification is effective from the date of its publication in the Gazette i.e. 12 September 2016.
This issue of First Notes aims to provide an overview of the key amendments in Schedule V relating to remuneration payable by companies having no profit or inadequate profit without central government approval.
Overview of the amendments in limits on remuneration payable by companies having inadequate/no profit without central government approval
Currently Section II of Part II of the Schedule V of the 2013 Act prescribes that the remuneration to managerial personnel should not be paid in excess of specified limits when a company that has no profits or inadequate profits, may without central government approval. These limits have been revised and following sections explain the new requirements.
The amended limits for the companies (having inadequate/no profit to pay remuneration to the managerial personnel (without central government approval)) are as follows:
|S. No.||Where the effective capital is||Limitof yearly remuneration payable shall not exceed*|
|i.||Negative or less than
|INR60 lakh (earlier INR30 lakh)
|ii.||INR5 crore and above but less than INR100 crore||INR84 lakh (earlier INR42 lakh)
|iii.||INR100 crore and above
but less than INR250 crore
|INR120 lakh (earlier INR60 lakh)
|iv.||INR250 crore and above
||INR120 lakh plus 0.01 per cent of the effective capital in excess of INR250 crore
(earlier INR60 lakh).
* Limits specified can be doubled if a special resolution is passed.
If the managerial personnel is functioning in a professional capacity and possesses graduate level qualification with an expertise and specialised knowledge in the field in which the company operates then approval of the central government is not required if such managerial person, at any time during the last two years before or on after the date of appointment, does not have
The notification specifies that any employee of a company holding shares of the company not exceeding 0.5 per cent of its paid up share capital under any scheme formulated for the allotment of shares to such employees including Employees Stock Option Plan (ESOP) or by way of qualification shall be deemed to be a person not having any interest in the capital of the company.
Following are the conditions which a company needs to satisfy to apply the above mentioned limits (in (A) and (B) section above)
(Emphasis added to the amendments added by the recent notification)
The MCA through its notification has removed the following requirement:
‘in the case of a managerial person who was not a security holder holding securities of the company of nominal value of INR5 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 years prior to his appointment
as a managerial person, - 2.5 per cent of the current relevant profit:
Provided that if the resolution passed by the shareholders is a special resolution, this limit shall be doubled:
Provided further that the limits specified under this section shall apply, if
The Companies Law Committee (CLC) was constituted on 4 June 2015 to examine and make recommendations to the government on the issues arising out of implementation of the 2013 Act. The CLC submitted its report to the government on 1 February 2016 and recommended amendments to both the 2013 Act and the Rules to the 2013 Act. The CLC in its report
had made recommendations to amend the managerial remuneration limits specified in the Schedule V of the 2013 Act. These recommendations were made after comparing managerial remuneration levels in other countries. It also recommended to substitute special resolution by shareholders with an ordinary resolution in certain cases.
The MCA has considered these suggestions made by the CLC and has amended the Schedule V.
The revised Schedule V adds a new requirement for payment of managerial remuneration. It requires a company with no profits or inadequate profits to obtain approval from secured creditors if the company defaults in repayment of its debts or interest payable, for a continuous period of 30 days in the preceding financial year before the date of appointment of such managerial person.
Before amendment, managerial remuneration could be paid by a company, that does not have any profit or inadequate profit, within the limits specified in Schedule V if a special resolution was passed.
Now managerial remuneration within the limits specified can be paid by passing an ordinary resolution. However, to double the limit specified in Schedule V, a company would have to pass a special resolution.
In the case, managerial personnel is functioning in a professional capacity, then to pay managerial remuneration to such an individual, when company has no profits or inadequate profits, a special resolution has to be passed.
To access the text of the MCA notification, please click here.
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