3 Managerial Remuneration

Section-II of Part-II to Schedule-V of companies Act 2013

Where in any financial year, a company has no profits or its profits are inadequate, it may pay remuneration
to the managerial person or other director not exceeding the higher of the limits under (A) and (B) given
below: —
other director shall mean a non-executive director or an independent director.
Managerial Person means MD/WTD/Manager

[A]

Effective Capital Limit of yearly remuneration Limit of yearly remuneration

payable shall not exceed (in payable shall not exceed (in
Rupees) in case of a managerial rupees) in case of another
person director
For MD/WTD/Manager For other director

(i) (-) Or less than 5cr 60 lakhs per person per annum 12 Lakhs per person per
annum

(ii) 5cr & above less 100cr. 84 lakhs per person per annum 17 Lakhs per person per
annum

(iii) 100cr. & above less than 120lakhs per person per annum 24 Lakhs per person per
250cr annum

(iv) 250cr. & above 120 lakhs (+) 0.01% 24 Lakhs plus 0.01% of the
effective capital in excess of
Of E.C >250 cr Rs.250 crores
per person per annum per person per annum

Provided that the remuneration in excess of above Limits may be paid if the resolution passed by the
shareholders, is a special resolution.

How to compute Effective Capital

Paid up capital (excluding share application money or advances against shares, if any, for the time
being standing to the credit of share premium account)

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Add: - Reserve & Surplus

(Excluding Revaluation Reserve)

Add: - Long-term loans and deposits repayable after one year (excluding working capital
loans, over drafts, interest due on loans unless funded, bank guarantee, etc., and other
short-term arrangements)

Less: - Accumulated Losses

Preliminary Expenses
Non-Trade Investment (except in case of investment by an investment company whose
principal business is acquisition of shares, stock, debentures or other securities)

When to check Effective Capital

Where Appointment is during 1st year of Appointment during any subsequent financial year
incorporation

As on date of appointment Last Audited

[B]
➢ Any Managerial person or other director functioning in professional capacity➔ remuneration as
per item (A) may be paid, if
➢ Such M.P or other director have no interest in capital of “Company/Holding/Subsidiary” (whether
directly or indirectly), & not even though any statutory structure [e.g., company/society/trust/trust
etc]
➢ Such M.P or other director shall not be possessing any direct or indirect relation with any director
or promoter of “Company/Holding/Subsidiary” any time during 2 year before or on or after
appointment
➢ Such M.P or other director possesses graduate level qualification (+) expertise in field related to
object of co.
➢ Note: - Employee shall not be interested if hold shares up to 0.5% of paid-up capital allotted under
ESOP
Provided further that the limits specified under items (A) and (B) of this section shall apply, if-
(i) payment of remuneration is approved by a resolution passed by the Board and, in the case of a company
covered under sub-section (1) of section 178 also by the Nomination and Remuneration Committee;

(ii) the company has not committed any default in payment of dues to
• any bank or
• public financial institution or

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• 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 other secured creditor, as the case may be, shall be obtained by the
company before obtaining the approval in the general meeting;

(iii) an ordinary resolution or a special resolution, as the case may be, has been passed for payment of
remuneration as per item (A) or a special resolution has been passed for payment of remuneration as per
item (B), at the general meeting of the company for a period not exceeding three years.
Simple:- Thus any O/Res or S/Res shall have a validity of 3 years

Example: -Ram Appointed as Managing Director in A Ltd i.e., a company having inadequate net profit
: - He is a shareholder of company as well
: - Effective capital is ₹ 4.90 Cr
: -provide the maximum remuneration allowed to Ram

Solution: -
Since company is having inadequate net profit, thus remuneration to be paid as per Sec-II-Part-II of
Schedule V of Companies Act 2013
Item [B] to Section-II is N.A., as he is shareholder of company also
Thus, we may conclude that remuneration to be paid as per Item [A]
Since Effective Capital - ₹ 4.90cr
Thus, Maximum remuneration allowed shall be 60 Lacs per annum along with O/Res
For any remuneration over and above S/ Res to be passed
However, remuneration as per Item [A] can be paid, if
(i) payment of remuneration is approved by a resolution passed by the Board and, in the case of a
company covered under sub-section (1) of section 178 also by the Nomination and Remuneration
Committee;

(ii) the company has not committed 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 other secured creditor, as the case may be, shall be obtained by the
company before obtaining the approval in the general meeting;

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(iii) an ordinary resolution or a special resolution, as the case may be, has been passed for payment of
remuneration as per item (A) or a special resolution has been passed for payment of remuneration as per
item (B), at the general meeting of the company for a period not exceeding three years.

[Section III] of Part-II of Schedule V of Companies Act 2013: —

Remuneration by Cos having no profit or inadequate profit without CG approval in some cases.
In the following circumstances a company may pay remuneration to a managerial person or other director in
excess of the amounts provided in Section II above: —
(a) where the remuneration in excess of the limits specified in Section I or II is paid by any other company
and that other company is either
• a foreign company or
• Any other company, which is paying managerial remuneration or other director as per section 197
subject to approval of its members in their general meeting
Q: What is the purpose behind introduction of this clause
Ans: To enable the companies having loss or inadequate profit to encourage hiring of foreign talent or
Indian Talent from companies having adequate net profit

(b) Where the Co. is

➢ Newly incorporated Co. → for first 7 years, or
➢ Sick Co., for whom scheme of Revival/Rehabilitation ordered → up to 5 years.
➢ Co. for which resolution approved by NCLT under "Insolvency & Bankruptcy 2016" for a period of
five years from the date of such approval, it may pay "any remuneration to its managerial persons or
other director ".:
Provided that the limits under this Section shall be applicable subject to meeting all the conditions specified
under Section II and the following additional conditions: —
(i) except as provided in para (a) of this Section, the managerial person is not receiving remuneration
from any other company;
(ii) the auditor or Company Secretary of the company or where the company has not appointed a
Secretary, a Secretary in whole-time practice, certifies that all secured creditors and term lenders
have stated in writing that they have no objection for the appointment of the managerial person as
well as the quantum of remuneration and such certificate is filed along with the return as prescribed
under sub-section (4) of section 196.
(iii) the auditor or Company Secretary or where the company has not appointed a secretary, a secretary
in whole-time practice certifies that there is no default on payments to any creditors, and all dues to
deposit holders are being settled on time.
Explanation. – For the purposes of Section I, Section II and Section III, the term or other director shall
mean a non-executive director or an independent director.

Appointment & Remuneration of Managerial Person Rules, 2014

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Rule-3. Filing of return of appointment. —A company shall file a return of appointment of a Managing
Director, Whole Time Director or Manager within 60 days of the appointment, with the Registrar in Form
No. MR.1 along with such fee as may be specified for this purpose.
Rule-7. Fees. —
(1) Every application made to the Central Government under this chapter i.e., Managerial Remuneration shall
be made in Form No. MR.2 and shall be accompanied by fee as may be specified for the purpose.
Sub Rule-(2) Omitted
(3) Every such application seeking approval shall be made to the Central Government within a period of
ninety days from the date of such appointment.

[Section IV] of Part-II of Schedule V of Companies Act 2013: — Perquisites not

included in managerial remuneration:
Remuneration [Section 2 (78)]: ‘Remuneration’ means 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.
1. A managerial person shall be eligible for the following perquisites which shall not be included in the
computation of the ceiling on remuneration specified in Section II and Section III:
(a) Contribution to provident fund, superannuation fund or annuity fund to the extent these either singly or put
together are not taxable under the Income-tax Act, 1961;
(b) Gratuity payable at a rate not exceeding half a month’s salary for each completed year of service; and
(c) Encashment of leave at the end of the tenure.

2. In addition to the perquisites specified in paragraph 1 of this section, an expatriate managerial person
(including a non-resident Indian) shall be eligible to the following perquisites which shall not be included in
the computation of the ceiling on remuneration specified in Section II or Section III:
(a) Children’s education allowance: In case of children studying in or outside India, an allowance limited to a
maximum of rupees 12,000 per month per child or actual expenses incurred, whichever is less. Such
allowance is admissible up to a maximum of two children.
(b) Holiday passage for children studying outside India or family staying abroad: Return holiday passage
once in a year by economy class or once in two 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 be spent in home country instead of anywhere in India.
Explanation I.— For the purposes of this Schedule, ‘‘family’’ means the spouse, dependent children and
dependent parents of the managerial person.
Explanation II. — The Nomination and Remuneration Committee while approving the remuneration
under Section II or Section III, shall—
(a) take into account, financial position of the company, trend in the industry, appointee’s qualification,
experience, past performance, past remuneration, etc.;

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(b) be in a position to bring about objectivity in determining the remuneration package while striking a
balance between the interest of the company and the shareholders.
Explanation III. — For the purposes of this Schedule, “negative effective capital” means the effective
capital which is calculated in accordance with the provisions contained in Explanation I of this Part is less
than zero.
Explanation IV. — For the purposes of this Schedule: —
(A) Omitted
(B) “Remuneration” means remuneration as defined in clause (78) of Section 2 and includes reimbursement
of any direct taxes to the managerial person.

Section – V - Remuneration payable to M.P. in 2 Cos

Overall remuneration shall not exceed higher limit admissible from any Co. in which he is Managerial Person

Example Mr D is a Managerial Person (Shareholder also) in

: - X limited i.e., a Company eligible to pay remuneration upto ₹ 60 Lakh
: - Y limited i.e., a Company eligible to pay remuneration upto ₹ 120 Lakh
: - Now, overall remuneration payable to Mr D shall not exceed

Solution 120 Lakh

PART III OF SCHEDULE V- Provisions applicable to Parts I and II

1. The appointment and remuneration referred to in Part I and Part II of this Schedule shall be subject
to approval by a resolution of the shareholders in general meeting.
2. The auditor or the Secretary of the company or where the company is not required to appoint a
Secretary, a Secretary in whole-time practice shall certify that the requirement of this Schedule have
been complied with and such certificate shall be incorporated in the return filed with the Registrar
under sub-section (4) of section 196.

PART IV OF SCHEDULE V: Exemption by Central Government

The Central Government may, by notification, exempt any class or classes of companies from any of
the requirements contained in this Schedule.

Check Your Concepts

Quest-4 X, a Director of MJV Ltd., was appointed on 1st April, 2011, one of the terms of appointment
was that in the absence of adequacy of profits or if the company had no profits in a particular
year, he will be paid remuneration in accordance with Schedule V. For the financial year ended
31st March, 2014, the company suffered heavy losses. The company was not in a position to
pay any remuneration but he was paid ₹ 50 lacs for the year, as paid to other directors. The
effective capital of the company is ₹ 150 crores. Referring to the provisions of Companies Act,
2013, as contained in Schedule V, examine the validity of the above payment of remuneration

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to X.

Solution The payment of ` 50 Lacs in the year as remuneration to Mr. X is valid in case he accepts it as
under the said schedule he is entitled to a remuneration of ` 120 Lakhs in the year and his
terms of appointment provide for payment of the remuneration as per schedule V.

Quest-5 You are provided with the relevant extract of the financials of Tribune Company Limited for the
financial year ended as on 31st March 2020 as below:
Sr. No Particulars Amount
1 Authorised Share Capital 10,00,00,00,000
2 Issued and Paid-up Share Capital 5,00,00,000
3 Share Premium Account 25,00,000
4 Reserves and Surplus (Amount of Rs. 25,00,000 is 35,00,000
included as Revaluation Reserve)
5 Term loan repayable after 1 year 12,00,000
6 Current Borrowings (Cash Credit Loan from 20,00,000
Banks)
7 Non-Current Investments 10,00,000
8 Accumulated Losses 5,00,000
9 Preliminary expenses not written off 3,00,000
The company has three managerial persons in its board of directors – Mr. A – Managing
Director, Mr. B – Whole Time Director and Mr. C – Director. According to their terms of
appointment, in case the company has no or inadequate profits, the managerial remuneration
payable to them shall be in accordance with Schedule V. You are required to compute the total
managerial remuneration payable considering the provisions of Schedule V.

Solution Accordingly, to compute the total managerial remuneration payable, we should first calculate
the effective capital.
Particulars Amount
Issued and Paid up Capital 5,00,00,000
Add: Share Premium Account 25,00,000
Add: Reserves and surplus excluding revaluation reserve 10,00,000
Add: Term Loan repayable after 1 year (excluding working capital 12,00,000
loans)

Less: Non-Current Investments 10,00,000

Less: Accumulated Losses 5,00,000
Less: Preliminary Expenses 3,00,000
Effective Capital 5,29,00,000
Section II of Part II of Schedule V states that where the effective capital is 5 crores and above
but less than 100 crores, the remuneration payable shall not exceed Rs. 84 lakhs. Accordingly,
the total managerial remuneration payable by the Companies to three managerial personnel for
the year ended 31st March 2020 shall not exceed Rs. 252 lakhs (Rs. 84 lakhs x 3 managerial
personnel).

3.2 Section 197 → Managerial Remuneration (M.R.)

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1. Overall managerial remuneration by public Cos to directors (including manager) → max 11% of net
profit
Provided that the company in general meeting may authorise the payment of remuneration exceeding
11% of the net profits of the company:[1st Proviso to Sec 197 (1)]
Except with approval in G. Meeting by S Res :[2nd Proviso to Sec 197 (1)]
➢ Remuneration to any 1 MD/WTD/Manager → Max 5%
➢ Remuneration to > 1 MD/WTD/Manager → Max 10% [ For Overall to MD/WTD/Manager]
Remuneration payable to non-Executive directors shall not exceed, --
(A) 1% of the net profits of the company, if there is a managing or whole-time director or manager;
(B) 3% of the net profits in any other case.

Quest: - State the max amount of remuneration to

Case-1- 1 Manager + 10 WTD

Overall 10%

Case-2- 1 Manager + 5 WTD + 3 NED

Overall 11%

Case-3- 1 Manager to whom company want to pay 7%

Allowed, subject to S/Res

Case-4- 1 Manager + 10 WTD + 3 NED and company want to pay

:- 6% to Manager
:-10.5% to WTD
:-15% overall

Allowed
1. Subject to S/Res for
> 5% to Manager and
> 10% to MD + WTD and
> 5 % to WTD

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2. O/Res for >11% overall

Provided also that, where the company has defaulted in payment of dues to
• any bank or
• public financial institution or
• non-convertible debenture holders or
• any other secured creditor,
the prior approval of the bank or public financial institution concerned or the non-convertible debenture
holders or other secured creditor, as the case may be, shall be obtained by the company before obtaining the
approval in the general meeting.
Second proviso shall apply to Nidhi company [i.e. no need to pass any S/Res ] with the modification that the
remuneration of a director who is neither managing director nor whole-time director or manager for
performing special services to the Nidhi’s specified in the articles of association may be paid by way of
monthly payment subject to the approval of the company in general meeting and also to the provisions of
section 197:
Provided that no approval of the company in general meeting shall be required where, —
(a) a Nidhi does not have a managing director or a whole-time director or a manager;
(b) the remuneration payable during a financial year to all the directors of the Nidhi does not exceed ten
per cent, of the net profits of such Nidhi or fifteen lakh rupees, whichever is less; and
(c) a remuneration payable under clause(b) is approved by a special resolution passed in this behalf by the
Nidhi.
Section 197 (2) → In addition to remuneration, directors also eligible for sitting fee as per 197 (5)

Section 197 (3) → [Mother of Schedule V] If company has no profit/inadequate profit → the company
shall not pay to its directors, including any managing or wholetime director or manager or any other non-
executive director, including an independent director, by way of remuneration any sum exclusive of any fees
payable to directors under sub-section (5) hereunder except in accordance with the provisions of Schedule V
Simple: - If company has no profit/inadequate profit➔Remuneration shall be paid as Per Schedule V

Section 197 (4) → 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
E.g., 1%/2%/3% etc will be decided through Article/Resolution
Any remuneration for services rendered by any such director in other capacity shall not be so included if—

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(1) the services rendered are of a professional nature; and
(2) in the opinion of the Nomination and Remuneration Committee, if the company is covered under sub-
section (1) of section 178, or the Board of Directors in other cases, the director possesses the
requisite qualification for the practice of the profession.
E.g., Dr Naresh Trehan
Who is getting remuneration as Chief Surgeon along with Remuneration as per MD of company. His
remuneration as per Chief Surgeon shall not form part of his remuneration
Even though Sec 188 (1) (f) i.e. OPP shall apply

Section 197 (5) read with Rule-4 of Companies (Appointment and Remuneration of Managerial
Personnel) Rules, 2014
(a) A director may receive remuneration by way of fee for attending meetings of the Board or Committee
thereof or for any other purpose whatsoever as may be decided by the Board.
(b) The sitting fees shall not exceed one lakh rupees per meeting of the Board or committee thereof.
However, for Independent Directors and Women Directors, the sitting fee shall not be less than the sitting
fee payable to other directors.

Example

10th Oct-Board Meeting-But adjourned 25th Oct- Finally conducted

Whether separate fee to be paid for adjourned board meeting as well

Solution No

Section 197 (6) → Remuneration either monthly/% of net profit/both

Section 197 (7) →N.A.
Section 197 (9) → If any director draws or receives, directly or indirectly, by way of remuneration any
sums in excess of the limit prescribed by this section, he shall refund such sums to the company, within 2
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

Why Section 197(9) and (10) required

18-19 19-20

31/03/19

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Remuneration Proposed will be 5%/10%/11% of net profit of which year?

Net profit of 18-19 XXXXX

Add:- Expected growth XXXXX

Expected net profit of 19-20 XXXXX

Now, based upon this estimated profit of 19-20 remuneration shall be computed during 19-20
Suppose total remuneration paid = ₹ 2 cr
Whereas remuneration u/s 197 = ₹ 1.50 cr (Based on actual net profit)
To overcome this situation, Sec 197(9) was framed

Section 197 (10) → The company shall not waive the recovery of any sum refundable to it under sub-
section (9) unless approved by the company by special resolution within two years from the date the sum
becomes refundable
Provided that where the company has defaulted in payment of dues to
• any bank or
• public financial institution or
• non-convertible debenture holders or
• any other secured creditor,
the prior approval of the bank or public financial institution concerned or the non-convertible debenture
holders or other secured creditor, as the case may be, shall be obtained by the company before obtaining
approval of such waiver.

Section 197 (11) Where remuneration is paid as per Schedule V due to no profit or inadequate profit, any
provision which has the effect of increasing the amount shall not have any effect unless such increase is in
accordance with the conditions specified in that Schedule
i.e. Any revision in amount of remuneration shall be in compliance with provisions of Schedule V
Sec 197 (12) Every listed company shall disclose in the Board’s report, the ratio of the remuneration of each
director to the median employee’s remuneration and such other details as may be prescribed.

Rule-5- Companies (Meetings of Board and its Powers) Rules, 2014: Disclosure in Board’s Report

The board’s report shall include a statement showing the names of the top ten employees in terms of
remuneration drawn and the name of every employee, who-

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if employed throughout
the financial year, was
in receipt of
remuneration for that
year which, in the
aggregate, was not less
than ₹1.02 Cr p.a.
if employed for a part if employed throughout the financial year or part
of the financial year, thereof, was in receipt of remuneration in that year
was in receipt of which,
remuneration for any
part of that year, at a • in the aggregate, or at a rate which, in the aggregate,
rate which, in the • is in excess of that drawn by the managing director
aggregate, was not or whole-time director or manager
less than ₹8.50 lakh
per month • and
• holds by himself or along with his spouse and
dependent children,
• not less than 2% of the equity shares of the company.

Other special points

• Provided that the particulars of employees posted and working in a country outside India, not being
directors or their relatives, drawing more than 60 lakh rupees per financial year or 5 lakh rupees per
month, shall not be circulated to the members in the Board’s report, but such particulars shall be filed
with the Registrar of Companies while filing the financial statement and Board Reports:
• Provided further that such particulars shall be made available to any shareholder on a specific request
made by him in writing before the date of such Annual General Meeting wherein financial statements
for the relevant financial year are proposed to be adopted by shareholders and such particulars shall
be made available by the company within three days from the date of receipt of such request from
shareholders
• Provided also that in case of request received even after the date of completion of Annual General
Meeting, such particulars shall be made available to the shareholders within seven days from the date
of receipt of such request.

Summary
Disclosure for following -Listed Company only

1. Top 10 Employees

2. Employed throughout the year and getting >= 1.02 Cr p.a.

remuneration

3. Employed part of the year and getting >=8.50 Lacs p.m.

remuneration

4. Employed
1. Throughout or part
+
2. Getting more than MD/WTD/Manager
+

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3.Hold Min 2% along with Spouse / Children

5. Drawing more than 60 lakh rupees per financial Not be circulated to the members in the Board’s
year or 5 lakh rupees per month report
But
Shall be filed with the ROC

Particulars shall be made available to any shareholder on a specific request made by him in writing
before the date of such Annual General Meeting➔Within 3 days
Within 7 Days ➔ In case of request received after the date of completion of Annual General Meeting

Sec 197(13) Where any insurance is taken by a company

• on behalf of its managing director, whole-time director, manager, Chief Executive Officer, Chief
Financial Officer or Company Secretary
• for indemnifying any of them against any liability in respect of any negligence, default, misfeasance,
breach of duty or breach of trust for which they may be guilty in relation to the company,
• the premium paid on such insurance shall not be treated as part of the remuneration payable to any such
personnel
• Provided that if such person is proved to be guilty, the premium paid on such insurance shall be treated as
part of the remuneration.

Sec 197 (14) Receiving Commission: - Any director who is in receipt of any commission from the company
and who is a managing or whole-time director of the company shall not be disqualified from receiving any
remuneration or commission from any holding company or subsidiary company of such company subject to
its disclosure by the company in the Board’s report.
Simple: - Thus, Director of company can receive remuneration by way of commission/remuneration from
its holding / subsidiary company, subject to disclosure in Boards report

Sec 197 (15) Contravention: - If any person contravenes the provisions of section 197, he shall be
punishable with fine which shall not be less than ₹ 1 Lakh but which may extend to ₹ 5 Lakhs.

Sec 197 (16) The auditor of the company shall, in his report under section 143, make a statement as to
whether the remuneration paid by the company to its directors is in accordance with the provisions of this
section, whether remuneration paid to any director is in excess of the limit laid down under this section and
give such other details as may be prescribed

Check Your Concepts

Quest-6 M/s Star Health Specialities Ltd. owns a Multi- specialty Hospital in Chennai. Dr. Hamilton, a
practising Heart Surgeon, has been appointed by the company as its director and it wants to

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pay him fee, on case-to-case basis, for surgery performed on the patients at the hospital. A
question has arisen whether payment of such fee to him would amount to payment of
managerial remuneration to a director subject to any restriction under the Companies Act,
2013.
Advise the company, which seeks to ensure that the same does not contravene any provision
of the Companies Act, 2013.

Solution Section 197(4) states that the remuneration payable to the directors including managing or
whole-time director or manager shall be inclusive of the remuneration payable for the
services rendered by him in any other capacity except the following:
(a) the services rendered are of a professional nature; and
(b) in the opinion of the Nomination and Remuneration Committee (if applicable) or the
Board of Directors in other cases, the director possesses the requisite qualification for
the practice of the profession.
The company can therefore, pay a remuneration to Dr. Hamilton as fee for surgeries
performed by him as a professional fee which shall not be construed as a Managerial
Remuneration under the Act.

Quest-7 The Article of Association of a listed company have fixed payment of sitting fee for each
Meeting of Directors subject to maximum of ₹ 30,000. In view of increased responsibilities of
independent directors of listed companies, the company proposes to increase the sitting fee
to ₹ 45,000 per meeting. Advise the company about the requirement under Companies Act,
2013 to give effect to the proposal.

Solution Section 197(5) of the Companies Act, 2013 provides that a director may receive
remuneration by way of fee for attending the Board/Committee meetings or for any other
purpose as may be decided by the Board, provided that the amount of such fees shall not
exceed rupees 1 lakh per meeting.
From the above, it is clear that fee to independent directors can be increased from
` 30,000 to `45,000 per meeting by passing a Board Resolution
However, since Article has restricted limit upto ` 30,000, thus company shall also pass S/Res
for alteration of Article

Quest-8 Directors of ABC Limited have been given the following remuneration --
Guarantee Commission has been paid to them for having guaranteed the term loans
obtained from a financial institution.
Examine the validity of the above payment in the light of the provisions of the Companies
Act, 2013.

Solution It was held in Suessen Textile Bearings Ltd v Union of India that the guarantee commission
paid to directors for giving surety against loans or credit facilities taken by the company from
financial institution is not a remuneration and therefore, approval of the Central
Government is not necessary.
The director giving guarantee does not render manual, clerical, technical, supervisory or
administrative service. He gets the commission for the risk which he bears and that has
nothing to do with his directorship.

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Considering the above, it may be concluded that the guarantee commission paid to the
directors for guarantee provided on loan from a financial institution is valid.

Quest-9 Advise M/s Super Specialities Ltd. in respect of the following proposals under consideration
of its Board of directors:
(i) Appointment of Managing Director who is more than 70 years of age;
(ii) Payment of commission of 4% of the net profits per annum to the directors of the
company;
(iii) Payment of remuneration of ₹ 40,000 per month to the whole-time director of the
company running in loss and having an effective capital of ₹ 95.00 lacs.
Solution (i) Section 196 (3) of the Companies Act, 2013 states that, a person who has attained the age
of seventy years may be employed as managing director, whole-time director or manager by
the approval of the members by a special resolution passed by the company in the general
meeting
Provided, where no such special resolution is passed but votes cast in favour of the motion
exceed the votes, if any, cast against the motion and the Central Government is satisfied, on
an application made by the Board, that such appointment is most beneficial to the company,
the appointment of the person who has attained the age of seventy years may be made
(ii) Proviso to section 197 (1) provides that except with the approval of the company in
general meeting through S/Res, the remuneration payable to directors who are neither
managing directors or whole-time directors shall not exceed one per cent. of the net profits
of the company, if there is a managing or whole-time director or manager; or three per cent
of the net profits in any other case
Therefore, in the given case, the commission of 4% is beyond the limit specified, and the
same should be approved by the members by Special resolution.

(iii) If company has no profit/inadequate profit → the company shall not pay to its directors,
including any managing or wholetime director or manager or any other non-executive
director, including an independent director, by way of remuneration any sum exclusive of
any fees payable to directors under sub-section (5) hereunder except in accordance with the
provisions of Schedule V

Section II of Part II of schedule V provides that where in any financial year during the
currency of tenure of a managerial person, a company has no profits or its profits are
inadequate, it may pay remuneration to the managerial person not exceeding ` 60 Lakhs for
the year if the effective capital of the company is negative or upto ` 5 Crores.
In the present case the proposed remuneration can be paid

Quest-11 International Technologies Limited, a listed company, being managed by a Managing Director
proposes to pay the following managerial remuneration:
(i) Commission at the rate of five percent of the net profits to its Managing Director, Mr.
Kamal.
(ii) The directors other than the Managing Director are proposed to be paid monthly
remuneration of ₹50,000 and also commission at the rate of one percent of net profits of the

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company subject to the condition that overall remuneration payable to ordinary directors
including monthly remuneration payable to each of them shall not exceed two percent of the
net profits of the company. The commission is to be distributed equally among all the
directors.
(iii) The company also proposes to pay suitable additional remuneration to Mr. Bhatt, a
director, for professional services rendered as software engineer, whenever such services are
utilized.
You are required to examine with reference to the provisions of the Companies Act, 2013 the
validity of the above proposals.

Solution (i) Commission at the rate of 5% of the net profits to its Managing Director, Mr. Kamal:
As per proviso to section 197(1), except with the approval of the company in general meeting
by S/Res, the remuneration payable to any one managing director; or whole time director or
manager shall not exceed 5 % of the net profits of the company and if there is more than one
such director then remuneration shall not exceed 10 % of the net profits to all such directors
and manager taken together.
In the present case, since the International Technologies Limited is being managed by a
Managing Director, the commission at the rate of 5% of the net profit to Mr. Kamal, the
Managing Director is allowed and no approval of company in general meeting is required.

(ii) The directors other than the Managing Director are proposed to be paid monthly
remuneration of ` 50,000 and also commission at the rate of 1% of net profits of the
company subject to the condition that overall remuneration payable to ordinary directors
including monthly remuneration payable to each of them shall not exceed 2% of the net
profits of the company:
Second proviso to section 197(1) provides that except with the approval of the company in
general meeting by S/Resolution, the remuneration payable to directors who are neither
managing directors nor whole time directors shall not exceed-
(A) 1% of the net profits of the company, if there is a managing or whole-time director
or manager;
(B) 3% of the net profits in any other case.
In the present case, the maximum remuneration allowed for directors other than managing
or whole-time director is 1% of the net profits of the company because the company is
having a managing director also. Hence, if the company wants to fix their remuneration at
not more than 2% of the net profits of the company, the approval of the company in general
meeting is required through S/Res.

(iii) According to section 197(4),

In the present case, the additional remuneration to Mr. Bhatt, a director for professional
services rendered as software engineer will not be included in the maximum managerial
remuneration and is allowed but opinion of Nomination and Remuneration Committee is to
be obtained.

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Also, the International Technologies Limited (a listed company) shall disclose in the Board’s
report, the ratio of the remuneration of each director to the median employee’s
remuneration and such other details as may be prescribed under the Companies
(Appointment and Remuneration of Managerial personnel) Rules, 2014.
Quest-12 You are a young women Chartered Accountant from India, having graduated from a top-
notch business school in India and later on became a Certified Public Accountant (CPA) from
USA. You have a special acumen for providing scratch to end business advisory and
regulatory related solutions. Your client, M/s New Tech Software Solutions Limited (NTSSL) is
a listed entity engaged in developing customized software packages for two and three-
wheeler automobile manufactures in India and abroad. The Company follows strict corporate
governance norms in letter and spirit and has the following composition of Board of
Directors:
Name DESIGNATION/CATEGORY
Mr. X CEO and Managing Director
Mr. Y Non-independent and on- Executive Director
Mr. A, Mr. B, Independent Directors
Mr. C and Mr. D
Mrs. E Independent, women Director

During the financial year 2019-20, the Company made the Following remuneration to its
directors:
Name Amount (in Rs.)
Mr. X- CEO & Monthly remuneration of Rs. 50,000 + Commission of Rs. 1,50,000
MD calculated as a percentage of net profits
Mr. Y Commission at the rate of 1% of the net profit.
(i) Mr. Y was paid a fee Rs. 1,00,000 for the services rendered by him as a graduate civil
engineer for valuing the assets of the Company. Through he is not a Registered Valuer, he
carried out the valuation on the assumption that, valuation can be done by a person having
such qualifications and experience for registered valuers
(ii) Payment of Rs. 5,00,000 insurance premiums towards Directors and Officers Liability
Policy to protect the Company against any negligence on the part of Mr. X, the Insurance
Company as a result of guilty of negligence of Mr. X.
With the above information, the said Company approached you seeking certain clarifications.
Clearly explaining the relevant provisions of the Companies Act, 2013 and the Rules made
there under, provide your professional advice to the following questions as raised by the
Company:
(i) Whether the payments made to Mr. X and Mr. Y forms part of an overall maximum
managerial remuneration?
(ii) whether payment of insurance premium towards Directors and officers Liability Policy

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form part of remuneration of Mr. X?
(iii) Who is the approving / recommending authority for the payments made to Mr. Y?

Solution As per section 197(1) of the Companies Act, 2013, 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 11% of the
net profits of that company for that financial year.

Section 197(6), states that a Director or Manager may be paid remuneration by way of a
monthly payment; or at a specified percentage of the net profits of the company; or partly by
one way and partly by the other.

Further section 197(4), states that 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:
Provided that any remuneration for services rendered by any such director in other capacity
shall not be so included if —
(a) the services rendered are of a professional nature; and
(b) In the opinion of the Nomination and Remuneration Committee, if the company is
covered under section 178(1), or the Board of Directors in other cases, the director possesses
the requisite qualification for the practice of the profession.
Now in the given case, payment made to Mr. X comprising of monthly remuneration of `
50,000 and commission ` 1,50,000 and the payment of the premium amount of ` 5,00,000 on
account of guilty of negligence of Mr. X, will form the part of the overall maximum
managerial remuneration.

Even though payment made to Mr. Y comprising of commission at the rate of 1% of the net
profit will form part of the overall maximum managerial remuneration.

Further, fee of ` 1,00,000 rendered to him for valuing the asset of the company is the service
not given in professional capacity as he does not possess the requisite qualification for
practice of respective profession as per the Companies (Registered Valuers and Valuation)
Rules, 2017.

Thus payment of fees in light of section 197(4) will also form the part of the overall
maximum managerial remuneration.

(ii) Section 197(13) states that ,where any insurance is taken by a company on behalf of its

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Managing Director, Whole-Time Director, Manager, Chief Executive Officer, Chief Financial
Officer or Company Secretary for indemnifying any of them against any liability in respect of
any negligence, default, misfeasance, breach of duty or breach of trust for which they may
be guilty in relation to the company, the premium paid on such insurance shall not be
treated as part of the remuneration payable to any such personnel:
Provided that if such person is proved to be guilty, the premium paid on such insurance
shall be treated as part of the remuneration.
In the given case claim of ` 1,00,000 was lodged with the Insurance company as a result of
guilty of negligence of Mr. X. Therefore payment of the insurance premium of ` 5,00,000 shall
be treated as part of the remuneration of Mr. X.

(iii) As per Section 197(1) of the Companies Act, 2013 remuneration payable to Mr. Y who is
neither Managing Director nor Whole time director, shall not be exceeding 1% of the net
profits of the company, as there is Mr. X (a Managing Director). Here in the given case,
payment of ` 1,00,000 over 1% may require the approval of the company in general meeting
by passing a Special Resolution. Since NTSSL is a listed company, so Nomination and
Remuneration Committee will recommend for payment of commission and ` 1,00,000 for
valuation purposes for approval of Board.

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