Managerial Remuneration under Companies Act, 2013

Managerial remuneration is defined as total compensation. This can include salary, bonuses, perks, and stock options. The company generally pays this remuneration to the top executives and directors for their work. The Companies Act, 2013, has regulated it. It is a vital aspect of corporate governance. These laws support company growth, value goals, and build a strong reputation. In this blog, you will get guidance on managerial remuneration.

What is Managerial Remuneration?

Managerial remuneration refers to compensation. This contains the salary, perks, bonuses, and stock options. A company pays it to its directors, managing directors (MD), whole-time directors (WTD), and managers. According to Section 197 of the Companies Act, total remuneration cannot be more than 11% of net profits. There is also a specific limit. The specific limit is 5% for one managing director and 10% for all managers. However, higher limits will be approved by special agreements.

Legal Frameworks of Managerial Remuneration

According to the Companies Act, 2013, and amendments, the legal framework mainly applies to public companies (and their subsidiaries. It is managed as per Sections 197 and 198, and Schedule V.

Here are the legal frameworks of Managerial Remuneration:

1) Statutory Limits (Section 197)

This mainly covers:

a) Overall Cap

Total remuneration payable by a public company to its directors and manager shall not exceed 11% of net profits.

b) Individual Caps

There are specie caps. This attracts a 5% for one managing or whole-time director. 10% applies to several directors. 1% if a company has MD/WTD/Manager, 3% if a company has no MD/WTD/Manager.

c) Excess Pay

The payments that are more than these limits need specific approval.

2) Inadequate Profits (Schedule V)

In case the profits are insufficient, remuneration is set by Schedule V, Part II, based on the company's capital. Remuneration payable in case of inadequate profits depends on the effective capital slabs prescribed under Schedule V Part II. This can be doubled with special approval.

3) Key Regulatory Updates and Requirements

Listed below are the key regulatory updates and requirements:

a) Approval

The company does not need central government approval when it passes a special resolution.

b) Claw back (Section 199)

It is a required recovery of extra pay when financial statements are corrected.

c) Disclosures

Companies need to report the ratio of director remuneration to the median employee salary.

d) Promoter Pay

SEBI (LODR) necessitates special resolutions for high promoter-director remuneration. The SEBI (LODR) means the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015.

4) Penalties

Violations of Section 197 (15) can lead to a fine of Rs. 5 lakhs for the company and Rs. 1 lakh for defaulting officers. Excess funds need to be recovered compulsorily.

Components of Managerial Remuneration

The following are key components of the managerial remuneration:

a) Fixed Pay (Salary/DA)

This means regular monthly remuneration.

b) Variable Pay (Commission)

The variable pay mainly depends on the percentage of net profits. The shareholders approved it.

c) Perquisites

It has company-provided accommodation, cars, and other amenities. This will be valued as per the Income Tax Act.

d) Retirement Benefits

These benefits can include contributions to provident fund (PF), superannuation, or gratuity. However, these are generally excluded from the computation of managerial remuneration. It is excluded if there is an 11% overall ceiling in case; they are taxable as perquisites. Still, they are considered as the components of the total pay package.

e) Stock Options/Sweat Equity

Shares issued at a discount or free of charge. ESOP / sweat equity may form part of managerial remuneration depending on approval structure and accounting treatment.

f) Sitting Fees

There is a Rs. 1 lakh fees per meeting for attending Board/Committee meetings (maximum permissible limit). Companies can decide on a lower amount as well. This is regulated under Rule 4 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. However, the sitting fees are considered excluded from the 11% ceiling.

g) Reimbursement of Expenses

An actual expense paid for company business. It is not considered part of remuneration.

Statutory Limits for Profit-Making Companies on Managerial Remuneration

Below is the table that outlines the statutory limits for Profit-Making Companies on Managerial Remuneration:

Remuneration in Case of Inadequate Profits

Here is a detailed overview of the remuneration in case of inadequate profits or no profits:

Consequences of non-compliance

Listed below are the consequences of non-compliance:

a) Mandatory Refund of Excess Remuneration

If a director gets remuneration of more than the specified limits or without the required approvals, they need to refund the extra amount to the company. The refund needs to be made within two years, or a shorter period stipulated by the company.

b) "Trust" Obligation

The director has to hold the amount "in trust" for the company before the amount is completely refunded. This means the director will not be able to use or dispose of the amount.

c) Monetary Penalties (Section 197(15))

The penalties can lead to Rs. 5, 00,000 for the Company. The Officers in default need to pay the penalty of Rs. 1, 00,000 each.

d) Claw back Provision (Section 199)

The company must have the right to recover extra remuneration. It includes stock options paid to executives. It happens if financial statements are required to be restated due to fraud or non-compliance.

e) Imprisonment for Non-Payment of Penalty

In case of failing to pay the penalty charged by the Adjudicating Officer (ROC) within 90 days, officers in default can suffer. Imprisonment can arise under general non-compliance provisions, not directly as standard punishment under Section 197.

f) Inability to Waive Recovery

The company cannot give the recovery of excess remuneration unless a special vote is passed within two years. This applies only if creditors or lenders agree first that the company owes money.

g) Disqualification of Directors

Long-term or repeated failure to follow rules can lead to directors being disqualified. It is stated as per Section 164 of the Companies Act, 2013.

h) Damage to Reputation

Non-compliance results can damage the company's reputation and lower investor trust.

Conclusion

Knowing managerial remuneration is vital for corporate governance. This will help to keep good employees and follow company rules. So, every business should know about it for Company success. Top-tier compensation must align with company performance and legal frameworks under the Companies Act. A fair and clear pay policy brings motivation to important workers. This also helps to gain the trust of investors. 

FAQ

Q1. What is Managerial Remuneration?

Managerial Remuneration means the money or its equivalent paid to its directors for their work. The director can be a managing director, a whole-time director, manager, or other directors. This remuneration is handled by Section 197, 198, and Schedule V of the Companies Act, 2013.

Q2. What is the penalty for violating managerial remuneration rules?

The penalty is the minimum Rs. 1 lakh or up to Rs. 5 lakhs for violating managerial remuneration rules. Every officer must also pay the fines. The director may also be required to refund the excess amount.

Q3. How much salary can a single Managing Director (MD) receive?

A single MD, Whole-time Director (WTD), or manager can be paid up to 5% of the net profits. If there are multiple directors, their total pay will not go above 10% of the net profits.

Q4. Can a company pay remuneration to its directors if it has no profits or losses?

Yes, a company can pay remuneration to its directors if it has no profits or losses.

Disclaimer

This article is for informational purposes only and does not constitute legal advice. Online Legal India is a digital platform. If you require legal assistance, we strongly recommend consulting a qualified lawyer or law firm.