MD Remuneration Companies Act (Package & Calculation)

MD Remuneration Calculation (Private & Public Companies) companies act 2013The following article is an detailed explanation under Companies Act 2013, of Managing Director/Whole time Director Remuneration, Managing Director/Whole time Director Salary Packages, Managing director Remuneration calculations etc under the Companies Act 2013. There is no restriction relating to managerial remuneration for a private company. [Section 197(1)]. Also read our Previous articles on Directors Appointment in casual Vacancy, Appointment of Additional Director  and Appointment of Alternate Director.

Remuneration of Managing Director/Whole time Director

Total managerial remuneration payable by a public company to its directors (including Managing Director and Whole Time Director) and Manager in a financial year shall not exceed eleven percent of net profit of the company.

Manner of calculation is given in Section 198. [Section 197(1)] Any remuneration exceeding 11% of net profit limit may be payable subject to compliance of conditions given in Schedule V. In case these requirements of Schedule are not fulfilled, such remuneration will be subject to the approval of Central Government. [First Proviso to Section 197(1)].

The remuneration of any one Managing Director or Whole Time Director or Manager shall not exceed 5% of net profit. Where, there is more than one Managing Director or Whole Time Director, the overall limit is 10% of net profit.

The remuneration may exceed this limit only after approval by company in general meeting and after satisfying the conditions given in this Section and Schedule V. [Second Proviso to Section 197(1)].

Managing Director Remuneration in case of inadequate or no profit 

(Section II Part II Schedule V)

In case of inadequate or no profit, a company may pay to a managerial person without central government approval higher of the following two options (A or B):

A. As per following table with approval of company by ordinary resolution in general meeting or double of these limit with approval by special resolution:

Effective Capital (EC)
Negative to Rs. 5 Crore Rs. 30 Lakh yearly
Rs. 5 crore to Rs. 100 Crore Rs. 42 Lakh yearly
Rs. 100 crore to Rs.250 Crore Rs. 60 Lakh yearly
Rs. 250 Crore and above Rs. 60 lakh + 0.01% of EC above these Rs. 250 Crore


or

B. In case of managerial person who was not a security holder holding securities of the company of nominal value of rupees five 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% of the current relevant profit.

If, shareholders passes special resolution this limit will be double. This remuneration should be approved by resolution of Board of director and also by Nomination and Remuneration committee (where it is). The company has not made any default in repayment of its debt or debenture or interest thereon for a continuous period of 30 days in preceding financial year.

The approval of remuneration by special resolution should be for not more than three years. The statement along with the notice of this resolution should provide information like:

  1. General Information i.e. Nature of industry, commencement of production, Financial performance, Foreign investment or collaboration;
  2. Appointee information i.e. Background, past remuneration, recognition or award, job profile, suitability, proposed remuneration, comparative remuneration profile, Pecuniary relationship;
  3. Other information i.e. reason for loss or inadequate profit, step for improvement and expected increase.
  4. Disclosure in Board of Director’s report under corporate governance i.e. remuneration package, fixed component and performance linked incentives, service contract, notice period, severance fee, stock options.

Managing Director Remuneration in case of inadequate or no profit without central government approval in certain circumstances 

(Section III Part II Schedule V)

In these cases, the company may pay remuneration in excess of amount provided in Sec I:

  1. Where remuneration in excess of these limit is paid by other company, which is within permissible limit under Section 197.
  2. A company within seven year from its incorporation or a sick company within five years from sanction of scheme of revival may pay up to two times the amount permissible under Section II.
  3. Remuneration fixed by BIFR or NCLT
  4. An unlisted company in SEZ may pay up to Rs. 240 Lakh yearly

The conditions are:

  1. An auditor or Company Secretary of the company or company secretary in practice has 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.                     There is no default on payments to any creditors, and all dues to deposit holders are being settled on time.
  2. For Para (b) and (c), the managerial person is not receiving remuneration from any other company.

Perquisites not included in managerial remuneration (Section IV Part II Schedule V):

A managerial person shall be eligible for:

  1. 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.
  2. Gratuity payable at a rate not exceeding half a month’s salary for each completed Year of service; and
  3. Encashment of leave at the end of the tenure

A expatriate managerial person shall be eligible for:

  1. Children’s education allowance
  2. Holiday package studying outside India or family staying outside India
  3. Leave travel concession

These perquisites shall not be included in the computation of ceiling of Remuneration.

Remuneration payable to a managerial person in two companies (Section V Part II Schedule V):]

A managerial person shall draw remuneration from one or both companies. The total remuneration drawn should not exceed the higher maximum limit admissible from any company of which he is a managerial person.

Procedure for Fixation of Remuneration to Managing Director/Whole-time Director/Manager

The procedure to be followed for fixation of remuneration of Managing Director is as follows:

  • Convene a Board meeting after giving notices to all the directors of company in accordance with Section 173, to fix the date, time, place and agenda of the General Meeting to pass an ordinary or special resolution for fixing the remuneration of Managing Director.
  • Send the notice in writing atleast twenty-one days before the date of General Meeting.
  • Hold the general meeting and pass the ordinary or special resolution as the case may be.
  • If special resolution has been passed, then file Form MGT – 14 along with explanatory statement with the Registrar of Companies within thirty days.
  • Send three copies of the notices and copy of the proceedings of the General Meeting to the Stock Exchange(s), if the shares of company are listed.                                              If the remuneration fixed in the meeting, is more than stipulated under Section 197 read with Schedule V to the Act, The application should be filed electronically in MR – 2 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules 2014 accompanied by the prescribed fees. Details of proposal needs to be entered along with certain attachments as given below:
    1. Copy of the calculation sheet of effective capital;
    2. copy(ies) of Board Resolutions;
    3. Copy of resolution of Nomination and Remuneration Committee along with its composition and certificate by the nomination committee that the remuneration is as per remuneration policy of the company;
    4. copy of share holders resolution;
    5. certificate form auditor or company secretary of the company or company secretary in practice with regard to compliance of Section 196;
    6. Certificate of no – default in repayment of debts for continuous period of thirty days in the preceding financial year from a director or company secretary of the company;
    7. No objection certificate from the financial institutions or banks to whom the company has defaulted;
    8. copy of scheme of approval by the Tribunal for the revival of the company;
    9. Copy of Draft agreement between the company and the proposed appointee;
    10. Newspaper clipping of notices published under section 201
    11. Copy of visa or passport in case the proposed appointee is foreign national;
    12. Copies of education or professional qualification certificate;
    13. Statement as per item (iv) of 3rd proviso of Section II of Part II of Schedule V of the Companies Act, 2013
    14. Statement as per item (iv) of third proviso of section II of Part II of Schedule V to the Companies Act, 2013
    15. Projections of the Turnover and net profits for next three years;
    16. Calculation of estimated profit under section 198 of the Act;
    17. An application under Section 460 of the Act for condonation of delay;
    18. Full and proper justification in favour of the proposal along with bio-data of the appointee;
    19. Documentary proof regarding compliance of the provisions of Section 196 of the Companies Act, 2013 at the time of appointment/ re-appointment of the proposed appointee;
    20. Certificate by the secretary of the company or CA/CS in whole time practice to be notified erstwhile;
    21. Details, if applicant company is a subsidiary of listed company;
    22. Certificate from CA/CS in whole time practice along with calculation of excess remuneration paid to the appointee;
  • Execute the agreement, as approved by the Board and Central Government (where applicable), with the managing director.
  • Make necessary entries in the register of directors etc. and other records and registers of the company
  • . File the following documents with the ROC:
    1. The company should file with the ROC return of appointment of the managing director in Form MR -1, within sixty days as per Section 196(4) of the appointment and the return must be certified by the auditors of the company or the company secretary or a secretary in whole-time practice. The Mandatory attachments for Form MR – 1:
      1. Copy of Board Resolution,
      2. Copy of Shareholders Resolution
      3. Copy of letter of consent to act as managing director
      4. Copy of Central Government Approval
      5. Copy of certificate by nomination and remuneration committee
    2. Form DIR – 12 for particular of appointment of a key managerial personnel, within thirty days of the appointment.
    3. Form MGT – 14 for special resolution within thirty days of the appointment.
  • In case of listed company, submit to the stock exchanges, proceedings of the general meeting. Inform stock exchanges about remuneration immediately.
  • . Inform all concerned about the appointment of the managing director. It is advisable to issue a general notice in newspapers about the appointment of the managing director.

Revision of Remuneration of Managing Director/Whole-time Director

The remuneration of any one Managing Director or Whole Time Director or Manager shall not exceed 5% of net profit. Where, there is more than one Managing Director or Whole Time Director, the overall limit is 10% of net profit.

The remuneration may exceed this limit only after approval by company in general meeting and after satisfying the conditions given in this Section and Schedule V.

Any revision of remuneration shall also be accordingly and similar procedure as that of the fixing of remuneration at the time of appointment as discussed above.

  • As per Section 197,
  • As per Schedule V where applicable, or
  • As per Central Government approval.