Appointment of and Remuneration to Managerial Personnel (MD, WTD, Manager)

Term 
[S.196(2)]

NOT > 5 years at a time
[Also refer ‘Remuneration by public companies having no / inadequate profits’]

Re-appointment [Proviso to S. 196(2)]

NOT earlier than 1 year before the expiry of the term

Age of the Appointee [S.196(3)]

NOT < 21 years & NOT > 70 years unless a special resolution is passed and the explanatory statement annexed to the notice for such motion indicates the justification for appointing such person.

Where no such special resolution is passed but votes cast in favour of the motion > the votes, if any, cast against the motion and the CG is satisfied, on an application made by BoD, that such appointment is most beneficial to the company, the appointment of the person who has attained the age of 70 years may be made.

Terms and Conditions for Appointment of managerial personnel without approval of CG (i.e. Eligibility)

[S. 196(3) read with Sch V, Part I]

Eligibility for appointment as a managerial person i.e. MD / WTD / manager, of a Co:

1. he is not an undischarged insolvent or has not at any time been adjudged as an insolvent;
2. he has not at any time suspended payment to his creditors or does not make, or has not at any time made, a composition with them; or
3. he has not at any time been convicted by a court of an offence and sentenced for a period of > 6 months.
4. he had not been sentenced to imprisonment for any period, or to a fine > ₹ 1,000, for the conviction of an offence under any of the following Acts, namely:—
   1. the Indian Stamp Act, 1899;
   2. the Central Excise Act, 1944;
   3. the Industries (Development and Regulation) Act, 1951;
   4. the Prevention of Food Adulteration Act, 1954;
   5. the Essential Commodities Act, 1955;
   6. the Companies Act, 2013 or any previous company law;
   7. the Securities Contracts (Regulation) Act, 1956;
   8. the Wealth-tax Act, 1957;
   9. the Income-tax Act, 1961;
   10. the Customs Act, 1962;
   11. the Competition Act, 2002;
   12. the Foreign Exchange Management Act, 1999;
   13. the Sick Industrial Companies (Special Provisions) Act, 1985;
   14. the Securities and Exchange Board of India Act, 1992;
   15. the Foreign Trade (Development and Regulation) Act, 1922;
   16. the Prevention of Money-Laundering Act, 2002
5. he had not been detained for any period under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974
   Where CG has given its approval to the appointment of a person convicted or detained under (d) or (e) mentioned above, as the case may be, no further approval of CG shall be necessary for the subsequent appointment of that person if he had not been so convicted or detained subsequent to such approval.
6. Age of the Appointee - Already covered above
7. where he is a managerial person in more than one Co, he draws remuneration from one or more companies subject to the ceiling provided in section V of Part II of Sch V;
8. he is resident of India.

Explanation I.—For the purpose of this Schedule, Resident in India includes a person who has been staying in India for a continuous period of not < 12 months immediately preceding the date of his appointment as a managerial person and who has come to stay in India,—

1. for taking up employment in India; or
2. for carrying on a business or vacation in India.

Explanation II.—This condition shall not apply to the companies in Special Economic Zones as notified by Depr of Commerce from time to time:

Provided that a person, being a non-resident in India shall enter India only after obtaining a proper Employment Visafrom the concerned Indian mission abroad. For this purpose, such person shall be required to furnish, along with the visa application form, profile of the company, the principal employer and terms and conditions of such person’s appointment.

Board / General Meeting Approvals

[S. 196(4)]

• Terms including remuneration should be approved by BoD, subject to approval by a resolution at the next GM
• Notice convening the relevant meeting should include terms and conditions of such appointment, remuneration payable and such other matters including interest of directors

Return of Appointment
[2nd Proviso to S. 196(4)]

• In Form MR 1 to be filed within 60 days of appointment

From

To

* Yearly remuneration not exceeding

Negative

< ₹ 5 cr

₹ 60 lakhs

₹ 120 lakhs

* Yearly remuneration exceeding the limits mentioned in the earlier 2 columns

₹ 5 cr

< ₹ 100 cr

₹ 84 lakhs

₹ 168 lakhs

₹  100 cr

< ₹ 250 cr

₹ 120 lakhs

₹ 240 lakhs

₹ 250 cr and above

₹ 120 lakhs + 0.01% of effective capital in excess of ₹ 250 cr

₹ 240 lakhs + 0.02% of effective capital in excess of ₹ 250 cr

[Explanation I]

Effective capital =

• paid-up share capital (excluding share application money or advances against shares) +

• amount, if any, for the time being standing to the credit of share premium account +

• reserves and surplus (excluding revaluation reserve) +

• 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)]

reduced by: the aggregate of -

• any investments (except in case of investment by an investment company whose principal business is acquisition of shares, stock, debentures or other securities) +

• accumulated losses +

• preliminary expenses not written off

[Explanation II]

[Explanation IV]

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 < 0

Remuneration
[Explanation VI. (B)]

“Remuneration” means remuneration as defined in clause (78) of section 2 and includes reimbursement of any direct taxes to the managerial person.

Remuneration [S.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;

Excluded Perquisites [Section IV of Part II, Sch V]

Perquisites NOT INCLUDED in managerial remuneration:

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, 1961;
2. gratuity payable @ not >½a month’s salary for each completed year of service; and
3. encashment of leave at the end of the tenure
4. 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—

   (i) Children’s education allowance: In case of children studying in or outside India, an allowance limited to a Minimum (₹ 12,000 per month per child, actual expenses incurred), - up to a maximum of 2 children.

   (ii) Holiday passage for children studying outside India or family staying abroad: Return holiday passage once in a year by economy class/ once in 2 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.

   (iii) 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 III. - For the purpos

    

Remuneration for other services [S.197(4)]

either by the AoA of the Co, or by a resolution or, if the AoA so require, by a special resolution, passed by the Co in GM 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, unless

• the services rendered are of a professional nature; and
• in the opinion of the NRC, if the Co is covered u/s 178, / the BoD in other cases, the director possesses the requisite qualification for the practice of the profession.

Sitting fees [S.197(2), (5) & R.4 of the Co (Appt & Rem of Mgr Personnel) Rules, 2014]

• Sitting fees to be excluded while calculating remuneration as a % of net profit as shown in the chart at 2.2 above
• Sitting fees NOT > ₹ 1 lakh per meeting of the Board or committee thereof
• For Independent Directors and Women Directors, the sitting fee shall not be less than the sitting fee payable to other directors

Manner of payment of remuneration [S.197(6)]

A director or manager may be paid remuneration either by way of a monthly payment or at a specified percentage of the net profits of the Co or partly by one way and partly by the other.

Remuneration payable to a managerial person in two companies: [Section V]

Subject to the provisions of sections I to IV, a managerial person shall draw remuneration from one or both companies, provided that the total remuneration drawn from the companies does not exceed the higher maximum limit admissible from any one of the companies of which he is a managerial person.

Approval for remuneration (i)

Payment of remuneration is approved by a resolution passed by the BoD and, in the case of a company covered u/s. 178(1) also by the NRC;

Explanation IV.— The NRC while approving the remuneration under Section II or Section III, shall—

1. take into account, financial position of the Co, trend in the industry, appointee’s qualification, experience, past performance, past remuneration, etc.;
2. be in a position to bring about objectivity in determining the remuneration package while striking a balance between the interest of the Co and the shareholders.

No Default (ii)

• the Co has not made any default in repayment of any of its debts (including public deposits) or debentures or interestpayable thereon for a continuous period of 30 days in the preceding FY before the date of appointment of such managerial person; and
• in case of a default, the date of obtaining prior approval by the Co from secured creditors for the proposed remuneration and
• the fact of such prior approval of secured creditor having been obtained is mentioned in the explanatory statement to the notice convening the GM

GM Approval (iii)

— an ordinary or a special resolution, as the case may be, has been passed for payment of remuneration, at the GM of the Co

— for a period not exceeding 3 years

Disclosure in Explanatory Statement (iv)

I. General information:

1. Nature of industry
2. Date or expected date of commencement of commercial production
3. In case of new companies, expected date of commencement of activities as per project approved by financial institutions appearing in the prospectus
4. Financial performance based on given indicators
5. Foreign investments or collaborations, if any.

II. Information about the appointee:

1. Background details
2. Past remuneration
3. Recognition or awards
4. Job profile and his suitability
5. Remuneration proposed
6. Comparative remuneration profile with respect to industry, size of the company, profile of the position and person (in case of expatriates the relevant details would be with respect to the country of his origin)
7. Pecuniary relationship directly or indirectly with the Co, or relationship with the managerial personnel, if any.

III. Other information:

1. Reasons of loss or inadequate profits
2. Steps taken or proposed to be taken for improvement
3. Expected increase in productivity and profits in measurable terms

Disclosure in Board of Director’s report under the heading “Corporate Governance”(IV)

1. all elements of remuneration package such as salary, benefits, bonuses, stock options, pension, etc., of all the directors;
2. details of fixed component. and performance linked incentives along with the performance criteria;
3. service contracts, notice period, severance fees; and
4. stock option details, if any, and whether the same has been issued at a discount as well as the period over which accrued and over which exercisable.

Explanation: For the purposes of Section II of this part, “Statutory Structure” means any entity which is entitled to hold shares in any company formed wider any statute.”

Exemption I:

[Sch V, PART II, Section II (B)]

A Professional

a managerial person functioning in a professional capacity:-

NOT HAVING

possesses graduate level qualification with expertise and specialised knowledge in the field in which the Company operates

• any interest in the capital of the company / its holding company / any of its subsidiaries, directly or indirectly or through any other statutory structures,
  • an employee holding shares of the Company upto 0.5% of the paid-up share capital under any scheme formulated for allotment of shares to such employees including ESOP/ by way of qualification

• any, direct or indirect interest or related to the directors or promoters of the company / its holding company / any of its subsidiaries at any time during the last 2 years before or on or after the date of appointment,

Exemption II:

Special circumstances under Section III of Part II to Sch V to the Companies Act 2013

(a)

remuneration paid by OTHER company (referred to as "PAYER company")

PAYER company making payment of managerial remuneration is :

• a foreign company; or
• an Indian company:
  • which has got the approval of its shareholders in GM to make such payment, and
  • treats this amount as managerial remuneration for the purpose of S. 197 and
  • the total managerial remuneration payable by such other company to its managerial persons including such amount or amounts is within permissible limits u/s 197.

(b)

remuneration by New / Sick company etc.

(c)

Remuneration of a managerial person exceeds the limits in Section II, fixed by BIFR / NCLT:

Compliance with all the conditions specified under Section II (except CG approval) (i.e. Conditions at 2.3.1.3 above)

Additional conditions:

(i) except as provided in para (a) of this Section, the managerial person is not receiving remuneration from any other company;

(j) the auditor / CS of the Co or where the Co has not appointed a Secretary, a Secretary in whole-time practice, certifiesthat 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 u/s 196(4).

(k) the auditor or CS or where the Co 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.

(d)

If a company is in a Special Economic Zone as notified by Department of Commerce from time to time, and

• it has not raised any money by public issue of shares or debentures in India
• it has not made any default in India in repayment of any of its debts (including public deposits) or debentures or interest payable thereon for a continuous period of 30 days

it may pay remuneration up to ₹ 2,40,00,000 p.a.