PROVISIONS REGARDING MANAGERIAL

REMUNERATION

INTRODUCTION

1) Section 198 provides that the total managerial remuneration payable by a public
company or a private company which is a subsidiary of a public company to its directors,
including managing and whole-time directors and manager, if any, in respect of any financial
year shall not exceed eleven per cent of the net profits of the company for that financial year
computed in the manner laid down in Sections 349 and 350 of the Act, except that the
remuneration of the directors shall not be deducted from the gross profits. This percentage
shall be exclusive of the fee payable to directors for attending meetings of the
Board/committees under Section 309(2) of the Act.

(2) A director of a company is not its employee unless he has been entrusted with any
specific assignment which involves full time and attention, which means more effort than
what is expected of him as a non-executive director. However, a director may be a whole-
time employee of the company and he may be paid an agreed remuneration. Therefore, in the
absence of a specific agreement, no director is entitled to any remuneration for his services as
director, apart from the fee and actual expenses incurred in connection with attending the
Board/committee meetings, as per provisions of the Act and articles of the company.

(3) Sub-section (2) of Section 309 of the Act provides that a director may receive
remuneration by way of a fee for each meeting of the Board, or a committee thereof, attended
by him.

Sub-section (2) of Section 198 of the Act provides that the percentage given in Sub-
section (1) of Section 198 of the Act shall be exclusive of any fees payable to directors under
Sub-section (2) of Section 309.

The amount of fee for each meeting shall not exceed rupees twenty thousand in case
of companies with a paid up share capital and free reserves of Rs. 10 crores and above or
turnover of Rs. 50 crores and above. For other companies the sitting fees should not exceed

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the sum of ten thousand rupees. [Notification No. GSR 580(E) dt. 24.7.03]. [Rule 10B of the
Companies (Central Governments) General Rules and Forms, 1956].

(4) According to Section 309(4) of the Act, a director, who is neither in the wholetime
employment of the company nor a managing director may be paid remuneration

either by way of monthly, quarterly or annual payment with the approval of the
Central Government;

or by way of commission if the company by special resolution authorises such

payment;

Provided that the remuneration paid to such director, or where there is more than one
such director, to all of them together, shall not exceed

one per cent of the net profits of the company, if the company has a managing or
whole-time director or a manager;

three per cent of the net profits of the company, in any other case;

Provided further that the company in general meeting may, with the approval of the
Central Government, authorise the payment of such remuneration at a rate exceeding one per
cent or, as the case may be three per cent of its net profits.

Vide Circular No. 4/2011 dated 4th March 2011, it has been decided that a Company
shall not require approval of the Central Government for making payment of remuneration by
way of Commission to its non-whole time Director(s) in addition to sitting fee if the total
commission to be paid to all these non-whole time Directors does not exceed 1% of the net
profit if it has whole time Director(s) or 3% of net profit, if it does not have MD or WTD(s)

(5) Proviso to the Sub-section (1) of Section 309 of the Companies Act, 1956,
provides that remuneration for services rendered by any such director in any other capacity
shall not be included in the remuneration if

the services rendered are of a professional nature, and

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 in the opinion of the Central Government the director possesses the requisite
qualifications for the practice of the profession.

For obtaining the Central Governments opinion, the company is required to make an
application to the Secretary, Ministry of Corporate Affairs, New Delhi, and pay the prescribed
fee along with the application.

DEFINITION AND COMPOSITION OF WORD MANAGERIAL

REMUNERATION

The managerial remuneration shall be payable to a person appointed within the

meaning of section 196 of the Companies Act, 2013. Under the Companies Act, 2013 the
provisions of payment of managerial remuneration are governed by Section 197, 198,199 and
Schedule V. The word remuneration is defined under section 2 (78) of Companies Act,
2013 which says that 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. Section 17(2) of Income Tax Act, 1961 has given an inclusive definition of the
term perquisite. This clause comprises of eight sub-clauses followed by two provisos,and
they deal with the following perquisites:

Value of rent-free accommodation provided to the assessee by his employer.

Value of any concession in respect of rent respecting any accommodation

provided to the assessee by his employer.

The value of any benefit or amenity granted or provided free of cost or at a

concessional rate to employee directors; or to employees who have substantial
interest and certain specified employees with some exceptions.

Sums paid by the employer in respect of any obligation which, but for such
obligation, would have been payable by the assessee.

Sums payable by the employer to effect an assurance on the life of the assessee
employee or to effect a contract for an annuity.

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 W.E.F assessment year 2010-11, value of securities / sweat equity shares allotted
or transferred by the employer or former employer to the employee.

7.W.E.F assessment year 2010-11 a contribution made by an employer to an

approved superannuation fund to the extent it exceeds Rs 1 lakh.

Value of any other fringe benefit or amenity as may be prescribed.

The first proviso states that certain medical benefits are not treated as perquisites
in certain specific situations.

Any expenditure incurred by the Company to affect any insurance on the life of, or to
provide any pension, annuity or gratuity for, any of the persons aforesaid or spouse or child
shall be included in managerial remuneration.

We can say that definition of remuneration as well as perquisites are inclusive in

nature and hence it covers every amount that the company pays or spends for or for the
benefit of a Director, in whatever form and by whatever name. Moreover, any remuneration
for services rendered by any such director which are of professional nature shall not be
included in the managerial remuneration. Further, a director may receive remuneration by
way of a fee for each meeting of the Board, or a committee thereof attended by him.

Where if insurance is taken by a company on behalf of its Key Managerial Personnel

for indemnifying 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 remuneration. But if such Key
Managerial Personnel is found guilty then such insurance shall be treated as income part of
remuneration. If a manager or any director enjoys benefit or amenity without the company
incurring any expenditure therefor, such benefit or amenity may not be included in the
managerial remuneration. An Independent director shall not be entitled to receive stock
option. However, in case of other directors, Stock options would be part of remuneration.

THREE WAYS TO MANAGERIAL REMUNERATION

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 Automatic Route by Profits.

Shareholders Approval Route for more. &Shareholders and Central Government

for even more.

APPLICABILITY OF PROVISIONS TO WHOM

Section 196 deals with appointment of Managerial Personnel an d is applicable to

private companies and public companies both while section 197 which deals with
remuneration payable to managerial personnel is applicable to public companies only.
Schedule V is partly applicable to private companies (i.e. in relation to Part I that deals with
appointment) and partly not applicable to private companies (i.e. Part II that deals with
remuneration)

CONCLUSION

Managerial Persons covered are Managing Director, Whole-time Director, Part time
Directors and managers who shall be paid remuneration subject to and in accordance with
provisions of Section 197 of the Companies Act, 2013. As compared to various sections and
chapters viz section 198, 309, etc of Companies Act, 1956 which deals with Managerial
remunerations separately, the new Act has solved this issue by consolidating all provisions
under a single provision of 197.

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REFERENCES

http://company-registration.pro/provisions-applicable-to-managerial-
remuneration/

http://taxguru.in/company-law/managerial-remuneration-companies-act-2013.html

http://www.mca.gov.in/SearchableActs/Section197.htm