INTRODUCTION:
This provision talks about the managerial remuneration of the management of the company. This Section applies to every public company but not to private companies.
“Remuneration” refers to any money or its equivalent paid to a person in exchange for services done, as well as the perquisites included in the 1961 Income-tax Act. In basic terms, managerial compensation is the compensation provided to managing personnel. Here, management personnel refers to directors such as the managing director and full-time director, as well as the manager.
• Overall management compensation payable by a public business to its directors, managing director, and full-time director, as well as its manager, for each fiscal year:
| Condition | Max Remuneration in any financial year |
| Company with one Managing director/whole time director/manager | 5% of the net profits of the company |
| Company with more than one Managing director/whole time director/manager | 10% of the net profits of the company |
| Overall Limit on Managerial Remuneration | 11% of the net profits of the company |
| Remuneration payable to directors who are neither managing directors nor whole-time directors | |
| For directors who are neither managing director or whole-time directors | 1% of the net profits of the company if there is a managing director/whole time director |
| If there is a director who is neither a Managing director/whole time director | 3% of the net profits of the company if there is no managing director/whole time director |
The aforementioned percentages are exclusive of any fees due under section 197. (5). Prior to this point, any managerial compensation over 11% required government approval. Yet, a public business may now pay its managerial staff compensation in excess of 11% without prior clearance from the Central Government. The shareholders’ approval of a special resolution will suffice. If a corporation has defaulted on its obligations or failed to fulfil its obligations, authorization from the lenders will be required.
When a corporation has insufficient or no profits: In the event that a corporation has insufficient or no earnings in any fiscal year, no compensation shall be paid unless these rules are met.
| Where the effective capital is: | Limits of yearly remuneration |
| Negative or less than 5 Crores | 60 Lakhs |
| 5 crores and above but less than 100 Crores | 84 Lakhs |
| 100 Crores and above but less than 250 Crores | 120 Lakhs |
| 250 Crores and above | 120 Lakhs plus 0.01% of the effective capital in excess of 250 Crores |
MAXIMUM MANAGERIAL REMUNERATION:
The Company which is acquiring the profits in the financial year may have to pay the remuneration to managerial personnel or person, not exceeding the limits prescribed in this provision.
According to Section 197(1) of the Companies Act, 2013, the total managerial remuneration payable by a public company to its directors, including the managing director and whole-time director, and its manager in respect of any fiscal year period not exceeding 11% of the company’s net profits for that fiscal year.
If there is a requirement to exceed the overall limit of eleven percent, as per Schedule V, the company needs to call the general meeting and should obtain the authorization for exceeding the limit.
Moreover, the company needs to obtain the approval of the shareholders and pass the special resolution.
It is stated under this provision that if there is one managing director/Whole-time director manager, then that individual will entertain the 5% of the net profits of the company for that financial year.
If there is a requirement for exceeding the limit of 5%, then there is a need to pass or approve a special resolution.
However, if there is more than one managing director/Whole-time director manager, then the remuneration will be 10% of the net profits of the company for that fiscal year.
If there is a requirement for exceeding the limit of 10%, then there is a need to pass or approve the special resolution.
Remuneration payable to the directors who are neither Managing Directors nor whole-time directors is the 1% of the net profits of the company if there is a managing director.
Remuneration payable to the directors who are neither Managing Directors nor whole-time directors is the 3% of the net profits of the company but there is no managing director or Whole-time director in the company
If there is a need to exceed the limit of 3%, then there is a requirement for special resolution approval.
When the company has defaulted in the payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, there is a need to obtain the prior approval of such person (as applicable) shall have to be obtained by the company before obtaining the approval in the general meeting.
DETERMINATION OF REMUNERATION:
To determine the remuneration, there are certainly three ways, which are been stated under the Section 194(4), they are as follows:
- By the articles of the company, or
- By a resolution or,
- If the article so require, by a special resolution, passed by the company in a general meeting.
The payment payable to directors includes the remuneration payable for services provided in any other position, with the following exceptions:
(a) the nature of the services rendered is professional; and
(b) the director holds, in the judgement of the Nomination and Remuneration Committee (where applicable) or the Board of Directors in all other situations, the qualifications necessary for the practise of the profession.
- A director may accept compensation in the form of a fee for attending Board or Committee meetings or for any other purpose. The Board must authorise director sitting fees subject to the following conditions: (i) The fees must not exceed one lakh rupees every meeting of the Board or any of its committees. (ii) The sitting fee paid to Independent Directors and Women Directors cannot be less than that paid to other directors.
- Different fees may be established for various kinds of corporations and for independent directors.
A director or manager may be paid remuneration in any of the following manner:
(a) Monthly payment
(b) Specified percentage of profit
(c) Combination of method (a) and method (b)
- If a director obtains pay in excess of the authorised limit (described above) or without the necessary consent, he must either return the excess to the business or retain it in trust for the company.
- Such recovery may not be waived unless the firm approves it by issuing a special resolution within two years of the date the amount becomes refundable.
- If the corporation has failed to pay its debts to a bank, public financial institution, or other secured creditor, the agreement of that person is necessary prior to waiving the collection of excess compensation.
MODES OF PAYMENT OF REMUNERATION:
The certain modes of payment of remuneration, which are been prescribed under the Section 197(6), are:
- By way of a monthly payment, or;
- At a specified percentage of the net profits of the company, or;
- Partly in one way and partly in another.
PENALTY FOR NON-COMPLIANCE:
- For a Defaulting Person: The Defaulting individual is liable to a penalty of rupees one lakh.
- For a Company: The Company or an organization is liable to a penalty of rupees five lakhs.
The auditor of the company shall make a statement regarding remuneration in his report as under:
(i) whether the remuneration paid by the company to its directors as per section 197;
(ii) whether remuneration paid to any director is in excess of the limit given under section 197;
(iii) give such other details as may be prescribed.
Related Posts
Register Private Limited Company
Get your business a separate legal identity, limited liability protection, and easier access to funding.
LLP Registration
Register a Limited Liability Partnership with flexible structure and lower compliance requirements.
One Person Company Registration
Start your business journey as a single founder with limited liability protection.
Start Up India Registration
Empowers entrepreneurs with government recognition, tax benefits, funding support, and simplified compliance.
Virtual Office
Give your business a premium address and professional presence without the cost of a physical space.
Private Limited Company Compliance
Ensure legal, financial, and regulatory obligations and maintain the company’s good standing legally.
GST Registration
Register for Goods and Services Tax to legally collect tax from your customers.
MSME Registration
Register as a Micro, Small, or Medium Enterprise to avail government benefits.
FSSAI Registration
Obtain your FSSAI license to legally sell and serve safe food in India.
