Section 197 of the Companies Act 2013 [CoAct] is applicable to remuneration paid to Managing Director, Whole-time Director, Part time Directors and managers. section 197 which deals with remuneration payable to managerial personnel is applicable to public companies only.
"Remuneration" is defined u/s 2(78) of CoAct as 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”, which includes
- Value of rent-free accommodation provided to the assessee by his employer.
- Value of any concession in respect of rent for 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.
- 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.
- 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.
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.
Any remuneration for services rendered by such director which is 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.
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, (Directors and officers liability insurance) the premium paid on such insurance shall not be treated as part of remuneration. However if such Key Managerial Personnel is found guilty then such insurance shall be treated as income as 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.
Limit on remuneration as % of net profit.
Section 197 of the Companies Act, 2013 provides a way to pay managerial remuneration in case of Company’s having adequate profits. A Public Company can pay remuneration to its directors including Managing Directors and Whole-time Directors, and its managers which shall not exceed 11% of the net profit as calculated in a manner laid down in section 198 of the CoAct. Wherein a Company in which there is onlhy one Managing Director or Whole-time Director or Manager the remuneration to be paid shall not exceed 5% of net profits and where there are more than one of such Directors, remuneration payable shall not exceed 11 % of the net profit.
Payment of remuneration in excess of the above limit.
A company can pay more remuneration in accordance with Part II of Schedule V of CoAct.
Payment of remuneration in excess of above limits with the permission of shareholders.
A company with inadequate profit may pay remuneration @ 200% of the limit mentioned in Part II of Schedule V if shareholders have given their approval through a special resolution.
Where a managerial person does not hold Rs. 5 lacs worth of shares or more or an employee or a director of the company not related to any director or promoter at any time during the two years prior to his appointment as a managerial person, In such cases, the company can pay to him up to maximum of 2.5% of the “current relevant profits” and up to 5% with the approval of shareholders by a special resolution. The term “current relevant profit” means profit calculated under section 198 but without deducting the excess of expenditure over income as defined in section 4(1) of section 198 relating to all usual working charges in respect of those years during which the managerial person was not an employee, director or shareholder of the company or its holding and subsidiary companies.
However, Section IV Part II of Schedule V states that a managerial person shall be eligible for the following perquisites which shall not be included in the computation of the ceiling on remuneration specified in Section II and Section III:—
- 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 (43 of 1961);
- Gratuity payable at a rate not exceeding half a month’s salary for each completed year of service; and
- Encashment of leave at the end of the tenure.
When profit is adequate – the entire value of perquisites as per IT Act, 1961 will be considered in the managerial remuneration. However in the event of inadequacy of profits or nil profits, only the taxable amount of perquisites should be considered.
In case of expatriate the amounts paid under the heads of income mentioned below will not be considered as managerial remuneration.
- Children’s education allowance
- Holiday package studying outside India or family staying outside India
- Leave travel concession
If any managerial personnel receives any amount in excess of limits mentioned under the provisions of the CoAct, It is his obligation to refund such amount to the company and until such sum is refunded, hold it in trust for the company.
Further, if a Company wants to pay remuneration exceeding Schedule V of the Act then approval from Central Government is compulsory.
Section 197 of the CoAct allows a managing or whole-time director of a company to receive compensation from its holding company or subsidiary provided the same shall be disclosed in the director’s report.
NO PROFIT OR INADEQUATE PROFIT IN SPECIAL CIRCUMSTANCES
In certain special circumstances, a company without profit or inadequate profit may pay managerial remuneration in excess of limits specified in Section II above and that too without the approval of Central Government. Provided:
- The company paying managerial remuneration in excess of maximum specified limits is either a foreign company or a company who has got approval of its shareholders in this regard and the total managerial remuneration payable by such company is within the permissible limits of Section 197 of Companies Act’2013.
- A company can pay managerial remuneration up to two times of the amount specified in Section II, given above, provided:
- A newly incorporated company and is in existence for last seven years from the date of its incorporation, or
- A sick company in respect of which a scheme for revival and rehabilitation has been ordered by BIFR or NCLT for a period of five years from the date of sanction of revival scheme
- Where such excess managerial remuneration is fixed by BIFR or NCLT, subject to fulfilment of certain additional conditions apart from that given in Section 197 of Companies Act’2013
RESTRICTION ON INDEPENDENT DIRECTOR
- Section 197(5) of the CoAct specifically permits different fees to be paid to Independent Directors, there is no such enabling provision with respect to profit related commission. This means profit related commission may be paid uniformly to all non-executive directors. A company may pay such commission within the limit of 1% or 3% of the net profits, as the case may be. Further, Independent Directors cannot be granted stock options.
- A company resident in India, shall make payment in rupees to non Whole Time Directors who are resident outside India and is on visit to India for the company’s work and is entitled to payment of sitting fees or commission or remuneration, and travel expenses to and from and within India, in accordance with the provisions contained in the company’s MOA & AOA or in agreement entered into by it or in any resolution passed by the company in general meeting or by Board, provided the requirements of any law, rules, regulations, directions applicable for making such payments are duly complied with.
ADJUSTMENT OF MANAGERIAL REMUNERATION ACCORDING TO FOREX FLUCTUATIONS
- Where an expatriate is occupying the position of managerial person he may be paid a remuneration taking foreign currency as a base. In case of devaluation of currency there was a need to compensate such non-resident managerial persons to maintain these remittances at the pre-devaluation level and such increase in remuneration is allowed even if the resultant increased remuneration exceeds the statutory limits imposed by the Companies Act.
REMUNERATION PAYABLE TO A MANAGERIAL PERSON FROM TWO COMPANIES
- 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.
PENALTY TOWARDS NON-COMPLIANCE
- If any person contravenes the provisions of the section 197, he shall be punishable with fine which shall not be less than 1 lakh rupees and may extend to 5 lakhs rupees If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made there under, the company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to Rs.10,000/-, and where the contravention is continuing one, with a further fine which may extend to Rs.1,000/- for every day after the first during which the contravention continues.
