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Managerial Remuneration: Liberalising the Rigmarole of Government Approvals

Managerial Remuneration: Liberalising the Rigmarole of Government Approvals

Prelude

The Ministry of Corporate Affairs vide its notice dated 12th September, 2016 amended Schedule V of the Companies Act, 2013 which inter-alia deals with conditions for appointment and payment of remuneration to managerial personnel. The Government has moved one step forward in its initiative to help Corporates in India to do business with ease. Several provisions of the Act have been liberalized to prevent corporates from going through the rigmarole of government approvals.

An Insight into the Key Changes made in Schedule-V

Section 197 of the Companies Act, 2013 inter alia deals with the overall limits on managerial remuneration. Schedule V prescribes ceiling limit on Managerial Remuneration in cases where the company is making nil or inadequate profits.

1. Amendment pertaining to appointment of Managerial Personnel

  • Part I of Schedule V inter alia lists out certain conditions to be fulfilled for the appointment of managerial personnel.
  • By virtue of the Amendment, now a person shall not be eligible for appointment as a managing or whole time director or manager of a company if he has been sentenced to imprisonment for any period or to a fine exceeding one thousand rupees for convention of an offence under the Companies Act, 2013 or any other previous company law.
  • Prior to the Amendment, the condition on appointment of managerial personnel was restricted only to conviction pertaining to Companies Act, 2013.

2. Increased limit on Managerial Remuneration

  • Part II of Schedule V of the Companies Act, 2013 inter alia deals with the limits on managerial remuneration.
  • Section II of Part II fixes a ceiling limit on remuneration payable by companies having no profit or inadequate profit without getting the approval of the Central Government.
  • The Amendment to Schedule II has doubled the ceiling limit prescribed for managerial remuneration payable by a company having nil or inadequate profits, without the approval of Central Government.
  • Companies can pay managerial remuneration not exceeding higher of the limits set forth under (A) or (B) as stated hereunder. The limits set forth under clause (A) is tabulated below:
(A)
Where the effective capital is Existing limit of yearly remuneration Revised limit of yearly remuneration as per MCA Notification
Negative or less than 5 crores 30 lakhs 60 lakhs
5 crores and above but less than 100 crores 42 lakhs 84 lakhs
100 crores and above but less than 250 crores 60 lakhs 120 lakhs
250 crores and above 60 lakhs plus 0.01% of the effective capital in excess of Rs. 250 crores 120 lakhs plus 0.01% of the effective capital in excess of Rs. 250 crores
  • Maximum remuneration as prescribed under Clause (A) shall be doubled if the resolution passed by the shareholders is a ‘special resolution.’
(B)

Clause (B) of Section II inter alia lays down certain conditions to be fulfilled for a managerial person to be called as a Director functioning in a Professional Capacity. The amendment relieves companies from obtaining previous permission of the Central Government if the conditions stated hereunder are fulfilled at the time of appointment.

Conditions
  • No interest, directly or indirectly or through any statutory structures in the capital of the Company, its holding company or any of its subsidiaries; and
  • No interest, directly or indirectly or related to the directors or promotors of the company or its holding company or any of its subsidiaries at any time during the last two years before or on or after the date of appointment.
  • A graduate level qualification with expertise and specialized knowledge in the field in which the company operates.
  • Any employee of a company holding shares of a company not exceeding 0.5% of its paid up share capital under any scheme formulated for allotment of shares to such employees including Employees Stock Option Plan or by way of qualification shall be deemed to be a person not having any interest in the capital of the company.

Provided that the limits specified under items (A) and (B) shall apply, if:

  • Payment of remuneration is approved by a resolution passed by the Board and, in the case of a company covered under sub-section (1) of section 178 also by the Nomination and Remuneration Committee;
  • The company has not committed any default in repayment of any of its debts (including public deposits) or debentures or interest payable thereon for a continuous period of thirty days in the preceding financial year before the date of appointment of such managerial person and in case of a default, the company obtains prior approval from secured creditors for the proposed remuneration and the fact of such prior approval having been obtained is mentioned in the explanatory statement to the notice convening the general meeting;
  • An ordinary resolution or a special resolution, as the case may be, has been passed for payment of remuneration as per the limits laid down in item (A) or a special resolution has been passed for payment of remuneration as per item (B), at the general meeting of the company for a period not exceeding three years.
  • A statement along with a notice calling the general meeting referred to in clause (iii) is given to the shareholders containing the information stated thereunder.

Conclusion

The Government by increasing the ceiling limit on managerial remuneration has endeavored to reduce the rigmarole procedure required for government approval. In light of increased government control over the day to day functioning of companies, the Amendment is a significant step towards limiting government control over functioning of Companies. However, the Government has maintained proper checks and balances by imposing certain conditions and limitations with regard to remuneration payable to managerial personnel.

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