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Remuneration to Directors

By : Nirav Pankaj Shah on 24 April 2010 Report Abuse Print Print this
 



 

 

Remuneration to Directors

 

Appointment and Remuneration of a Director requires a careful understating of the

various provisions of the Companies Act and other applicable Acts. Sections 197A, 198,

268, 269, 309, 310, 311 read with Schedule XIII of the Companies Act, 1956 contain

provisions relating to the appointment and remuneration of a Managerial Personnel. The

purpose of this article is to understand the practical aspects of the Managerial

Remuneration.

e-mail :

sumanrk_verma@hotmail.com

The Board of every company should have the most talented

people to enable it to grow in this era of fierce competition.

No company wants to lose its bright talent to its competitors.

Remuneration is one of the vital aspects for the retention of

the talent in the company. The legal framework for the

remuneration of Directors is complex and requires compliance

of various provisions of the Companies Act, 1956, SEBI

regulation etc. Both appointment of and remuneration to a

Director require a careful understating of the various

provisions of the Companies Act and other applicable Acts.

Sections 197A, 198, 268, 269, 309, 310, 311 read with

Schedule XIII of the Companies Act, 1956 (herein after

referred to as the “Act”) contain provisions relating to the

appointment and remuneration of managerial personnel. The

purpose of this article is to understand the practical aspects

of the Managerial Remuneration.

Applicability of the provisions

The provisions contained in the Companies Act, 1956 relating

to the appointment and remuneration of managerial personnel

are not applicable to an independent private company.

However, an independent private company can appoint them

in accordance with the provisions contained in the Articles of

Association (AOA). If Articles of the concerned independent

private company does not provide for such office then the

AOA will have to be first altered under section 31 of the

Companies Act.

Definition of Remuneration

The word “remuneration” is defined in the Explanation

appended to Section 198 of the Companies Act, 1956.

Accordingly, for the purposes of Sections 198, 309, 310, 311,

381, 387, remuneration shall include the following:—

(a) Any expenditure incurred by the company in providing

any rent free accommodation, or any other benefit or

amenity in respect of accommodation, free of charge, to

any of the company’s directors and manager;

(b) Any expenditure incurred by the company in providing

any other benefit or amenity free of charge or at a

concessional rate to any of the company’s directors and

manager;

(c) Any expenditure incurred by the company in respect of

any obligation or service, which, but for such expenditure

by the company, would have been incurred by any of

the company’s directors and manager; and

(d) any expenditure incurred by the company to effect any

insurance on the life of, or to provide any pension,

annuity or gratuity for, any of the company’s directors

and manager or his spouse or child.

This is an inclusive definition and not an exhaustive definition.

Its covers almost all the expenditure incurred by the company

on behalf of the managerial personnel.

TOTAL CEILING OF MANAGERIAL

REMUNERATION

1. Section 198(1) limits the overall maximum managerial

remuneration. The total managerial remuneration payable by

a public company or a private company which is a subsidiary

of a public company, to its directors and its manager in respect

of any financial year shall not exceed 11% of the net profits

of the company for that financial year.

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2. Net profits shall be computed in a manner laid down under

sections 349 and 350, except that the remuneration of the

directors shall not be deducted from the gross profits.

3. However such limit is exclusive of the sitting fee payable

to the directors for attending the Board meeting.

For the purpose of remuneration, Directors may be classified

as executive and non executive directors.

A. REMUNERATION TO EXECUTIVE

DIRECTORS

As per Section 269 of the Companies Act, 1956, appointment

of managerial personnel can be made by following two

methods.

(i) With the approval of the Central Government : - A

company can pay to its managerial personnel any amount

with the approval of the Central Government. Form 25A,

with necessary annexure and with the justification of

the remuneration, should be filed with ROC within 90

days of the appointment. A company can pay whatever

amount it wants to pay to its managerial personnel with

the approval of the Central Government.

(ii) In accordance with conditions specified in Parts I and II

of Schedule XIII (Without the approval of the Central

Government) :

Part I of Schedule-XIII of the Companies Act, 1956 sets out

the eligibility criteria of a person for being appointed as

managerial personnel.

Part II of Schedule XIII of the Companies Act, 1956 deals

with remuneration of Managerial Personnel. If the

appointment of Managerial Personnel is made without the

approval of the Central Government, then remuneration must

be paid as per the Part-II of Schedule XIII of the Companies

Act, 1956.

Part II of Schedule XIII of the Companies Act, 1956 is divided

into 3 Sections. Section-I deals with Remuneration payable

by the Companies having profits. Section-II deals with

Remuneration payable by the Companies having no profits or

inadequate Profits. Section-III deals with Remuneration

payable to managerial personnel in two companies.

REMUNERATION PAYABLE BY COMPANY

HAVING PROFITS

Section-I of Part II of Schedule-XIII deals with Remuneration

payable by the Companies having profits. This section is

subject to provisions of sections 198 and 309 of the Companies

Act, 1956.

1. Remuneration of the Directors shall be determined in

accordance with and subject to Sections 198 and 309 of

the Companies Act, 1956 only by the following ways.

– By Articles of Association or

– By a resolution passed by the Company in General

Meeting or

– If the Article so required by a Special Resolution

passed by company in General Meeting.

2. The remuneration payable to any such Director

determined as per the said provisions shall be inclusive

of the remuneration payable to such Director for services

rendered by him in any other capacity.

3. However, any remuneration for services will not be so

included if the services are of a professional nature

and in the opinion of the Central Government, the

Director possesses the requisite qualifications. It is

immaterial, whether the professional fees, which are

paid to him is on a monthly basis or on a case to case

basis.

4. The Board of Directors has no power to decide the

remuneration. It can only recommend the remuneration.

MODE

As per Section 309, a company can remunerate its Executive

Directors i.e. Managing Director or Whole time Directors either

by way of a monthly payment or at a specified percentage of

net profits of the company or partly by one way and partly by

the other.

QUANTUM

A company can pay a maximum of 5% of its profits

calculated as per section 198 read with sections 349 and

350 in any financial year as remuneration to its managerial

personnel (Managing Director/WTD). Where there are more

than one managerial personnel, the company can pay a

maximum of 10% of its profits in any financial year as

remuneration to all such managerial personnel. For example,

if a Director is appointed as MD in May 2009, in the

financial Year 2009-10, his total remuneration up to March

2010 should not exceed the 5% of the net profit of the

financial year ended 2010 calculated as per section 198 read

with section 349 and 350. (With an assumption that

company has only one MD.)

A company having profits in a financial year may pay any

remuneration, by way of salary, dearness allowance, perquisites,

commission and other allowances

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Note :

1. If the appointment of the managerial personnel has been

made as per Schedule XIII, then this remuneration is

also subject to the approval of shareholders by way of

ordinary resolution in the General Meeting.

2. A return in Form-25C must be filed with ROC

within 90 Days of the appointment of the managerial

personnel.

LIMITS

Total Managerial Remuneration 11% of the net profits of the

Payable ( Section 198) company calculated in

accordance with the

provisions of sections 349

and 350.

Only One Managing Director Not exceeding 5% of the net

or Whole Time Director profits computed in the

(Section 309) manner as stated above.

More than One Managing Not exceeding 10% of the

Director or Whole Time net profits computed in the

Director (Section 309) manner as stated above.

REMUNERATION PAYABLE BY COMPANY

HAVING NO PROFITS OR INADEQUATE

PROFITS

Section-II of Part-II of Schedule-XIII deals with Remuneration

payable by the Companies having no profits or inadequate

Profits.

Meaning of ‘No Profit’ or ‘Inadequate Profit’

Inadequate profit means that the remuneration paid/payable

to a managerial person in the financial year is more than 5%

of the net profit of that financial year.

Let’s assume that a company has appointed a managerial

personnel on 1st day of May 2009 in the financial Year 2009-

10 and fixed his monthly remuneration as Rs. 1 Lac. His

total remuneration for the financial Year ended March, 2010

would be Rs. 10 Lacs. If the profits of the company for the

financial year ended March 2010, calculated as per sections

349 & 350, is Rs. 30 Lacs, the company can pay to a

managerial personnel for the financial year ended March 2010,

only up to 5% of Rs. 30 Lacs which comes to Rs. 1.5 Lacs.

In this case company is paying Rs. 10 Lacs as remuneration

to its managerial personnel. Therefore in this case, one can

say that the profit is inadequate to pay the managerial

personnel Rs. 1 Lac per month for the financial year ended

March-2010.

CEILING LIMIT

Section-II of Part II of Schedule-XIII contains a different

situation for applying different ceiling limits. The different

situations can be classified into following category.

1. Where only the approval of the Remuneration Committee

is required.

2. Where approval of the Remuneration Committee as well

as approval of the shareholders by way of Special

Resolution is required.

3. Where approval of the Central Government apart from

approval of remuneration Committee and shareholders

approval by way of special resolution is also required.

4. Limit for SEZ.

Situation- I - Where only the approval of the

Remuneration Committee is required

Where in any financial year during the currency of the tenure

of the managerial personnel, a company has no profit or

inadequate profit, maximum remuneration payable should not

exceed Rs. 2 Lacs per month or Rs. 24 Lacs per annum

depending upon the effective capital of the company as per

following table.

If the effective capital of the Monthly Remuneration

Company is: not exceeding:

Less than Rs. 1 Crore Rs. 75,000

Rupees 1 Crore or more but less Rs. 1,00,000

than Rs. 5 Crores

Rupees 5 Crores or more but less Rs. 1,25,000

than Rs. 25 Crores

Rupees 25 Crores or more but less Rs. 1,50,000

than Rs. 50 Crores

Rupees 50 Crores or more but less Rs. 1,75,000

than Rs. 100 Crores

Rupees 100 Crores or more Rs. 2,00,000

For paying remuneration as per above table following

conditions should be satisfied.

1. Payment of remuneration is approved by the resolution

of the Remuneration Committee.

2. The Company should not have made 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 personnel.

Therefore, if a Company has committed any of the above

said default it shall not give remuneration to a Managerial

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Personnel under the provisions of Schedule XIII of the

Companies Act and it shall be required to obtain approval

of the Central Government for that purpose.

Note: As per Part-III of Schedule XIII, all remuneration is

subject to approval by a resolution of the Shareholders in the

General Meeting.

Situation- II - Where approval of the Remuneration

committee as well as approval of the Shareholders by

way of Special Resolution is required.

Where in any financial year during the currency of the tenure

of the managerial personnel, a company has no profit or

inadequate profit, maximum remuneration payable should not

exceed Rs. 4 Lacs per month or Rs. 48 Lacs per annum

depending upon the effective capital of the company as per

following table.

If the effective capital of the Monthly Remuneration

Company is: not exceeding:

Less than Rs. 1 Crore Rs. 1,50,000

Rupees 1 Crore or more but less Rs. 2,00,000

than Rs. 5 Crores

Rupees 5 Crores or more but less Rs. 2,50,000

than Rs. 25 Crores

Rupees 25 Crores or more but less Rs. 3,00,000

than Rs. 50 Crores

Rupees 50 Crores or more but less Rs. 3,50,000

than Rs. 100 Crores

Rupees 100 Crores or more Rs. 4,00,000

For paying remuneration as per above table following condition

should be satisfied.

Apart from complying with the conditions mentioned under

Situation-I, a Special Resolution has to be passed at the General

Meeting of the Company for fixing the remuneration of the

managerial personnel for a period not exceeding 3 Years.

Along with the notice of the General Meeting as is referred to

above, a statement is given to the Shareholders containing the

information as is mentioned in Para B of Section II of Part II

of this Schedule.

Such Statement shall give the following information:

1. General information

2. Information about the appointee

3. Other information

4. Disclosures

This information is mainly related with the Corporate

Governance norms.

Situation- III - Where approval of the Central

Government apart from approval of Remuneration

Committee and Shareholders approval by way of Special

Resolution is also required.

Apart from Complying with the condition mentioned under

Situations -I & II, prior approval of Central Government is

also required in the following situation.

1. Where the effective capital of the company is negative.

2. Where the remuneration is more than Rs. 4 Lacs per

month or Rs. 48 Lacs per annum depending upon the

effective capital of the company as per following table.

If the effective capital of Monthly Remuneration

the Company is: payable exceeds:

Less than Rs. 1 Crore Rs. 1,50,000

Rupees 1 Crore or more but less Rs. 2,00,000

than Rs. 5 Crores

Rupees 5 Crores or more but less Rs. 2,50,000

than Rs. 25 Crores

Rupees 25 Crores or more but less Rs. 3,00,000

than Rs. 50 Crores

Rupees 50 Crores or more but less Rs. 3,50,000

than Rs. 100 Crores

Rupees 100 Crores or more Rs. 4,00,000

Situation- IV – For SEZ

Companies in Special Economic Zones can pay to a

managerial personnel up to Rs. 2,40,00,000 per annum or

Rs. 20,00,000 per Month. Central Government approval is

not required in this case. However following conditions

should be satisfied.

1. Company has not raised any money by public issue of

shares or debentures in India.

2. Company should not have made 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 any financial year.

EXEMPTION FROM CEILING LIMIT

In addition to the above, managerial personnel are entitled for

the following perquisites which are not to be considered for

the ceiling as prescribed under Section II of Part II of Scheduled

XIII of the Companies Act, 1956 :

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(i) 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,

(ii) Gratuity payable at a rate not exceeding half a month’s

salary for each completed year of service, and

(iii) Encashment of Leave at the end of the tenure.

Note : It may be noted that clause (d) of the Explanation to

section 198 includes expenditure incurred by the company to

take out insurance on the life of managerial personnel or his

spouse or child or to provide any pension, annuity or gratuity

to them. Therefore when there are adequate profits,

expenditure in respect of contribution to provident fund,

superannuation fund, gratuity would all form part of

remuneration. In this case limit of 5%or 10% as the case may

be should apply.

Maximum remuneration payable to managerial

personnel in case he is managerial personnel in two

companies

Section III of Part II of Schedule XIII to the Companies Act,

1956 inter alia provides that the total remuneration which can

be paid by two companies in which an individual is a

managerial personnel shall not exceed the higher maximum

limit admissible from any one of the companies of which he

is a managerial personnel. It is to be noted that Section III is

also subject to the provisions of Sections I and II.

For example, if the remuneration payable by Company A as

per Schedule XIII is Rs.75,000/- per month and Company B

is Rs.1,00,000/- per month, then the total remuneration from

both the companies shall not exceed Rs.1,00,000/- per month.

Press Note No. 2/96, dated 16-9-1996 issued by the Department

of Company Affairs vide F. No. 1/18/96-CL V inter alia

provides that a person who is a managerial personnel in more

than one company shall be able to draw Remuneration from

one or both the companies.

REMUNERATION PAYABLE TO FOREIGN

DIRECTOR

Provisions for the payment of the remuneration applicable

to Indian director are also applicable to the Foreign Director.

However foreign director who has been appointed as

managerial personnel is also eligible for the following

perquisites in addition to those which is payable to Indian

Director which shall not be included in the computation of

the ceiling on remuneration specified in the above

paragraphs.

(i) Children’s Education Allowance : For maximum 2

children not exceeding Rs. 5,000 per month per child or

actual expenses incurred, whichever is less whether

children are studying in India or abroad.

(ii) Holiday passage for children studying abroad or

family residing abroad: Return holiday passage once

in a year by economy class or 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 Personnel.

(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.

REPATRIATION FACILITIES

Foreign nationals employed in India would like to repatriate

best part of their income. Salary earned by foreign nationals

being current account transaction is regulated by the Foreign

Exchange Management (Current Account Transactions) Rules,

2000. The amount that can be repatriated outside India can be

classified as follows:

1. Repatriation by a foreign National (Other than citizen

of Pakistan) who is a person resident in India but not

permanent resident in India- Up to net salary of the person

[Net salary is computed after deduction of taxes,

contribution to provident fund and other deductions.]

2. Repatriation by a foreign National (Other than citizen

of Pakistan) who is a person resident in India but not

permanent resident in India - Up to US $ 1,00,000 per

year per recipient.

A national of a foreign state could continue to be an employee

of foreign company and posted in Indian operations on

deputation to the joint venture or branch in India. In such

cases they are not employee of Indian company and are allowed

to open, hold and maintain foreign currency account with bank

outside India.

IMPORTANT DEFINITIONS UNDER SECTION –

II OF PART-II OF SCHEDULE XIII

Effective Capital

Company’s effective capital has to be calculated to determine

the amount that can be paid to the Managerial Personnel.

Effective Capital means the aggregate of paid-up share capital

(excluding share application money or advances against shares)

amount, if any, standing to the credit of share premium

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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) as reduced by the aggregate of any investments

(except in the case of investment by an investment company

whose principal business is acquisition of shares, stock,

debentures or other securities) accumulated loss and preliminary

expenses not written off.

Calculation of Effective Capital

Particulars Amount (Rs.)

Paid-up Share Capital (Excluding

Share application money or advance

against shares)

Share Premium

Reserves and Surplus (- Revaluation

reserve)

Long term Loans

Deposits repayable after one year

Total

Less : Investments

Accumulated loss (not written off)

Preliminary expenses (not written

off)

Effective Capital

Remuneration Committee

Remuneration Committee as per Explanation IV of the

Schedule, means a committee which consists of at least three

Non-Executive Independent Directors including nominee

Director or nominee Directors, if any.

Independent Director

Companies Act does not define the term “Independent

Director”. However Clause 49 of the Listing Agreement defines

this term.

Negative Effective Capital

Negative effective capital as defined under this Schedule means

the effective Capital which is less than Zero.

Important Points

1. In case of loss or inadequacy of profits, and the company

still wants to pay a remuneration to its managerial personnel

which is more than the ceiling limit under section 198, then

it shall be compulsory for a public company or a private

company, which is a subsidiary of a public company to

constitute and appoint a remuneration committee of the

directors for deciding the remuneration of the Managerial

Personnel.

2. The company should not have made 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 personnel. Therefore, if a

company has committed any of the above said defaults it shall

not pay remuneration to a managerial personnel under the

provisions of Schedule XIII of the Companies Act and it shall

be required to obtain approval of the Central Government for

that purpose.

3. In the case of a profit making company the provisions of

Section 1 of Part II of Schedule XIII are applicable.

Accordingly the company can pay managerial remuneration

upto 5% of net profits to one such managerial personnel

and if there is more than one person, 10% of the net profits

for all of them put together. However, if the company

incurred losses or earned inadequate net profits in any

subsequent financial year, then the company has to either

re-fix the remuneration within the applicable ceiling limits

specified in Section II of Part II or to obtain the approval

of the Central Government for payment in excess of

Schedule XIII limits.

4. Where remuneration is fixed as per Section II of Part II,

but effective capital is reduced in any subsequent financial

year then, the remuneration package has to be scaled down or

the approval of the Central Government has to be obtained.

5. The approval of members by way of special resolution will

be valid at a time for a period of three years.

6. Remuneration as per Part C, Section-II Part-II of Schedule-

XIII (In case a company proposes to pay managerial

remuneration to a person in excess of Rs. 48, 00,000 p.a. or

Rs. 4, 00,000 p.m. calculated on the scale in terms of Schedule

XIII of the Companies Act, and having negative zero effective

capital), cannot be paid without the prior approval of the

Central Government.

7. Remuneration under Part II is also subject to the approval

of Shareholders by way of ordinary resolution in the General

Meeting. (Part III of Schedule XIII of the Companies Act,

1956).

8. The auditor or secretary or secretary in whole-time practice

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will certify that all requirements have been complied with

which shall be incorporated in the Return filed under Section

269(2) i.e. Form 25C.

B. REMUNERATION TO NON-EXECUTIVE

DIRECTORS

Limits

If the company has Managing Director or whole time director

or a manager: - 1% of net profits

If the company has no Managing Director or whole time

director or a manager: - 3% of net profits

Mode of Payment

Section 309(4) authorizes payment of remuneration to non –

executive directors in two ways : -

(i) by way of monthly, quarterly or annual payment with

the approval of the Central Government; or

(ii) by way of commission if the Company by way of Special

Resolution authorizes such payment.

Approvals Required

1. In order to pay remuneration by way of commission, a

Special Resolution in the General Meeting is required to be

passed.

2. In order to pay such remuneration by way of a monthly,

quarterly or annual payment the Company is required to obtain

the approval of Central Government.

3. In order to pay the remuneration in excess of 1% or 3% (as

mentioned above) to its directors a separate approval of the

Central Government is required for paying such higher

remuneration.

4. Such higher remuneration is authorized by the Company in

its General Meeting.

Sitting Fee

A director may receive remuneration by way of a sitting fee

for each meeting of the Board, or a committee thereof, attended

by him. By virtue of sub-section (2) of Section198. Sitting

fee paid to directors shall not be reckoned for the purpose of

calculating Directors Remuneration.

Ceiling Limits for Sitting Fee

Rule 10-B of the Companies (Central Government’s) General

Rules and Forms, 1956 provides that companies having a paidup

capital and free reserves of Rs. 10 Crores or above or

companies having a turnover of Rs. 50 Crores or above can

pay sitting fees not exceeding Rs. 20,000 and other companies

can pay sitting fees up to Rs. 10,000.

Sitting Fees to Non-Resident Non-Whole-Time

Directors

Companies in India can make payments in Indian rupees to

their non Whole-Time Directors who are resident outside

India and are on a visit to India for the company’s work

such as attending Board meetings, etc., and are entitled to

payment of sitting fees or commission or remuneration in

accordance with the provisions contained in the concerned

company’s entered into by it or in any Board resolution or

General Body Resolution passed by the company, provided

that the Central Government’s approval has been obtained

by the company under section 309(4) or section 310 of the

Companies Act, 1956, wherever it applies (RBI Notification

No. FEMA -16/2000).

Important Points

1. If any director draws or receives, directly or indirectly, by

way of remuneration any such sums in excess of the limit

prescribed by section 309 or without the prior sanction of the

Central Government, where it is required, he shall refund such

sums to the company and until such sum is refunded, hold it

in trust for the company.

2. The company shall not waive the recovery of any

sum refundable to it unless permitted by the Central

Government.

3. Payment of sitting fees to managerial personnel is part of

Managerial remuneration and in case of Schedule XIII

appointments, no such sitting fee is payable in the absence of

any provision made therein. (DCA Vide letter no. 3/1/90-CLV

dated. 18.08.1990).

4. Expenditure incurred on maintenance of vehicles would

fall within the meaning of ‘remuneration’ and once

remuneration is fixed as provided under section 309 it is not

possible to state that the expenditure incurred by the company

on personal use of car by directors would not be allowable

deduction. In so far as the company is concerned the expenditure

is business expenditure, which could not be disallowed as such.

[Sayaji Iron & Engineering Co. v. CIT (2002) Comp Cas 675

(Guj)].

5. It has been clarified vide Circular No. 1 of 1972, dated 2-

2-1972 (DCA) that sitting fees, traveling allowances, etc., are

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payable to a director who was present at the meeting of the

Board or committees thereof with a view to participating in

its proceedings though no business could be transacted at that

meeting for want of quorum.

6. Pension given to the retired director of the company is

not remuneration. However, as a matter of abundant caution,

in view of the judgment of the Supreme Court in Dr. A.

Lakshmanaswamy Mudaliar v. Life Insurance Corporation

of India AIR 1963 SC 1185, the company which is making

the payment of monthly pension should ensure that

its Memorandum of Association contains an enabling

clause to pay pension to directors/former directors of the

company.

7. No approval of the Central Government under section 198

will be necessary for an increase in the amount of sitting fee

so long as such increase is within the limits prescribed by the

Government.

8. Payment of guarantee commission to directors is not

remuneration. In Sussen Textile Bearings Ltd. v Union of India

(1984) 55 Comp Cas 492, it was held by Delhi High Court

that guarantee Commission paid by a company to its director

for standing surety for loans and credit facilities taken by the

company was not a remuneration within the meaning of section

309 of the Companies Act, 1956 and approval of the Central

Government was not necessary. [Circular No. 3/94 (F. No.

14/3/87-CLV).

9. For the payment of remuneration to non-executive directors

by way of commission, prior approval of the company in

general meeting accorded by a special resolution in terms of

section 309(4) shall be made.

10. The special resolution passed under section 309(4)(b) is

valid for a period of 5 years at a time, it may be renewed for

a further period of five years at a time and any renewal must

be done not earlier than one year from the date on which it is

to come into force. (309(7)).

11. Whole-time Director or Managing Director who is in receipt

of any commission from the company shall not be entitled to

receive any commission or other remuneration from any

subsidiary of such company.(309(6)).

12. Rule 4.3 of the Securities and Exchange Board of India

(Employee Stock Option Scheme And Employee Stock

Purchase Scheme) Guidelines, 1999 provides that “A director

who either by himself or through his relative or through any

body corporate, directly or indirectly holds more than 10% of

the outstanding equity shares of the company shall not be

eligible to participate in the ESOP.

13. Section 309 is not applicable to Government Companies.

(Notification GSR 235 date 31.1.1978).

14. Section 309 is also not applicable to Private companies.

LIMITS AT A GLANCE

Total Managerial Remuneration 11% of the net profits of the

Payable company calculated in

accordance with the

provisions of sections 349

and 350.

Only One Managing Director Not exceeding 5% of the net

or Whole Time Director profits computed in the

manner as stated above.

More than One Managing Not exceeding 10% of the

Director or Whole Time net profits computed in the

Director manner as stated above.

One or more Director(s), but Not exceeding 3% of the net

no Managing Director or profits computed in the

Whole Time Director manner as stated above.

One or more Director(s) and also Not exceeding 1% of the net

a Managing Director or Whole profits computed in the

Time Director manner as stated above.

ANOMALIES

1. Under Schedule XIII, all public Companies having loss

or inadequate profit shall have Remuneration Committee. It

is not so for profit making companies. Even Clause 49 of

the listing agreement makes a non-mandatory

recommendation for the constitution of a Remuneration

Committee.

2. Part III of Section III of the Schedule says that appointment

and remuneration referred to in Parts I and II shall be subject

to approval by a resolution of the shareholders in general

meeting. However conditions imposed under the Schedule call

for a special resolution of the shareholders for the categories

B and C.

3. Default in repayment of any of its debts or debentures

or interest payable thereon for a period of thirty days in

the preceding financial year disqualifies a company from

making payment of any remuneration to its executive

directors. However profit making companies can pay

remuneration to its executive directors even if there is default

in repayment of debts. 􀂉

Remuneration to Directors


Source : ICSI,



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