Managerial Remuneration

Managerial Managerial RemunerationRemuneration

Thoughts shared by:

P C AgrawalB.Com., LL.B., CAIIB, FCS

[email protected]

22/04/23 Managerial Remuneration - P C Agrawal 2

Managing Director

Section 2(26) defines Managing Director as under:

“Managing Director” means a director, who, by virtue of an agreement with the company, or of a resolution passed by the company in general meeting or by its Board of Directors or, by virtue of its memorandum or articles of association, is entrusted with substantial powers of management which would not otherwise be exercisable by him, and includes a director occupying the position of managing director, by whatever name called.

Provided that the power to do administrative acts of a routine nature when so authorised by the Board such as the power to affix the common seal of the company to any document or to draw and endorse any cheque on the account of the company in any bank or to draw and endorse any negotiable instrument or to sign any certificate of share or to direct registration of transfer of any share, shall not be deemed to be included within substantial powers of management:

Provided further that a managing director of a company shall exercise his powers subject to the superintendence, control and direction of its Board of Directors.


Whole Time Director

As per Explanation to Section 269, a whole-time director includes a director in the whole-time employment of the company.

Hence a WTD of a company cannot accept the position of WTD in any other company.


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Manager

Section 2(24) defines Manager as under:

“Manager” means an individual (not being the managing agent) who, subject to the superintendence, control and direction of the Board of directors, has the management of the whole, or substantially the whole, of the affairs of a company, and includes a director or any other person occupying the position of a manager, by whatever name called, and whether under a contract of service or not.


Appointment of Managerial Person in a public company

Appointment whether mandatory

a) Yes – if public company with paid up capital of Rs.5 crores or moreb) No – in other cases

Disqualifications (Sections 202, 203 & 267)

- Undischarged insolvent- Fraudulent person- Suspension of payment to creditors- Offence involving moral turpitude

Appointment of Manager (Section 386)

A person can be appointed as Manger if he is Manager/MD of not more than one other company. However, CG can permit if he is Manager of more than 2 companies.

Whether CG approval required? a) Yes – if Schedule XIII is not complied withb) No – if Schedule XIII is complied with

Procedure for CG approval - Publish notice in newspapers- Apply in Form 25A within 90 days of

appointment


Appointment of Managerial Person Contd…Can CG reject application? Yes – if he is not a fit & proper person or it is not in

public interest or the terms & conditions are not fair and reasonable.

Consequence of rejection of application

- Office to be vacated from the date of communication of decision

- Remuneration already received need not be refunded

Requirements of Schedule-XIII - Not penalised for economic offences under any of 15 Acts

- Not detained under COFEPSA Act 1974- Condition of age (25 to 70 years)- Resident in India- If appointed in two companies, can draw

remuneration from one or both (max. higher limit)- Approval of members

Returns to be filed - Form 23 (only for MD or variation of his terms)- Form 32 (for first appointment or change of

designation)- Form 25C (if Sch. XIII complied with)


Appointment of Managerial Person Contd…

Further action to be taken - Forward abstract to members u/s 302- Inform stock exchanges (in case of listed companies)- Make entry in register of directors

Other points - MD can be appointed for maximum 5 years at a time- MD/WTD should be a director first. However,

Manager may or may not be a director.- MD & Manager cannot be appointed simultaneously- Company can have two MDs- MD/WTD can also be liable to retire by rotation even if

appointed for fixed period- Resignation should be effective from date of

acceptance- Managerial person can waive his right to get

remuneration at any time- Office of managerial person is not an office or place of

profit u/s 314.



Remuneration

Includes:-Salary, DA, perquisites, commission & other allowances-Any other benefit free of charge or at concessional rate-Any expenditure for personal liability-Life insurance premium for self, spouse or child-Remuneration for services rendered in other capacity (except professional services by qualified persons)

Excludes:-Interest on loans taken from directors-Guarantee commission


Effective capital Monthly remuneration (Rs.in lacs)

Para AUpto

Para BUpto

Para C

i) < Rs.1 crore 0.75 1.50 Exceeding limits given in

Para Bii) >Rs.1 crore <= Rs.5 crores 1.00 2.00

iii) >Rs.5 crores <= Rs.25 crores 1.25 2.50

iv) >Rs.25 crores <= Rs.50 crores 1.50 3.00

v) >Rs.50 crores <= Rs.100 crores 1.75 3.50

vi) >Rs.100 crores 2.00 4.00


Ceiling on remuneration in case of profit

Ceiling on remuneration in case of inadequate or no profit (Sch.XIII – Part II)

Conditions on remuneration in case of inadequate or no profit (Sch.XIII – Part II)

Para A Para B Para Ci) Remuneration Committee resolution √ √ √

ii) No default in repayment of debt for 30 days in last financial year before the date of appointment

√ √ √

iii) Special resolution for payment of remuneration maximum upto 3 years

N.A. √ √

iv) Statement giving specified details in notice for GM to shareholders

N.A. √ √

v) Prior approval of CG in case of listed companies No No Yes


Constitution of Remuneration Committee:

Listed companies: Minimum 3 non-executive independent directors

Unlisted companies: Any two directors min. (need not be independent)

Ceiling on remuneration Contd…Mode of payment a) Monthly payment; and/or

b) Specified percentage of NP

Perquisites not included in the ceiling a) Contribution to PF & specified fundsb) Gratuity payable (upto ½ month salary

in a year)c) Encashment of leave at the end of the

term

In case excess amount is drawn Excess to be refunded to the company.Recovery cannot be waived without CG approval.


Effective CapitalEffective capital means aggregate of:•Paid-up share capital (excluding share application money)•Share Premium Account•Reserves & Surplus (excluding revaluation reserve)•Long term loans & deposits repayable after one year (excluding working capital loans, overdrafts, interest due on loans unless funded, bank guarantee etc. and other short term arrangements)

as reduced by aggregate of:•Any investments (except in case of investment co. having principal business of acquisition of securities)•Accumulated losses•Preliminary expenses not written off

Effective capital shall be calculated as on the last date of the financial year preceding the financial year in which the appointment of the managerial person is made (except in case of appointment in the year of incorporation when effective capital is to be calculated as on the date of such appointment).


Computation of net profit u/s 349Profit before tax as per P&L Statement

Add: the following items if debited to P&L Statement before arriving profit before tax

Managerial remuneration

Provision for doubtful debts

Provision for doubtful advances

Loss on sale/disposal/discarding of assets

Loss on sale of investments

Write off of investments

Provision for diminution in the value of investments

Unserviceable fixed assets written off

Fall in the value of foreign currency monetary assets

Loss on cancellation of foreign exchange contracts

Provision for contingencies and unascertained liabilities

Provision for loss of subsidiary companies

Lease premium written off

Provision for warranty spares/supplies

Infructuous project expenses written off

Provision for redundancy in stores/spares/finished goods

Provision for anticipated loss in case of contracts

Loss on sale of undertaking

Provision for wealth tax

Voluntary compensation paid under VRS

Depreciation as provided in books


Net profit u/s 349Less: the following if credited to P&L statement for arriving at profit before tax:Capital profit on sale/disposal of fixed assets

Capital profit on sale of immovable assets (unless it is company’s business)

Profit on sale of any undertaking or part thereof

Profit on buy back of shares

Profit/discount on redemption of shares or debentures

Profit on sale of investments

Compensation received on non-compete agreements

Write back of provision for doubtful debts

Write back of provision for doubtful advances

Appreciation in value of investments

Compensation received on surrender of tenancy rights

Profit on sale of undertaking

Consideration received on assignment of operating licences

Write back of provision for contingencies

Write off bad debts against the provision created earlier

Write back of provision for diminution in the value of investments

Excess of expenditure over income, i.e. loss of earlier years computed in accordance with Section 349

Profit on sale of forfeited shares

Depreciation as provided in books

Profit on sale of shares of subsidiary/associated companies


Net profit u/s 349

Besides the above:a)Certain extraordinary items as required under Accounting Standard-5 are shown after arriving at profit before tax, such items also need to be considered for arriving at the profit u/s 349b)Bounties and subsidies received from any Government or any public authority constituted or authorised by any Government shall also be added notwithstanding the fact that they may have been directly credited to capital reserve.


Professional directors in listed companies


In case of listed companies approval of CG is not required if the managerial person is not having any interest in the capital of the company or its holding company directly or indirectly or through any other statutory structures and not having any direct or indirect interest or related to the directors or promoters of the company or its holding company at any time during last 2 years before or on the date of appointment and is having a graduate level qualification with expert and specialised knowledge in the field of his profession. (MCA circular dated 14th July 2011)

Companies in SEZ areas

As per Para D, companies in notified SEZ areas can pay remuneration upto Rs.20 lacs p.m. if these companies have not raised any money by public issue of shares/debentures in India and have not defaulted in India in repayment of any of its debts (including public deposits) or debentures or interest payable thereon for continuous period of 30 days in any financial year.



Checklist for managerial remuneration in profit making public company

Calculate net profit u/s 349

Calculate ceiling on remuneration (@ 5% or 10% of NP)

Work out proposed remuneration for the year

If proposed remuneration is within the ceiling, CG approval not required

If proposed remuneration is in excess of ceiling, CG approval is required


Checklist for managerial remuneration in loss making public company

Work out effective capital

Work out proposed remuneration for the year

Check if Sch. XIII can be complied with

If yes, CG approval not required If no, CG approval is required

Remuneration to ordinary directors

Maximum remuneration without CG approval

a) 1% of NP – if co. has MD/WTD/ Managerb) 3% of NP – if co. does not have any of these

Mode of payment Can be paid as commission if special resolution is passed (valid for maximum 5 years at a time)

Maximum remuneration with CG approval

No limit.Can be paid monthly, quarterly or yearly.


Sitting feesWhether included in remuneration?

No

Eligibility - Payable only to ordinary directors- Payable for attending meetings of Board or Committee

thereof- Can be paid for meeting adjourned for want of quorum

Maximum fee payable Rs.20,000/- a) if aggregate of paid-up capital & free reserves is Rs.10 crores or more; orb) if turnover is Rs.50 crores or more

Rs.10,000/- in other cases


Increase in remunerationWhether CG approval required

a) Increase in sitting fee if within prescribed limit No

b) Increase in remuneration of managerial person within limits prescribed u/s 198, 309, 387 or Schedule-XIII

No

c) Increase in remuneration of non-executive directors within prescribed limit

No


Provisions applicable to private companies

Whether applicable

1 Section 267: Disqualifications for appointment of MD/WTD Yes

2 A person cannot be WTD in two companies and hence cannot draw remuneration from 2 companies

Yes(?)

3 If a director starts taking salary, he becomes WTD and Form 32 needs to be filed for change of designation from ‘director’ to ‘WTD’

Yes(?)

4 Section 269: Mandatory appointment of managerial person (even if paid-up capital is Rs.5 crores or more)

No

Cannot pay remuneration without CG approval unless Sch.XIII is complied with

5 Section 316: A person cannot be appointed as MD if he is MD or Manager of any other company

No

6 Section 317: MD cannot be appointed for more than 5 years at a time.

No


Mode of payment of managerial remuneration

Category of directors Mode of payment (Section 309)

MD or WTD a) Monthly payment; orb) At specified %age of net profit as per

Sec.198; orc) Partly by one way & partly by other.

Director (other than MD or WTD) a) Monthly, quarterly or annual payment (with approval of CG); or

b) By commission if special resolution is passed.


Foreign directorsWhether CG approval required

CG approval is mandatory in case he is not resident in India. However, this condition is not applicable to companies in notified SEZ provided that a non-resident shall enter India only after obtaining proper employment visa.

Additional perquisites applicable

A) Children’s education allowance: In case of children studying in or outside India, an allowance limited to a maximum of Rs.5,000/- pm. Per child or actual expenses incurred, whichever is less. -- Maximum for 2 children.B) Holiday passage for children studying outside India/family staying 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 person.C) 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 to be spent in home country instead of anywhere in India. (Here ‘family’ means spouse, dependent children and dependent parents of the managerial person.)

RBI permission for remittance

RBI has granted general permission to companies in India to make payments in Indian rupees to non-whole time directors resident outside India and are on a visit to India for company’ work.


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Managerial Remuneration

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