managerial remuneration

MCA has vide its notification dated 12/9/2018 notified the sections 66 to 70 of the companies amendment act, 2017 with effect from 12th September, 2018.

Briefly sections 66 to 70 above amends the following provisions of the companies act, 2013

  • Appointment of senior citizens as Managerial Personnel

Section 196 (3) (a) provided that no company shall appoint or continue the employment of any person as managing director, whole-time director or manager, who is below the age of 21 years or above 70 years. One proviso was provided that with special resolution it was possible to appoint a person as managing director even if he has crossed 70 years of age.

Now, another proviso has been added that even if the special resolution is not passed, but the votes cast in favour exceeds the votes cast against the resolution, if the Central Government is satisfied then approval for such appointment can be granted.

  • Managerial remuneration without govt. approval

Section 197 provides for payment of managerial remuneration to the managerial personnel. Now central government approval is not necessary for payment of managerial remuneration above 11% of the net profits of the company, subject to the provisions of Schedule V.  Also the company may vide special resolution passed at the general meeting provide for payment of more than 5% remuneration to one managing director or 10% to all of them together or remuneration payable to the non-executive directors also above the 1%/ 3% limit provided in that section.

Another proviso has been added that where the company has defaulted in its dues to banks/ financial institutions or non-convertible debenture holders or any other secured creditor, then prior approval of such banks/ financial institutions/ non-convertible debenture holders/ secured creditors will have to be obtained by the company before obtaining the general meeting approval.

Where the profits of the company are inadequate, then the company shall pay managerial remuneration only in accordance with the provisions of Schedule V. Here also the requirement of obtaining central government approval has been done away with.

Further sub-section (9) provides further leeway, in that where the managing director receives remuneration in excess of the limits specified in the section or without approval required under this section, then he shall refund such sum to the company within a period of two years or any lesser period allowed by the company and till that time, hold the moneys in trust for the company.

Further sub-section (10) provides that the company shall not waive recovery of any sum refundable to it under sub-section (9) unless approved by the company by a special resolution within two years from the date the sum becomes refundable. Therefore waiver special resolution has to be passed within two years from the date from which the sum becomes refundable.

Another proviso has been added to sub-section (10) that where the company has defaulted in its dues to banks/ financial institutions or non-convertible debenture holders or any other secured creditor, then prior approval of such banks/ financial institutions/ non-convertible debenture holders/ secured creditors will have to be obtained by the company before obtaining the general meeting approval for waiver of recovery of excess remuneration.  

Sub-section (11) has been amended reiterating that in case of no profits or where profits are inadequate, then Schedule V will be applicable without having to seek Central Government approval.

A new sub-section (16) has been added, mandating the auditors of the company to make a statement in his auditors’ report whether the remuneration paid by the company is in accordance with the provisions of this section and whether remuneration paid is in excess of the limit laid down in the section and such other details as may be prescribed. Since this sub-section has been notified on 12th September, 2018, it will become applicable to all auditors’ reports signed and dated after this date.

A new sub-section (17) has been added, that all pending applications with the central government shall abate and the company shall within one year from the commencement of this section take approval from the shareholders in a general meeting.

  • Calculations of net profit:

A couple of changes in section 198 w.r.t calculation of net profits. Credits shall be given for profits, by way of premium on shares or debentures of the company which are issued or sold by the company if the company is an investment company. In other cases, it is not allowed.

Credit is also not given for any amount representing unrealised gains, notional gains or revaluation of assets.

  • Company to fix limit with regard to remuneration:

Section 200 heading says “Central Government or company to fix limit with regard to remuneration”. The amending section 69 of the companies amendment act, 2017 removes the words “the Central Government or” appearing at two places in the section, which has been removed, but the heading remains the same. MCA forgot the heading, which is a goof up.

So now Central Government has no role to play in the remuneration matters of a company in India. So ideally this section i.e. section 200 should have been abolished altogether.

  • Amendment of section 201:

So now the result of all these amendments is that company has to go to central government only in one case in section 196 where the resolution for appointment of a managerial personnel above the age of 70 years has not been passed with special resolution, but the persons voting in favour is more than persons voting against the said resolution. Accordingly the amendments in section 201 reflect those changes.

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