COMPANIES ACT REFRESHER COURSE SERIES II

AT ICSI - SIRC

CHAPTER XIII
APPOINTMENT AND REMUNERATION OF MANAGERIAL
PERSONNEL
(SEC 196 TO SEC 205)
Agenda

Who are managerial personnel?

Appointment of Managerial Personnel

Remuneration of Managerial Personnel
Calculation of profit
Recovery of remuneration in certain cases

Company to fix limit of remuneration

Application to Central Govt.

Compensation for loss of office

Appointment of Key Managerial Personnel (KMP)

Secretarial Audit
Functions of Company Secretary
Who are managerial personnel?

MANAGER – SEC 2(53)

MANAGING DIRECTOR – SEC 2(54)_
“manager” means an individual who,
a director who, by virtue of the articles of a
subject to the superintendence, control and
company or an agreement with the company
direction of the Board of Directors, has the
or a resolution passed in its general meeting,
management of the whole, or substantially
or by its Board of Directors, is entrusted with
the whole, of the affairs of a company, and
substantial powers of management of the
includes a director or any other person
affairs of the company and includes a
occupying the position of a manager, by
director occupying the position of managing
whatever name called, whether under a
director, by whatever name called.
contract of service or not

REMUNERATION - SEC 2(78) OF

WHOLE-TIME DIRECTOR – SEC 2(94)
“whole-time director” includes a
director in the whole-time
employment of the company
COMPANIES ACT, 2013
“Remuneration means 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”
Appointment of Managerial Personnel – Sec 196

No company shall appoint a Managing Director and a Manager at the

same time

No company shall appoint or

No re-appointment shall be
re-appoint an MD/ WTD/
made earlier than one year
Manager for a term exceeding
before the expiry of term
5 years at a time
Appointment of Managerial Personnel – Sec 196

No Company shall appoint any person as

MD/WTD/Manager, who –

has at any time has at any time

is an
suspended payment been convicted by
is below the age undischarged
to his creditors or a court of an
of 21 years or has insolvent or has
makes, or has at offence and
attained the age at any time been
any time made, a sentenced for
of 70 years* adjudged as an
composition with a period of more
insolvent
them than six months

Votes cast in favour of the motion

Special resolution is
required for appointing a
person who has attained the
age of 70 years
exceed the votes, if any, cast
OR against the motion and the
Central Govt. approval is required
– effective 12.09.2018 (CA
Amendment 2017)
Appointment of Managerial Personnel – Sec 196

Recommendation by Nomination and Remuneration Committee (NRC), wherever

Step 1 applicable

Approval by Board of Directors (including terms and conditions of appointment and

Step 2 remuneration payable)

Approval by Shareholders at next general meeting (Special resolution required – for

Step 3 age of 70 years and more) – if not approved by shareholders, any act done by him
shall not be deemed invalid.

Step 4 Approval by Central Government in case such appointment does not fulfil the
conditions specified in in Part I of Schedule V and in such form as prescribed

Filing of Form with MCA – Form MR-1 within 60 days of appointment / DIR-12
Step 5 within 30 days of changes
Remuneration of Managerial Personnel – Sec 197

REMUNERATION PAYABLE BY COMPANIES HAVING PROFITS (SEC 197)

REMUNERATION TO
TOTAL MANAGERIAL MANAGERIAL PERSONAL
REMUNERATION  not exceeding 5% of net
payable by public co. shall profit – in case of one
not exceed 11% of net  not exceeding 10% of net
profits profit - in case of more
than one
REMUNERATION TO
DIRECTORS OTHER THAN
MD/WTD –
 1% of net profit if there is
a managerial personnel
 3% of net profit in other
cases

If exceeds 11% of net profit Special resolution

– shareholders approval is [effective 12.09.2018 (CA
required Amendment 2017)] in
(Central Govt. approval is general meeting is required
no more required – if exceeds the above
effective 12.09.2018 (CA threshold
Amendment 2017)
(Exclusive of sitting fees / fee for professional services payable to directors)
Remuneration of Managerial Personnel – Sec 197

For companies defaulted in payment of dues, prior approval of Banks, or secured creditors
shall be obtained before obtaining approval in general meeting.

If Company has no/inadequate profit – schedule V shall apply.

Schedule V cannot be overridden by any provision contained in company’s MOA, or in an

agreement or in any resolution

Remuneration to be determined by AOA or shareholder’s resolution.

Remuneration may be paid either by way of a monthly payment or at a specified percentage

of the net profits or partly by one way and partly by the other.

Premium paid on insurance taken for indemnifying any liability of Managerial Personnel /
KMP is not ‘remuneration’ unless he/she is proved to be guilty.
Remuneration of Managerial Personnel – Sec 197

SITTING FEE:
 Maximum Rs.1 lakh per meeting of Board or Committee
 Sitting fee of ID and Woman Director shall not be less than fee payable to other
directors

DISCLOSURE IN BOARD’S REPORT:

 Ratio of remuneration of each director to median remuneration of employees and
other details as specified under Rules.
 Statement on top 10 employees in terms of remuneration drawn and employees
who were in receipt of Rs. 102 lakhs through out the FY or Rs.8.50 lakhs per month.

REFUND OF EXCESS REMUNERATION:

 Director shall refund the excess remuneration drawn without approval, to the
Company within 2 years or lesser period as determined by Company.
 Company shall not waive the refundable amount unless approved by a special
resolution within 2 years. (Omitted the requirement of CG approval – effective
12.09.2018 (CA Amendment 2017)
Remuneration of Managerial Personnel – Sec 197

MD/ WTD who is

receiving any commission Penalty for default of Sec
from the company shall 197 - If any person makes
Auditors shall in his
not be disqualified from any default, he shall be
report, make a statement
receiving any liable to a penalty of Rs.1
on whether the payment
remuneration or lakh and where any
of remuneration is in
commission from holding default has been made
conformity with the
/ subsidiary of such by a company, the
provisions of the Act
company, provided the company shall be liable
same is disclosed in the to a penalty of Rs.5 lakhs.
Board’s report of Co.
Remuneration of Managerial Personnel – Sec 197

REMUNERATION PAYABLE BY COMPANIES HAVING NO PROFIT OR INADEQUATE PROFIT

(SECTION II OF SCHEDULE V)

Effective capital Remuneration limit (p.a.)

Negative or < 5 crs.
5 crs. & above but < 100 crs.
100 crs. & above but < 250
crs.
250 crs. & above
Remuneration in excess of
60 lakhs
above limit can be paid
84 lakhs with special resolution
upto three years (Omitted
120 lakhs “the above limits shall be
doubled....” – effective
120 lakhs plus 0.01% of the 12.09.2018 (CA
effective capital in excess of Amendment 2017)
Rs. 250 crs.

Remuneration as above may be paid [effective 12.09.2018 (CA Amendment 2017)] to

managerial person who is functioning in professional capacity, if –
 such person is not having any interest in capital of company/holding/subsidiary co. directly or
indirectly (holding up to 0.5% under ESOP is exempted) or related to directors/promoters of
company/holding/subsidiary co. during last 2 years before or on or after the date of appointment.
 possesses graduate level qualification with expertise and specialized knowledge in the field in
which the company operates
Remuneration of Managerial Personnel – Sec 197

For the purposes of Section II of this Part, “effective capital” means the aggregate of
the paid-up share capital (excluding share application money or advances against
shares); amount, if any, for the time being standing to the credit of share
premium 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 case of
investment by an investment company whose principal business is acquisition of
shares, stock, debentures or other securities), accumulated losses and preliminary
expenses not written off.

(a) Where the appointment of the managerial person is made in the year in which
company has been incorporated, the effective capital shall be calculated as on the
date of such appointment;

(b) In any other case the 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.
Remuneration of Managerial Personnel – Sec 197

SECTION III OF SCHEDULE V - CERTAIN SPECIAL CIRCUMSTANCES

The Co. is a sick Co. and

A resolution plan has
The Co. is a newly revival scheme has been
been approved for the
incorporated company ordered by BIFR – up to
Co. by NCLT under IBC,
– up to 7 years from 5 years from the date of
2016 - up to 5 years
the date of sanction of scheme
from the date of
incorporation approval

A Company may
the remuneration is paid
pay remuneration Remuneration has been
by foreign co. or any
to a managerial fixed by BIFR or NCLT
other Co. with their
person in excess subject to certain
shareholders approval
of the amounts conditions prescribed
and the same is within
provided in (given in next slide)
the total limit of that Co.
Section II , if -
Remuneration of Managerial Personnel – Sec 197

Remuneration has been fixed by BIFR or NCLT subject to the following conditions –

 The managerial person is not receiving remuneration from any other company.

 Certificate from auditor or CS/PCS (in absence of CS) that all secured creditors and
term lenders have given written NOC for appointment of managerial person / his
remuneration and such certificate to be filed with MR-1.

 Auditor or CS/PCS (in absence of CS) to certify that there is no default on payments
to any creditors and all dues to deposit holders are being settled on time.
Remuneration of Managerial Personnel – Sec 197

SECTION IV OF PART II OF SCHEDULE V

Following Perquisites shall not be included in managerial remuneration specified in
Section II and Section III of Schedule V –
Contribution to PF/superannuation fund
Gratuity
Leave encashment
For expatriate managerial person –
o Children’s education allowance
o Holiday passage for children studying outside India or family staying
abroad
o Leave travel concession

SECTION V OF PART II OF SCHEDULE V

Managerial person can draw remuneration from one or both companies – provided
the total remuneration does not exceed the higher maximum limit admissible from
any of the companies in which he is a managerial person.
Calculation of profits – Sec 198

Credit shall be Credit shall not be Not to be

To be Deducted
Given given Deducted
[Sec. 198(4)]
[Sec. 198(2)] [Sec. 198(3)] [Sec. 198(5)]

• Bounties and • Profits of capital • Normal business • Income tax,

subsidies nature. expenses voluntary
received from • Unrealised gains, including damages or
Govt. or any notional gains or remuneration to compensation,
public authority revaluation of directors, loss of capital
constituted by assets. employees, nature, change
Govt., unless interest on loan / in carrying
directed debentures, amount of asset
otherwise. bad/written off or liability.
debts etc.
Recovery of remuneration in certain cases – Sec 199

Where a Company is required to restate its financial statement due to

fraud or non-compliance under Act/Rules, the company shall recover
from past / present MD/ WTD/ CEO/ Manager (during that period)
the remuneration (including ESOP) paid in excess of what would have
been payable to him as per restatement of financial statements.
Company to fix limit of remuneration – Sec 200

Where the Company has inadequate or no profit, the Company shall have regard to the
following while fixing the remuneration –

 Financial position of the company

 remuneration or commission drawn by the individual concerned in any other
capacity;
 remuneration or commission drawn by him from any other company;
 professional qualifications and experience of the individual concerned;
 Financial/operation performance of the company during 3 preceding FY;
 relationship between remuneration and performance
 principle of proportionality of remuneration within the company
 Explanation for difference – if remuneration policy for directors differs from
remuneration policy for other employees;
 securities held by the director, including options and details of the shares pledged
as at the end of the preceding financial year.
Application to Central Govt. – Sec 201

Every application to Central Govt. shall be made in Form MR-2

Before making an application to Central Govt., Company shall issue a general notice to
the members indicating the nature of the application proposed to be made

Such notice shall be published in English and vernacular language (principal language in the
district where the registered office is situated)

Copies of notice and certificate by company about the publication of notice shall be
attached to the application

Every such application seeking approval shall be made to the Central Government within a
period of 90 days from the date of such appointment.
Central Govt. approval under this Chapter

Only in the following situations, Central Govt. approval is required -

Sec 196(3)(a) – For age of seventy years, simple resolution is passed by shareholders,
Central Govt approval is required.

Sec 196(4) – If the appointment is in variance to the conditions prescribed under Part I of
Schedule V – Central Govt. approval is required
Compensation for loss of office – Sec 202

Company may make payment to MD/WTD/Manager (not to any other director) by way of
compensation for loss of office, or as consideration for retirement from office or in
connection with such loss or retirement.

No payment shall be made for following cases –

 Director resigned for reconstruction / amalgamation of company and is appointed
as MD/WTD/Manager of the reconstructed/amalgamated company.
 Director resigns otherwise than of reconstruction / amalgamation ;
 Office is vacated under Sec 167(1);
 Company being wound up;
 Director has been guilty of fraud or breach of trust;
 Director has instigated or taken part in bringing the termination of his office

Any such payment shall not exceed the remuneration which he would have earned for
the remainder of his term or for three years, whichever is shorter, calculated on the
basis of avg. Remuneration earned during preceding 3 years from date of cessesion.
Appointment of key managerial personnel – Sec 203

KEY MANAGERIAL PERSONNEL – SEC 2(51):

 MD/CEO/Manager/WTD
 Company Secretary
 Chief Financial Officer
 Such other officer, not more than one level below the directors who is in whole-
time employment, designated as KMP by the Board; and
 Such other officer as may be prescribed;
– effective 12.02.2018 (CA Amendment 2017)
Appointment of key managerial personnel – Sec 203

For Sec 203, KMP

means –
 MD/ CEO/
Manager/WTD;
 CS;
 CFO
Class of Companies required to
appoint a whole-time KMP u/s 203

Companies other than

(B) (A) and (B), but having
(A) Public Company paid up share capital
having paid-up of Rs. 5 Crores or
Listed Company more shall have a
share capital of
Rs.10 crore or more whole time Company
Secretary
Appointment of key managerial personnel – Sec 203

Board shall appoint whole time KMP and approve terms and conditions / remuneration.

Chairperson and MD/CEO cannot be the same person unless its AOA provides otherwise or
Company does not carry on multiple businesses.

With effect from April 1, 2020 – Chairperson of top 500 listed companies shall be an NED
and not related to MD / CEO (term “relative” as defined under the Companies Act, 2013)
– SEBI (LODR) (Amendment) Regulations, 2018.
Appointment of key managerial personnel – Sec 203

A whole time KMP is allowed to be KMP of subsidiary company at the same time.

A KMP can be director of any company with the permission of Board.

Vacancy of whole time KMP shall be filled up by Board at its meeting within 6 months

In case of default, penalty for a Company – Rs.5 lakhs and Every director/KMP –
Rs.50,000/- and Rs.1000/- per day for continual default.
Secretarial audit – Sec 204

Following companies shall annex with its Board’s Report, a Secretarial

Audit Report in Form MR.3, given by a PCS

Public Company having Public Company

Listed Company paid-up share capital of having a turnover of
Rs.50 crs or more Rs.250 crore or more

BoD shall explain in Board’s Report any qualification / observation / remark made by
Secretarial Auditor in his report.

In case of default - the company, every officer of the company or the company secretary
in practice, who is in default, shall be punishable with fine which shall not be less than Rs.
1 lakh but which may extend to Rs. 5 lakh.
Secretarial audit – Sec 204

Based on the Kotak Committee recommendation, in addition to

annual secretarial audit report, SEBI has introduced an ANNUAL
SECRETARIAL COMPLIANCE REPORT to be issued by PCS to listed
companies as per the format prescribed by SEBI.

PCS are required to check the compliance of all applicable SEBI

Regulations and circulars/ guidelines issued there under.

Above report shall be submitted to stock exchanges within 60

days from the end of FY (effective FY ended March 2019) - SEBI
circular dated February 8, 2019
Secretarial audit – Sec 204

REGULATIONS TO BE COVERED UNDER SECRETARIAL AUDIT

Examination of books, papers, minute books, forms and returns filed and other records
maintained by the Company according to the provisions of –
(i) The Companies Act, 2013 (the Act) and the rules made there under;.
(ii) The Securities Contracts (Regulation) Act, 1956 (‘SCRA’) and the rules made there
under;
(iii) The Depositories Act, 1996 and the Regulations and Bye-laws Framed there under ;
(iv) Foreign Exchange Management Act, 1999 and the rules and regulations made
thereunder to extent of Foreign Direct Investment, Overseas Direct Investment and
External Commercial borrowings
Secretarial audit – Sec 204

The following Regulations and Guidelines prescribed under the SEBI Act, 1992:-
(a) SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011;
(b) SEBI (Prohibition of Insider Trading) Regulations, 2015;
(c) SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018;
(d) SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme)
Guidelines, 1999;
(e) SEBI (Issue and Listing of Debt Securities) Regulations, 2008;
(f) SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993 regarding the
Companies Act and dealing with client;
(g) SEBI (Delisting of Equity Shares) Regulations, 2009; and
(h) SEBI (Buyback of Securities) Regulations, 2018;

Compliance with the applicable clauses of the following:

(i) Secretarial Standards issued by ICSI
(ii) SEBI LODR
Functions of company secretary – Sec 205

COMPANY SECRETARY OR SECRETARY – SEC 2(24):

Company secretary or secretary means a company secretary as defined in Sec 2(1)(c)
of the Company Secretaries Act, 1980 who is appointed by a company to perform
the functions of a company secretary under this Act.

FUNCTIONS & DUTIES OF COMPANY SECRETARY:

 Report to Board about compliance with Companies Act, Rules, other applicable
laws.
 Ensure compliance with Secretarial Standards.
 Guidance to directors.
 Facilitate convening of meetings and maintaining minutes of meetings.
 Represent before various regulators / authorities.
 Assist / advise Board in ensuring / compliance with good corporate governance
practices.
 Such other duties as assigned by Board.
SEBI (LODR) (AMENDMENT) REGULATIONS, 2018

Regulation Amendment Applicability

17(6)(ca) Special resolution shall be obtained every year, if annual April 1, 2019
remuneration payable to a single Non-executive Director
(NED) exceeds 50% of the total annual remuneration payable
to all NEDs.

17(6)(e) Special resolution in general meeting is required for April 1, 2019

fees/compensation payable to Executive Director (ED) who are
from P&PG, if –

 Annual remuneration payable to such ED exceeds Rs.5 crs.

or 2.5% of the net profits, whichever is higher.

 For more than one ED, the aggregate annual remuneration

to such directors exceeds 5% of the net profits.
P. Sujatha
Sr. VP & Company Secretary
Cholamandalam Investment and
Finance Company Limited
Section 198 - Calculation of profits

(2) In making the computation aforesaid, credit shall be given for the bounties and subsidies received
from any Government, or any public authority constituted or authorised in this behalf, by any
Government, unless and except in so far as the Central Government otherwise directs.

(3) In making the computation aforesaid, credit shall not be given for the following sums, namely:—
(a) profits, by way of premium on shares unless the company is an investment company as referred to in
clause (a) of the Explanation to section 186
(b) profits on sales by the company of forfeited shares;
(c) profits of a capital nature including profits from the sale of the undertaking or any of the undertakings
of the company or of any part thereof;
(d) profits from the sale of any immovable property or fixed assets of a capital nature comprised in the
undertaking or any of the undertakings of the company, unless the business of the company consists,
whether wholly or partly, of buying and selling any such property or assets:
Provided that where the amount for which any fixed asset is sold exceeds the written-down value
thereof, credit shall be given for so much of the excess as is not higher than the difference between
the original cost of that fixed asset and its written down value;
(e) any change in carrying amount of an asset or of a liability recognised in equity reserves including
surplus in profit and loss account on measurement of the asset or the liability at fair value.
(f) any amount representing unrealised gains, notional gains or revaluation of assets.

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Section 198 - Calculation of profits

(4) In making the computation aforesaid, the following sums shall be deducted, namely:—
(a) all the usual working charges;
(b) directors’ remuneration ;
(c) bonus or commission paid or payable to any member of the company’s staff, or to any engineer, technician or person
employed or engaged by the company, whether on a whole-time or on a part-time basis;
(d) any tax notified by the Central Government as being in the nature of a tax on excess or abnormal profits;
(e) any tax on business profits imposed for special reasons or in special circumstances and notified by the Central
Government in this behalf;
(f) interest on debenture issued by the company;
(g) interest on mortgages executed by the company and on loans and advances secured by a charge on its fixed or
floating assets;
(h) interest on unsecured loans and advances;
(i) expenses on repairs, whether to immovable or to movable property, provided the repairs are not of a capital nature;
(j) outgoings inclusive of contributions made under section 181;
(k) depreciation to the extent specified in section 123;
(l) the excess of expenditure over income, which had arisen in computing the net profits in accordance with this section
in any year which begins at or after the commencement of this Act, in so far as such excess has not been deducted
in any subsequent year preceding the year in respect of which the net profits have to be ascertained;
(m) any compensation or damages to be paid in virtue of any legal liability including a liability arising from a breach of
contract;
(n) any sum paid by way of insurance against the risk of meeting any liability such as is referred to in clause (m);
(o) debts considered bad and written off or adjusted during the year of account.

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Section 198 - Calculation of profits

(5) In making the computation aforesaid, the following sums shall not be
deducted, namely:—
(a) income-tax and super-tax payable by the company under the Income-
tax Act, 1961, or any other tax on the income of the company not falling
under clauses (d) and (e) of sub-section (4);
(b) any compensation, damages or payments made voluntarily, that is to
say, otherwise than in virtue of a liability such as is referred to in clause (m)
of sub-section (4);
(c) loss of a capital nature including loss on sale of the undertaking or any of the
undertakings of the company or of any part thereof not including any excess
of the written-down value of any asset which is sold, discarded, demolished
or destroyed over its sale proceeds or its scrap value;
(d) any change in carrying amount of an asset or of a liability recognised
in equity reserves including surplus in profit and loss account on
measurement of the asset or the liability at fair value.

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Part I of Schedule V

No person shall be eligible for appointment as a managing or whole-time director or

a manager (hereinafter referred to as managerial person) of a company unless he
satisfies the following conditions, namely:—
(a) he had not been sentenced to imprisonment for any period, or to a fine exceeding
one thousand rupees, for the conviction of an offence under any of the following
Acts, namely —
(i) the Indian Stamp Act, 1899 (2 of 1899);
(ii) the Central Excise Act, 1944 (1 of 1944);
(iii) the Industries (Development and Regulation) Act, 1951 (65 of 1951);
(iv) the Prevention of Food Adulteration Act, 1954 (37 of 1954);
(v) the Essential Commodities Act, 1955 (10 of 1955);
(vi) the Companies Act, 2013 the Companies Act, 2013 (18 of 2013) or any previous
company law;
(vii) the Securities Contracts (Regulation) Act, 1956 (42 of 1956);
(viii) the Wealth-tax Act, 1957 (27 of 1957);
(ix) the Income-tax Act, 1961 (43 of 1961);
(x) the Customs Act, 1962 (52 of 1962);

36
Part I of Schedule V

(xi) the Competition Act, 2002 (12 of 2003);

(xii) the Foreign Exchange Management Act, 1999 (42 of 1999);
(xiii) the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986);
(xiv) the Securities and Exchange Board of India Act, 1992 (15 of 1992);
(xv) the Foreign Trade (Development and Regulation) Act, 1922 (22 of 1922);
(xvi) the Prevention of Money-Laundering Act, 2002 (15 of 2003);
(xvii) the Insolvency and Bankruptcy Code, 201.6 (31 of 2016)
(xviii) the Goods and Services Tax Act,20t7 (12 of 2017)
(xix) the Fugitive Economic Offenders Act, 2018 (17 of2018)
(b) he had not been detained for any period under the Conservation of
Foreign Exchange and Prevention of Smuggling Activities Act, 1974 (52 of 1974):
Provided that where the Central Government has given its approval to the
appointment of a person convicted or detained under sub-paragraph (a) or sub-
paragraph (b), as the case may be, no further approval of the Central Government
shall be necessary for the subsequent appointment of that person if he had not
been so convicted or detained subsequent to such approval.

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