Managerial Remuneration In Case Of Public Company

Managerial Remuneration in case of Public Limited companies (Both Listed companies and unlisted companies)

In the forgoing presentation, an effort is made to describe the method of calculating managerial remuneration.

        The matter relating to limit and method of calculating managerial remuneration is covered u/s 197 and 198 of companies act 2013 read with schedule V to the companies act, 2013. For the purpose of quantifying managerial remuneration, public companies are classified into two categories:

1. Companies having sufficient profit
2. Company having no profit or inadequate profit 

 

1. Companies having sufficient profit:

The provision of section 197 limits managerial Remuneration to 11% of net profit. This limit of remuneration applies to remuneration to all directors together including whole time director managerial director, executive director and so on.

 

i. Calculation of Net profits to be considered for the purpose of section 197

The amount and method of calculating net profit have been detailed in section 198. Section 198 provides that credit of following items are not to be given in income for the purpose of section 197:

     a. Premium on shares and debenture,

     b. Profit on sale of forfeited shares by the company,

     c. Profit of capital nature,

     d. capital gains,

     e. Revaluation surplus

     f. Notional income etc.

 

Similarly following expenses are not to be considered for section 197:

     a. All types of income tax payment

     b. Specified voluntary compensation

     c. Revaluation losses

     d. Capital losses etc.

 

Companies having adequate profit are also given liberty of paying remuneration exceeding 11%, provided that same is authorised by Special Resolution (which was earlier subject to permission of central government and has been amended vide Companies Amendment Act 2017).

 

Also one has to consider following sub limits while considering overall limit of 11% or more if no special resolution has been passed at the general meeting of the company (except Nidhi Companies):

Situation	Conditions
If remuneration is payable to one managing director / whole time director / manager	Company shall not pay remuneration exceeding 5% of net profits of the company.
If remuneration is payable to more than one managing director / whole time director / manager:	Company shall not pay remuneration exceeding 10% of net profits of the company (to be considered as total remuneration payable to all directors).
If remuneration is payable to a director who is neither managing director nor whole time director:	Company shall not pay remuneration exceeding 1% of net profits of the company, where the company has a Managing Director or Whole time director or Manager
	Company shall not pay remuneration exceeding 3% of net profits of the company, in any other case

 

 

2. Company having no profit or inadequate profit

Where company has no profit or inadequate profit, the quantum of managerial Remuneration depends on the amount of effective capital. If the following limits are adhered to, no permission for Central Government is necessary.

Where in the effective capital is as below:	Amount of (total) remuneration payable shall not exceed or go beyond (Rs)
Negative or less than Rs.5 Crore	Rs. 60,00,000/-
Rs.5 Crore and above but less than Rs. 100 Crore	Rs. 84,00,000/-
Rs.100 Crore and above but less than Rs.250 Crore	Rs. 1,20,00,000/-
Rs.250 Crore and beyond that	Rs.1,20,00,000 plus 0.01% of the effective capital in excess of Rs. 250 Crore

 

(Above limits shall be doubled if the resolution passed by the shareholders is a special resolution)

 

For the purpose of above calculation, EFFECTIVE CAPITAL has to be construed as aggregate of:

• Paid-up share capital
• Amount standing credit to the share premium account
• Reserves and surplus
• Long-term loans and advances repayable after one year

As reduced by:

• Accumulated losses
• Preliminary expenses not written off

 

-Yanshika Agrawal

(e) incometax@sdmca.in