Managerial Remuneration and its Limits

Managerial Remuneration and its Limits

Managerial remuneration is the compensation paid to the managers or directors of a public company for their services rendered to the organization. It is an important aspect of corporate governance, as it ensures that the top executives are fairly compensated for their efforts and helps attract and retain talent. In India, the Companies Act, of 2013, prescribes the limits for managerial remuneration, which we will discuss in this article.

The formula for calculating Managerial Remuneration:

The formula for calculating managerial remuneration is as follows:

Managerial Remuneration = Salary + Perquisites + Bonus + Commission

Here, salary refers to the fixed component of the compensation package, perquisites are the non-cash benefits such as housing, car, medical expenses, etc., the bonus is the variable component paid based on performance, and commission is the percentage of profits or turnover earned by the company.

Statutory provisions and Limits for Managerial Remuneration under the Companies Act 2013.

As per Section 197 of the Companies Act 2013, there are statutory provisions related to the payment of managerial remuneration by public companies.

The total remuneration paid by the company to its directors, including managing directors, whole-time directors, and managers, should not exceed 11% of the net profit of the company for the financial year. However, the remuneration payable to one managing director, whole-time director, or manager should not exceed 5% of the net profit of the company. If there are multiple such directors, then the remuneration should not exceed 10% of the net profit to all such directors taken together.

In cases where there is a managing director, whole-time director, or manager, the remuneration payable to directors who are neither the managing director nor whole-time directors or managers, should not exceed 1% of the net profit. However,iIf there is no managing director, whole-time director, or manager, then the remuneration should not exceed 3% of the net profit.

The company may authorize the payment of managerial remuneration in excess of the limit specified under the Act after passing a special resolution in a general meeting. However, if the company has defaulted in payment of dues to any bank, public financial institution, non-convertible debenture holders, or any other secured creditor, it must obtain the prior approval of such entities before obtaining approval in the general meeting.

Certain items are excluded from the calculation of managerial remuneration. For example, the sitting fee provided to the directors for attending meetings and any insurance taken in the name of the managing director, whole-time director, or manager for indemnifying them against any liability in respect of any negligence, default, misfeasance, breach of duty, or breach of trust for which they have been guilty about the company. The premium paid on such insurance shall not be treated as part of remuneration. However, if such a person is proven to be guilty, the premium paid on such insurance shall be treated as part of remuneration.

How to Calculate Net Profit for Managerial Remuneration

Profit before tax as per P&L Statement: xxx

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

  1. Managerial remuneration
  2. Provision for bad doubtful debts
  3. Loss on sale/disposal/discarding of assets
  4. Loss on sale of investments
  5. Provision for diminution in the value of investments
  6. Fixed assets are written off
  7. Fall in the value of foreign currency monetary assets
  8. Loss on cancellation of foreign exchange contracts
  9. Write off of investments
  10. Provision for contingencies and unascertained liabilities
  11. The lease premium is written off
  12. Provision for warranty spares/supplies
  13. Infructuous project expenses are written off
  14. Provision for anticipated loss in case of contracts
  15. Loss on sale of undertaking
  16. Provision for wealth tax
  17. Compensation paid under VRS

Less the following if credited to the P&L statement for arriving at a profit before tax:

  1. Capital profit on sale/disposal of fixed assets (added if applicable)
  2. Profit on sale of any undertaking or its part
  3. Profit on buyback of shares
  4. Profit/discount on redemption of shares or debentures
  5. Profit on sale of investments
  6. The compensation received on non-compete agreements
  7. Write back of provision for doubtful debts
  8. Write back of provision for doubtful advances
  9. Appreciation in value of any investments
  10. The compensation received on surrender of tenancy rights
  11. Profit on sale of undertaking
  12. Write back of provision for diminution in the value of investments
  13. Profit on sale of forfeited shares & shares of subsidiary/associated companies

After calculating the profit as said above, the limits specified in the act in respect of managerial remuneration can be applied to know the maximum allowable remuneration. If the actual remuneration is more than the maximum allowable remuneration then approval of shareholders is required to be taken in the General meeting of the company

Conditions for Payment of Managerial Remuneration in Case of Loss or Inadequacy of Profits

Managerial remuneration can be paid by a company to its managing director, whole-time director, manager or any other non-executive director in case of loss or inadequacy of profits, subject to the conditions specified in Schedule V of the Companies Act 2013. The maximum remuneration payable in such situations is up to the limit provided in Schedule V. The company must comply with the following conditions for payment of managerial remuneration:

  1. In the board meeting, a resolution should be approved.
  2. The business should not have neglected to pay its obligations to any banks, public financial institutions, holders of non-convertible debentures, or other secured creditors. Before seeking approval at the general meeting in the event of a default, the company must first obtain the consent of the relevant bank, public financial institution, holders of non-convertible debentures, or other secured creditors.
  3. The general meeting should pass either an ordinary resolution or a special resolution (if the limit is exceeded).

Form for Reporting Appointment and Remuneration payable:

The Companies Act, of 2013, requires companies to disclose the details of the managerial remuneration paid to their directors and key managerial personnel (KMP) in the annual report. To facilitate this disclosure, the Ministry of Corporate Affairs (MCA) has prescribed a form, Form MR1, which companies need to file with the Registrar of Companies (RoC). In this article, we will discuss the details and benefits of Form MR-1.

  1. Name of the director/KMP
  2. Designation
  3. Nature of employment (whether full-time or part-time)
  4. Remuneration (salary, perquisites, bonus, commission, etc.)
  5. Details of stock options, if any.
  6. Contribution to provident fund, superannuation fund, etc.    
  7. Other benefits such as housing, car, medical expenses, etc.          
  8. Details of remuneration paid to directors who are not KMPs.
  9. The ratio of remuneration of the highest-paid director/KMP to the median employee.

Relevance to Managerial Remuneration:

The provisions of Sections 197 and 198 are directly relevant to the payment of managerial remuneration. Companies need to comply with the overall maximum limit of 11% of net profits and other provisions while paying remuneration to their directors and KMPs. The approval of the shareholders is required for payment of remuneration above the maximum limit.

Moreover, the calculation of net profits as per Section 198 is important to determine the maximum limit of managerial remuneration. The deductions allowed under this section need to be considered while calculating the net profits of the company.

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