52 remuneration of managerial personnel

8/13/2019 52 Remuneration of Managerial Personnel

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HANDOUT_REMUNERATION OF MANAGERIALPERSONNELFor CA/CS Final Students

This handout deal with certain provisions related toManagerial Remunertion like Meaning of Managerialpersonnel and their remuneration along with totalceiling of managerial remuneration and various otherconnected details.

Ankur Garg9/25/2009


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Remunera!"n " Manager!a#

Per$"nne#This handout deal with certain provisions related to ManagerialRemuneration like Meaning of Managerial personnel and theirremuneration along with total ceiling of managerial remunerationand various other connected details.

O%er &eaure$ "& %!$ %an'"u are(

1. Remuneration for professional services rendered ! a director

". Mode of pa!ment of remuneration

#. $rovisions of Sitting Fees

%. &eneral permission granted ! the R'( to pa! sitting fees to non)resident non)whole)time directors

*. Remuneration pa!ale to managerial personnel ! compan!having no profits or inade+uate profits

,. Meaning of -no profit- or -inade+uate profit-

. Meaning of the effective capital

0. Amount of maimum remuneration pa!ale to a managerialperson

2. Remuneration Committee

13. Maimum remuneration pa!ale to managerial person in case he isa managerial personnel in two companies

11. $a!ment of remuneration to managerial person with the

approval of the Central &overnment

1". $a!ment of guarantee commission to the managing or whole)time director is remuneration which re+uires approval of theCentral &overnment

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1#. Amendment of provisions relating to the managing4 whole)time director or non)rotational directors re+uire approval ofthe Central &overnment

1%. $rovisions related to 5on)eecutive directors

Manager!a# )er$"nne#

The term Managerial $erson under the Act means a managingdirector4 whole)time director or manager. A compan! ma! either havea managing director or manager and in an! of the case ma! also havewhole)time director. $art ( of Schedule 6((( to the Companies Act4 12*,also states that the managerial person means a managing director orwhole)time director or a manager.

Mean!ng "& remunera!"n

The remuneration includes pa!4 compensation4 or reward for work4 etc.The word remuneration is defined in the eplanation appended tosection 120 of the Companies Act. Accordingl!4 for the purposes ofsections 1204 #324 #13 and #114 remuneration shall include thefollowing78

9a: an! ependiture incurred ! the compan! in providing an! rent freeaccommodation4 or an! other enefit or amenit! in respect ofaccommodation4 free of charge4 to an! of the compan!-s directorsand manager;

9b: an! ependiture incurred ! the compan! in providing an! otherenefit or amenit! free of charge or at a concessional rate to an! ofthe compan!-s directors and manager;

9c: an! ependiture incurred ! the compan! in respect of an!oligation or service4 which4 ut for such ependiture ! thecompan!4 would have een incurred ! an! of the compan!-sdirectors and manager; and

9d: an! ependiture incurred ! the compan! to effect an! insuranceon the life of4 or to provide an! pension4 annuit! or gratuit! for4 an!of the compan!-s directors and manager or his spouse or child.


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disallowed as such. =Sayaji Iron & Engineering Co. v CIT 9"33":Comp Cas ,* 9&u>:?.

T"a# *e!#!ng "& manager!a# remunera!"n

Section 12091: relates to overall maimum managerial remunerationand managerial remuneration in case of asence or inade+uac! ofprofits. The total managerial remuneration pa!ale ! a puliccompan! or a private compan! which is a susidiar! of a puliccompan!4 to its directors and its manager in respect of an! financial!ear shall not eceed 11@ of the net profits of the compan! for thatfinancial !ear. Such net profits shall e computed in a manner laiddown under sections #%2 and #*34 ecept that the remuneration of thedirectors shall not e deducted from the gross profits.

Remuneration is pa!ale to all the directors including managing andwhole)time directors and in an! capacit!. Therefore4 it includes the

remuneration for services rendered ! him in an! other capacit! otherthan that of a director.

Remunera!"n &"r )r"&e$$!"na# $er+!*e$ ren'ere' ,- a'!re*"r$roviso of section #3291: ecludes an! remuneration for professionalservices rendered ! a director4 provided that the director possessesre+uisite professional +ualification for practicing the profession inrespect of which the! render special services. (t is immaterial4 whetherthe professional fees4 which are paid to him is on a monthl! asis or on

a case to case asis. =Stup Consultants Ltd. v Union of India?.

.%e%er remunera!"n " 'e)u- manag!ng '!re*"r/"rk$manager/$a#e$ manager "u$!'e %e )r"+!$!"n$ "& $e*!"n9134

The Act does not recognise a eput! Managing irector. Thedesignation would e misleading if the incument is not a director.Bowever4 if the person concerned is in fact not a director and is notoccup!ing the position of a managing director4 manager or holdingother managerial office4 his remuneration would e outside the scope

of section 120.Appointment of a director as a whole)time sales manager or worksmanager would attract the provisions of section ",2 as from the dateof his appointment since4 as a director4 he will e in the position of awhole)time director. The provisions of sections #32 and 120 would alsoe attracted.

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.%e%er remunera!"n " Te*%n!*a# '!re*"r$ "r '!re*"r$'e$!gnae' a$ e*%n!*a# "u$!'e %e )ur+!e "& $e*!"n 9134

Though the directors are designated as technical advisors- or as-technical directors- the functions entrusted to them are not of a purel!advisor! or technical nature and in fact considerale administrative

and eecutive powers4 involving the eercise of managerial decisionhave een entrusted to them4 and conse+uentl! the remuneration paidto them is held to fall within the scope of section 12091: of the Act.

(t is hardl! necessar! to stress the point that the formal designationgiven to a director is in no wa! significant4 so far as the +uestion ofapplicailit! of the provisions of the Act is concerned. The importantpoint is whether the nature of the duties and powers delegated to adirector would4 in fact4 place him in the position of a managing directoror a director in the whole)time emplo!ment of a compan!.

.%e%er remunera!"n " '!re*"r "rk!ng a$ e*%n!*a# a'+!$er,e !n*#u'e' !n manager!a# remunera!"n4

(f a director of the compan! is working as a technical adviser to thecompan! and is paid remuneration ! wa! of monthl! salar!4 his salar!will e included in the 11@ limit of managerial remuneration.

M"'e "& )a-men "& remunera!"n

ithin the limits of the maimum remuneration specified in section12091:4 a compan! ma! pa! a monthl! remuneration to its managingor whole)time director in accordance with the provisions of section #32

or to its manager in accordance with the provisions of section #0.$a!ment of monthl! remuneration to an ordinar! or a sitting director is

governed ! the provisions of section #32.

SITTING FEESA director who is not a managing or whole)time director ma! e paidsitting fees for attending meetings of the 'oard or of the committee ofdirectors.

S!!ng &ee$ )a!' &"r aen'!ng mee!ng are e6*#u'e' &r"m"+era## manager!a# remunera!"n *e!#!ng

The limit of 11@ of the net profits on overall maimum managerial

remuneration $%a## ,e e6*#u$!+e "& an- $!!ng &ee$pa!aleto directors for attending each meeting of the 'oard or committee.

A))r"+a# "& %e 7enra# G"+ernmen !$ n" re8u!re' &"r!n*rea$e !n $!!ng &ee !%!n %e )re$*r!,e' #!m!

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5o approval of the Central &overnment under section 120 will enecessar! for an increase in the amount of sitting fee so long as suchincrease is within the limits prescried ! the &overnment.

'! N"!&!*a!"n N" GSR 510E3: 'ae' 2;


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een otained ! the compan! under section #329%: or section #13 ofthe Companies Act4 12*,4 wherever it applies.

Bowever4 &overnment of (ndia-s approval should have een otained! the compan! under the Companies Act4 12*,4 for the appointmentof the director4 wherever applicale.

REMUNERATION PA@A?LE TO MANAGERIAL PERSONNEL ?@7OMPAN@ HAING PROFITS

As per provisions of Section ( of $art (( of Schedule 6((( to theCompanies Act4 12*,4 su>ect to the provisions of sections 120 and#324 a compan! ma! pa! an! remuneration4 ! wa! of salar!4dearness allowance4 per+uisites4 commission and other allowances4which shall not eceed *@ of its net profits for one such managerialperson4 and if there is more than one such managerial person4 13@ forall of them together. Section #329#: provides that managerial

personnel ma! e paid remuneration either ! wa! of a monthl!pa!ment or at specified percentage of the net profits of the compan!or partl! ! one wa! and partl! ! the other. (n case if remunerationeceeds *@ or 13@ as the case ma! e4 it cannot e paid without theapproval of the Central &overnment.

Re8u!remen &"r a))r"+a# "& mem,er$ !n %e genera# mee!ngan' &!#!ng "& e


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from the gross profit4 is less than the overall managerial remunerationpa!ale under the provisions of section 120 read with the provisions ofsection #32 of the Act4 shall e considered as -no profit- or -inade+uateprofit-.

(t means that the remuneration pa!ale to the managerial person is

more than *@ of the net profit in case of one managerial person ormore than 13@ of the net profit in case of more than one managerialperson.

7"m)ua!"n "& )r"&! un'er $e*!"n >;9

Computation of net profits under section #%2 has to e ased on thenet profits shown in the profit and loss account of a compan! preparedin accordance with the normal accounting principles and applicaleaccounting standards. Certain additions and deletions contained insection #%2 are to e made.

Saemen$ "& *"m)ua!"n "& )r"&! &"r %e )ur)"$e "&manager!a# remunera!"n *"+er!ng +ar!"u$ !em$ "& a''!!"n$an' 'e#e!"n$ ,a$e' "n %e ana#-$!$ "& $e*!"n >;9 !$ )#a*e',e#"(Managerial Remuneration8 Salaries8 Allowances8 Compan!-s contriution to $F E other funds8 'enefits8 $ersonal accident insurance premium

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$rovision for loss of susidiar! companiesease $remiums written off$rovision for warrant! spares/supplies(nfructious pro>ect epenses written off$rovisions for redundanc! in stores4 spares and finished goods

$rovision for anticipated loss in case of contractsoss on sale of undertaking$rovision for wealth taHoluntar! compensation paid under HRS

Less the folloing if credited to the profit & loss account for arriving atprofit before ta!Capital profit on sale/disposal of fied assetsCapital profit on sale of immovale assets 9if the compan! is engagedin usiness of wholl! or partl! u!ing and selling of an! suchimmovale propert!4 it shall not e deducted:$rofit on sale of undertaking/an! part thereof

$rofit on u!)ack of shares$rofit/discount on redemption of shares or deentures$rofit on sale of investmentsCompensation received on 5on compete Agreementsrite ack of provision for doutful detsrite ack of provision for doutful advancesAppreciation in the value of investmentsCompensation received on surrender of tenanc! rights$rofit on sale of undertakingConsideration received on assignment of operating licencesrite ack of provision for contingencies

rite off ad dets against the provision created earlierrite ack of provision for diminution in the value of investments


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determining eligiilit! of remuneration4 shall e calculated as on thelast date of the financial !ear preceding the financial !ear in which theappointment is made.

For ascertaining the effective capital of a compan! for arriving at themaimum permissile remuneration4 the following shall e considered

and added781. $aid)up share capital 9ecluding share application mone! and

advances against shares:;

". Share premium account;

#. Reserves and surplus 9ecluding revaluation reserve:; and

%. ong)term loans and deposits repa!ale after one !ear utecluding working capital loans4 overdrafts4 interest due on loansunless funded4 ank guarantee and short)term arrangements.

The following amount shall e deducted78

1. (nvestments 9ecept in the case of investment compan!:;". Accumulated losses;

#. $reliminar! epenses not written off.

The net figure will e considered as the effective capital of a compan!.here the appointment of the managerial person is made in the !earin which the compan! has een incorporated4 the effective capital shalle calculated on the date of such appointment on the aovesaid asis.

REMUNERATION 7OMMITTEE

Re8u!remen &"r a))"!nmen "& a Remunera!"n 7"mm!ee "&

%e ?"ar'Schedule 6((( of the Companies Act4 12*, as amended ! N"!&!*a!"nN" GSR >E3: 'ae' % anuar-: 2002provides that pa!ment ofremuneration of a managerial person shall e approved ! a resolutionpassed ! the Remuneration Committee. Therefore4 it shall ecompulsor! for a pulic compan! or a private compan!4 which is asusidiar! of a pulic compan! to constitute and appoint aremuneration committee of the directors.

E!planation I" of Schedule 6(((4 inserted ! 5otification 5o. &SR #,9


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re+uired to otain approval of the Central &overnment for that purposein terms of the provisions of section ",2 of the Act.

7"m)an- $%"u#' %a+e a #ea$ %ree n"norit! or he has attained the age of 3 !ears;

9b: where in an! financial !ear during the currenc! of tenure of themanagerial person a compan! has no profits or its profits are

inade+uate4 and the proposed remuneration to managerial person! wa! of salar!4 dearness allowance4 per+uisites and otherallowances not eceeding the limit of Rs. %04334333 per annum orRs. %4334333 per month calculated on the scale as given in5otification 5o. &SR #,9


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(n terms of the amendments made ! in Schedule 6((( of theCompanies Act4 12*, vide 5otification 5o. &SR #,9ect to the provisions of Sections ( and ((.

As per $ress 5ote 5o. "/2,4 dated 1,)2)122, issued ! the epartmentof Compan! Affairs vide F. 5o. 1/10/2,)C H inter alia provides that aperson who is a managerial person in more than one compan! shall eale to draw remuneration from one or oth the companies.

For making pa!ment to a managerial person from two companies4 thefollowing steps are to e taken78

9i: ascertain that which of the following two sections is applicale tooth the companies of which one common individual is a

managerial person;Se*!"n I8 Remuneration pa!ale ! companies having profits.

Se*!"n II8 Remuneration pa!ale ! companies having no profits orinade+uate profits.

9ii: working out of maimum remuneration which can e paid to themanagerial person ! each compan! separatel!4 the higher of aove

two maimum limits will e the ceiling on total maimum remunerationwhich can e paid to such managerial person ! oth companies taken

together.

PA@MENT OF REMUNERATION TO MANAGERIAL PERSON .ITHTHE APPROAL OF THE 7ENTRAL GOERNMENT

Re8u!remen "& a))r"+a# "& %e 7enra# G"+ernmen &"r)a-men "& remunera!"n " manager!a# )er$"n

A compan! which has no profits or has inade+uate profits shall not pa!to its directors4 including an! managing or whole)time director or

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manager4 ! wa! of remuneration an! sum eclusive of an! feespa!ale to directors under section #329":4 ecept with the previousapproval of the Central &overnment. =Section 1209%:?

Bowever4 approval of the Central &overnment shall not e re+uired for

pa!ment of remuneration to its managerial person if the appointmenthas een made in accordance with the provisions of section ",2 readwith Schedule 6((( to the Act. =Section 1209%:?

7"m)u#$"r- re8u!remen "& a))r"+a# "& %e 7enra#G"+ernmen &"r a))"!nmen "& manager!a# )er$"nne#

(f the appointment and remuneration of a managerial person has noteen made in accordance with the provisions of Schedule 6(((4 it shalle got approved ! the Central &overnment. (n order to otainapproval of the Central &overnment4 application shall e made in theprescried Form "*A within a period of ninet! da!s from the date of

appointment.

Approval of the Central &overnment for pa!ment of remuneration shalle necessar! onl! if remuneration eceeds *@ of the net profits forone such director4 and if there is more than one such director4 13@ forall of them put together. This aforesaid limit is applicale in the case ofa compan! having profits.

7"m)u#$"r- re8u!remen &"r )r!"r a))r"+a# &"r )a-men "&remunera!"n e6*ee'!ng %e *e!#!ng #!m! "& R$ ;1:00:000 )a"r R$ ;:00:000 )m

(n the case of a compan! having negative or Jero effective capital andproposes to pa! managerial remuneration to a person in ecess of Rs.%04334333 p.a. or Rs. %4334333 p.m. calculated on the scale in terms ofthe amendments made in Schedule 6((( of the Companies Act4 12*,vide 5otification 5o. &SR #,9ect to theprior approval of the Central &overnment.

In*rea$e !n remunera!"n an' re8u!remen &"r a))r"+a# "& %e7enra# G"+ernmen

Section #13 stipulates that in case of a pulic compan!4 or a privatecompan! which is a susidiar! of a pulic compan!4 an! provisionrelating to increase in the remuneration of an! director including amanaging or whole)time director4 or an! amendment thereof4 whichpurports to increase or has the effect of increasing4 whether directl! orindirectl! the amount thereof shall not have an! effect8

9a: in cases where Schedule 6((( is applicale4 unless such increase is inaccordance with the conditions specified in that Schedule; and

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9b: in an! other case4 unless it is approved ! the Central &overnment;and the amendment shall ecome void if4 and in so far as4 it isdisapproved ! that &overnment.

The provision relating to the remuneration ma! e contained in the

compan!-s Memorandum or Articles4 or in an! agreement entered into! it4 or in an! resolution passed ! the compan! in general meetingor ! its 'oard of directors.

Following are the other important provisions in this regard78

91: Approval of the Central &overnment shall e otained where theprovision for increase in remuneration is not in accordance with theprovisions of Schedule 6((( to the Act. (n order to otain approval ofthe Central &overnment4 application shall e made in theprescried e)Form "*A. 9$reviousl! it was re+uired to sumit in theForm ",4 which has een merged with an e)Form "*A vide5otification 5o. &SR *,9


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5on)eecutive directors are those on the 'oard of a compan! who areother than a managing or whole)time director. These non)eecutivedirectors normall! receive onl! sitting fees for ever! meeting of the'oard and Committee attended ! them.

Therefore4 a director who is neither in the whole)time emplo!ment of

the compan! nor a managing director is called an ordinar! director ornon)eecutive director.

7e!#!ng "n remunera!"n "& "r'!nar- "r n"n


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'esides the approval of the Central &overnment4 no pa!ment to non)eecutive directors without the prior approval of the compan! ingeneral meeting accorded ! a special resolution in terms of section#329%: can e made.

S)e*!a# re$"#u!"n $%a## ,e +a#!' &"r a )er!"' "& &!+e -ear$The approval of memers ! wa! of special resolution will e valid at atime for a period of five !ears. The said approval shall e prior to thepa!ment of the commission.

Renea# "& $)e*!a# re$"#u!"n

The special resolution passed under section #139%:9b: is valid for a

period of * !ears at a time4 it ma! e renewed for a further period offive !ears at a time and an! renewal must e done not earlier than one!ear from the date on which it is to come into force.

Ar!*#e$ mu$ )r"+!'e &"r remunera!"n " n"n


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&overnment under section #13 and also approval of memers !special resolution.

A))#!*a!"n " %e 7enra# G"+ernmenThe application for pa!ment of remuneration to non)eecutive

directors shall e made in e)Form "*A. 9$reviousl! in the Form ",4which has een merged in the e)Form "*A ! the 5otification 5o. &SR*,9


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E6*e$$ remunera!"n: !& an-: )a!' " '!re*"r$

(f an! director draws remuneration in ecess of the limits provided insection #32 or without the approval of the Central &overnment4 wherere+uired4 he shall refund such ecess to the compan! unless on an

application made ! the compan!4 the &overnment waives therecover! for good and sufficient reasons. The application ma! e madein the form of a letter after it is approved ! the 'oard. Such waiver ofecess remuneration also re+uires the approval of memers.

Pa-men "& ra+e#!ng: ,"ar'!ng an' #"'g!ng e6)en$e$

The Articles shall contain a provision for pa!ment of traveling4oarding and lodging epenses to directors in connection with theusiness of a compan!. (n this contet the clarification vide Circular5o. */*4 dated 1)")12* given ! the CA have een reproduced as

under7

hether the condition restricting traveling and dail! allowances4which ma! e paid to the directors of the compan! for performing>ourne!s on the usiness of the compan! to the limits laid down in rule, of the (ncome)ta Rules4 12," should e imposed4 has eenconsidered in consultation with the Compan! aw Advisor! Committee.Baving regard to the various practical difficulties faced ! thecompanies in compl!ing with the aforesaid condition4 the Central&overnment have decided that no such condition could e imposed.The companies ma!4 however4 e advised to ensure that the pa!mentwill e on the asis of actual ependiture and ependiture kept to theminimum.

Pa-men "& guaranee *"mm!$$!"n " '!re*"r$ !$ n"remunera!"n

The epartment had issued earlier Circular 5o. 1%/*3)C.H4 dated 1,)1")12,2 according to which guarantee commission pa!ale to thedirectors for personal guarantee on loans to the compan! was to etreated as remuneration under section #3291: of the Companies Act412*,. (n Sussen Te!tile #earings Ltd. v Union of India reported in

9120%: ** Comp Cas %2"4 it was held ! elhi Bigh Court thatguarantee Commission paid ! a compan! to its director for standingsuret! for loans and credit facilities taken ! the compan! was not aremuneration within the meaning of section #32 of the Companies Act412*, and approval of the Central &overnment was not necessar!.=Circular 5o. #/2% 9F. 5o. 1%/#/0)C.H:4 dated 1,)")122%?


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52 remuneration of managerial personnel

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