Appointment and Remuneration of Managerial Personnel PDF

a CHAPTER 2 v v a v v APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL...

a CHAPTER 2 v v a v v APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL LEARNING OUTCOMES After studying this chapter, the students would be able to:  Describe the provisions relating to appointment of Managing Director, Whole Time Director and Manager.  Explain the provisions regarding appointment of Key Managerial Personnel (KMPs).  Comprehend the concept of maximum managerial remuneration and managerial remuneration payable in case of absence or inadequacy of profits.  Compute and calculate profits for the purpose of managerial remuneration and recovery of managerial remuneration in certain cases.  Explain the concepts of compensation for loss of office of Managing or Whole Time Director or Manager.  Explain about the functions of Company Secretary and requirements for Secretarial Audit. © The Institute of Chartered Accountants of India  a 2.2 CORPORATE AND ECONOMIC LAWS 1. INTRODUCTION This Chapter deals with the appointment of managerial personnel and managerial remuneration payable to them as per the applicable provisions of the Companies Act, 2013, with relevant Rules made thereunder and Schedule V. MEANING OF CERTAIN TERMS "Chief Executive Officer" [Section 2(18)] means an officer of a company, who has been designated as such by it. "Chief Financial Officer" [Section 2(19)] means a person appointed as the Chief Financial Officer of a company. "Company Secretary" or "secretary" [Section 2(24)] means a company secretary as defined in clause (c) of sub-section (1) of Section 2 of the Company Secretaries Act, 1980 who is appointed by a company to perform the functions of a company secretary under the Companies Act, 2013. "Company Secretary in practice" [Section 2(25)] means a company secretary who is deemed to be in practice under sub-section (2) of Section 2 of the Company Secretaries Act, 1980. "Key Managerial Personnel" [Section 2(51)] in relation to a company, means— (i) the Chief Executive Officer or the managing director or the manager; (ii) the company secretary; (iii) the whole-time director; (iv) the Chief Financial Officer; - (v) such other officer, not more than one level below the directors who is in whole-time employment, designated as key managerial personnel by the Board; and (vi) such oter officer as may be prescribed. "Manager" [Section 2(53)] means an individual who, subject to the superintendence, control and direction of the Board of Directors, has the management of the whole, or substantially the whole, of the affairs of a company, and includes a director or any other person occupying the position of a manager, by whatever name called, whether under a contract of service or not. According to the above definition, a manager is an individual person. Such person is given the charge of whole or substantially the whole of managing the affairs of a company. Therefore, a person appointed as manager to head one of the sections of the company (say, marketing department) cannot be said to be a ‘manager’ within the meaning of Section 2 (53). A manager functions under the superintendence, control and direction of the Board of Directors. It is not necessary that a manager should also be a director of the company though there is no restriction in designating a director as manager of the company. It is not permitted by Section 196(1) © The Institute of Chartered Accountants of India  APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL 2.3 for a company to appoint both managing director and manager at the same time. The simple reason behind this restriction is that when a person is entrusted with whole or substantially the whole of management, how can there be appointed another person for the same purpose. Moreover, due to overlapping of authorities between two powerful persons, the affairs of a company shall not be conducted the way they should, leading to mismanagement. Managing Director [Section 2(54)] means a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called. On simplifying we can understand, Managing Director means a director who is entrusted with substantial powers of management of the affairs of the company by: (i) virtue of the articles of a company, or (ii) an agreement with the company, or (iii) a resolution passed in its general meeting, or by its Board of Directors, and includes a director occupying the position of the managing director, by whatever name called. Explanation to Section 2(54) clarifies that substantial powers of the management shall not be deemed to include the power to do such administrative acts of a routine nature when so authorized by the Board such as: (i) the power to affix the common seal of the company to any document, or (ii) to draw and endorse any cheque on the account of the company in any bank, or (iii) to draw and endorse any negotiable instrument, or (iv) to sign any certificate of share, or (v) to direct registration of transfer of any share. Thus, excluding the above administrative acts of a routine nature, the managing director enjoys substantial powers of conducting and managing the business of the company as per its memorandum and articles of association. From the above definition, it emerges that a managing director needs to be a director in the first place. It is immaterial whether he is appointed as additional director or rotational director or non- rotational director. However, as soon as he ceases to be a director, he shall also cease to be a managing director. It is not necessary that a director who occupies the position of the managing director needs to be called ‘managing director’. He may be called by whatever name. The essential pre-requisite is that the director must be entrusted with substantial powers of management of the affairs of the company © The Institute of Chartered Accountants of India  a 2.4 CORPORATE AND ECONOMIC LAWS excluding routine administrative acts as entrusted by the Board. If such is the case, the director is a managing director, by whatever name called. It may be noted that Section 196 (1) prohibits a company to appoint both managing director and manager at the same time. However, it shall be appropriate if a person is designated as a Managing Director instead of manager. The Board of Directors exercises control over the managing director. Thus, powers as managing director are exercisable according to the directions of the Board. Whole Time Director (WTD) [Section 2(94)]: WTD includes a director in the whole-time employment of the company. As the definition suggests WTD is a director. Also, he is in the whole-time employment of the company i.e. he is a full-time employee who is required to devote his time in totality for the management of the company. A person who is not a director in the company cannot be employed as whole-time director. Remuneration [Section 2 (78)]: ‘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. 2. APPOINTMENT OF MANAGING DIRECTOR, WHOLE TIME DIRECTOR OR MANAGER [SECTION 196] Section 196 of the Act contains the provisions for appointment of managing director, whole time director or manager. According to this section: (i) Appointment [Section 196(1)]: A company shall appoint or employ managing director, whole time director or manager. But a company shall not appoint or employ a managing director and a manager at the same time. In other words, no company is permitted to appoint a manager if a managing director is already appointed and vice-versa. However, there can be both MD and whole-time director in a company. (ii) Tenure [section 196(2)]: (a) No company shall appoint or re-appoint any person as its managing director, whole- time director or manager for a term exceeding five years at a time. (b) It is further provided that no re-appointment shall be made earlier than one year before the expiry of his term. Example 1: ‘X’ was appointed as Managing Director for life by the Articles of Association of a private company which was incorporated on 1 stJune, 2019. Section 196(2) of the Companies Act, 2013 lays down that no company shall appoint or re-appoint any person as its managing director, whole-time director or manager for a term exceeding five years at a © The Institute of Chartered Accountants of India  APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL 2.5 time. No concession or exception is allowed by the Act to private companies. Hence, ‘X’ cannot be appointed as managing director for life. (iii) Eligibility Conditions for Appointment: For appointing a person as a managing director, whole-time director or manager, firstly he shall not be disqualified for appointment as a director under section 164. As per section 196(3), no company shall appoint or continue the employment of any person as managing director, whole-time director or manager who- (a) is below the age of 21 years or has attained the age of 70 years. Requirement of Special Resolution for appointment of a person above the age of 70 years: There is a relaxation in case of a person above the age of 70 years. Accordingly, where a person has attained the age of seventy years, he may still be appointed to such office if a special resolution is passed in this respect. In such a case, the explanatory statement annexed to the notice for such motion shall indicate the justification for appointing such person. Government approval required if no Special Resolution is passed: Further, where no such special resolution is passed but votes cast in favour of the motion exceed the votes, if any, cast against the motion and the Central Government is satisfied, on an application made by the Board, that such appointment is most beneficial to the company, the appointment of the person who has attained the age of seventy years may be made. In other words, approval of the Central Government is required if special resolution could not be passed. The significance of this provision lies in the fact that because majority of the members were in favour of such appointment, their wish should not be turned down simply due to non-passing of special resolution. Thus, the appointment can be regularized by seeking approval of the Central Government, which, if satisfied, can accord such approval. (b) is an undischarged insolvent or has at any time been adjudged as an insolvent; or (c) has at any time suspended payment to his creditors or makes, or has at any time made, a composition with them; or (d) has at any time been convicted by a court of an offence and sentenced for a period of more than six months. (e) Additional eligibility conditions for appointment as per Schedule V: Part I of Schedule V1 to the Companies Act, 2013, has prescribed additional eligibility 1 Heading of Part I of Schedule V reads as ‘Conditions to be fulfilled for the appointment of a Managing or Whole - time director of a manager without the approval of the Central Government’. © The Institute of Chartered Accountants of India  a 2.6 CORPORATE AND ECONOMIC LAWS conditions for appointment as managing director or whole-time director or a manager without seeking approval from the Central Government. They are stated as under: (1) 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 19 Acts 2 as specified under Part I of Schedule V. (2) he had not been detained for any period under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 (COFEPOSA). However, where the Central Government has given its approval to the appointment of a person convicted or detained under para (1) or para (2), 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. 3(3) he has completed the age of twenty-one years and has not attained the age of seventy years. However, where he has attained the age of seventy years; and where his appointment is approved by a special resolution passed by the company in general meeting, no further approval of the Central Government shall be necessary for such appointment. 2 The 19 Acts are: (i) the Indian Stamp Act, 1899. (ii) the Central Excise Act, 1944. (iii) the Industries (Development and Regulation) Act, 1951. (iv) the Prevention of Food Adulteration Act, 1954. (v) the Essential Commodities Act, 1955. (vi) the Companies Act, 2013or any previous company law (Substituted by notification dated 12 th September 2016) (vii) the Securities Contracts (Regulation) Act, 1956. (viii) the Wealth-tax Act, 1957. (ix) the Income-tax Act, 1961. (x) the Customs Act, 1962. (xi) the Competition Act, 2002. (xii) the Foreign Exchange Management Act, 1999. (xiii) the Sick Industrial Companies (Special Provisions) Act, 1985. (xiv) the Securities and Exchange Board of India Act, 1992. (xv) the Foreign Trade (Development and Regulation) Act, 1922. (xvi) the Prevention of Money-Laundering Act, 2002. (xvii) the Insolvency and Bankruptcy Code, 2016. (xviii) the Goods and Services Tax Act, 2017. (xix) the Fugitive Economic Offenders Act, 2018. 3 This condition is also specified by Section 196 (3) and mentioned earlier. © The Institute of Chartered Accountants of India  APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL 2.7 (4) he is resident of India. Explanation I clarifies that resident in India includes a person who has been staying in India for a continuous period of not less than twelve months immediately preceding the date of his appointment as a managerial person and who has come to stay in India, - (a) for taking up employment in India; or (b) for carrying on a business or vacation in India. Explanation II clarifies that the condition above shall not apply to the companies in Special Economic Zones (SEZ). However, a person, being a non-resident in India shall enter India only after obtaining a proper Employment Visa from the concerned Indian mission abroad. For this purpose, such person shall be required to furnish, along with the visa application form:  profile of the company,  the principal employer, and  terms and conditions of such person’s appointment. (iv) Procedure of Appointment [Section 196(4)]: Approval by Board and Shareholders Approval by Central Government Subject to the provisions of section 197 and In case such appointment is at variance to Schedule V, a managing director, whole- the conditions specified in Part I of time director or manager shall be appointed, Schedule V, the appointment shall be and the terms and conditions of such approved by the Central Government. appointment and remuneration payable shall be- (i) approved by the Board of Directors Form MR-2 has been prescribed by Rule 7 at a meeting; and of the Companies (Appointment and (ii) approved by shareholders by a Remuneration of Managerial Personnel) resolution at the next general Rules, 2014 in which application for meeting of the company. seeking approval from the Central Government shall be made within ninety days of such appointment of MD or WTD or manager in the company. © The Institute of Chartered Accountants of India  a 2.8 CORPORATE AND ECONOMIC LAWS Inclusion of certain disclosures in The notice convening Board or general Notice meeting for considering such appointment shall include: (i) the terms and conditions of such appointment, remuneration payable, and (ii) such other matters including interest, of a director or directors in such appointments, if any. Filing of Return: A return in the prescribed form 4 along with the prescribed fee shall be filed with the Registrar within sixty days of such appointment. (v) Validity of Acts [Section 196(5)]: Subject to the provisions of this Act, where an appointment of a managing director, whole-time director or manager is not approved by the company at a general meeting, any act done by him before such approval shall be deemed to be valid. Example 2: A Managing Director is appointed in the board meeting held on 20th May 2019. General meeting was to be held on 17th June, 2019 for approval of such appointment. Before the holding of general meeting, the managing director executed an agreement with another company of considerable importance on 3rd June, 2019. The general meeting was held accordingly on 17th June, 2019 but did not approve the appointment of managing director. Here, the agreement executed by Managing Director is valid. The acts done by the managing director from 20th May, 2019 to 17th June, 2019 i.e. upto the non-approval of his appointment by the shareholders at the general meeting, shall be valid subject to the provisions of the Companies Act, 2013. Exemptions (i) In case of a Government Company, Section 196(2), (4) and (5) shall not apply. However, for availing the exemption, such Government Company must not have committed a default in filing its financial statements under Section 137 or Annual Return under Section 92 with the Registrar. (Notification No. G.S.R. 463(E) dated 5th June, 2015 as amended by Notification No. G.S.R. 582 (E), dated 13-06-2017). (ii) In case of Private Company, Section 196(4) and (5) shall not apply provided such private company has not committed a default in filing its financial statements under Section 137 or Annual Return under Section 92 with the Registrar. (Notification No. G.S.R. 464(E) dated 5th June, 2015 as amended by Notification No. G.S.R. 583(E) dated 5th June, 2015). 4Rule 3 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 prescribes Form No. MR-1. © The Institute of Chartered Accountants of India  APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL 2.9 Example 3: Sukanya Limited, a company incorporated under the Companies Act, 2013, approved the appointment of Mr. Rajaram as the managing director of the company in the company’s last annual general meeting. Accordingly, Mr. Rajaram was vested with the substantial powers of managing the business of the company. After a period of 1 year from the appointment of Mr. Rajaram, the company wants to employ Mr. Rakesh, the whole time employee of the company, as the manager of the finance department of the company. Now the company is in dilemma regarding the appointment of Mr. Rakesh. In the said case, according to section 2(53) of the Companies Act, 2013, manager means an individual who, subject to the superintendence, control and direction of the Board of Directors, has the management of the whole, or substantially the whole, of the affairs of a Company, and includes a director or any other person occupying the position of a manager, by whatever name called, whether under a contract of service or not. According to the above definition, a manager is an individual person. Such person is given the charge of whole or substantially the whole of managing the affairs of a company. Therefore, a person appointed as manager to head any department of the company cannot be said to be a ‘manager’ within the meaning of section 2(53). Further the provisions of section 196(1) of the Companies Act, 2013 applies to manager falling within the meaning of the definition of section 2(53) In the given example, Mr. Rakesh is not falling within the meaning of the definition of section 2(53) and accordingly section 196(1) is not applicable. Hence company can go ahead with the appointment of Mr. Rakesh as manager of the Finance Department. High Court of Bombay decided in Sridhar Sundararajan v. Ultramarine & Pigments Limited that Special resolution under section 196(3)(a) is to be passed to continue any person aged 70 years as MD even if his appointment was made before coming into force of Companies Act, 2013, i.e., before 1-4-2014 when he was below 70 years. 3. APPOINTMENT OF KEY MANAGERIAL PERSONNEL [SECTION 203] Section 203 of the Act, and Rule 8 as well as Rule 8A of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 contain the provisions for appointment of Key Managerial Personnel in the prescribed companies. (i) Appointment of Key Managerial Personnel [Section 203(1)]: Every company belonging to the prescribed class or classes of companies shall have the following whole time key managerial personnel: © The Institute of Chartered Accountants of India  a 2.10 CORPORATE AND ECONOMIC LAWS Whole Time KMP's MD/CEO/M CS CFO in absence of above, a WTD According to Rule 8 following companies shall have whole-time key managerial personnel: (a) every listed company; and (b) every other public company having a paid-up share capital of 10 crore rupees or more. Requirement of Company Secretary in certain other companies: According to Rule 8A, every private company which has a paid up share capital of 10 crore rupees or more shall have a whole-time company secretary. In other words, it is now mandatory for every private company to have a whole-time company secretary if its paid up share capital is 10 crore rupees or more. (ii) Prohibition on individual to be appointed as Chairperson as well as Managing Director or Chief Executive Officer at the same time [Proviso to Section 203(1)]: An individual shall not be appointed or reappointed as the Chairperson of the company, in pursuance of the articles of the company, as well as the Managing Director or Chief Executive Officer (CEO) of the company at the same time, unless — (a) the articles of such a company provide otherwise; or (b) the company does not carry multiple businesses. [First proviso to Section 203(1)] Exemption from restriction: However, above-mentioned prohibition shall not apply to such class of companies which is engaged in multiple businesses and which has appointed one or more Chief Executive Officers for each such business as may be notified by the Central Government. [refer Second proviso to Section 203(1)] In other words, a person appointed as Chairperson of a company cannot be appointed as MD or CEO at the same time in that company. This prohibition is not applicable in the following cases: [Second proviso to Section 203(1)]  Where the articles of such company provide otherwise i.e., they allow the Chairperson to be appointed as MD or CEO. © The Institute of Chartered Accountants of India  APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL 2.11  Where the company belongs to the prescribed class of companies (refer Box below); is engaged in multiple businesses; and has appointed Chief Executive Officer for each such business. Notified Public Companies: The MCA vide Notification No. S.O. 1913(E) dated 25 th July, 2014 has notified that public companies having paid-up share capital of 100 crore rupees or more and annual turnover of 1,000 crore rupees or more which are engaged in multiple businesses and have appointed Chief Executive Officer for each such business shall be the class of companies for the purposes of the second proviso to sub-section (1) of section 203. Explanation-For the purpose of this notification, the paid-up share capital and the annual turnover shall be decided on the basis of the latest audited balance sheet. (iii) Conditions for Appointment: (a) Requirement of Board Resolution5: Every whole-time key managerial personnel of a company shall be appointed by means of a resolution of the Board. The resolution shall contain the terms and conditions of the appointment including the remuneration. [refer Section 203 (2)] (b) Bar on multiple appointments: A whole-time key managerial personnel shall not hold office in more than one company at the same time except in its subsidiary company. [Section 203 (3)] However, key managerial personnel shall not be disentitled from being a director in any company with the permission of the Board. [refer Proviso to Section 203 (3)] Provided further that whole-time key managerial personnel holding office in more than one company at the same time on the date of commencement of this Act, shall, within a period of six months from such commencement, choose one company, in which he wishes to continue to hold the office of key managerial personnel. (iv) Managing Director or Manager in more than one company [Third Proviso to Section 203(3)]: If a person is MD or manager in some other company it is permissible for a company to appoint him as its managing director. The modus operandi is as under: 5Rule 8 of the Companies (Meetings of Board and its Powers) Rules, 2014 requires passing of Board Resolution at a meeting of the Board if a key managerial personnel is appointed (or removed). © The Institute of Chartered Accountants of India  a 2.12 CORPORATE AND ECONOMIC LAWS Person so appointed /employed as MD should be MD/M in one company,and of not more than one other company made/approved by Board resolution passed with the consent of all the directors present at the meeting specific notice of such meeting, and of the resolution to be moved thereat has been given to all the directors then in India. Example 4: Virasat Limited, a company incorporated under the Companies Act, 2013, has a board of directors consisting of 10 directors, wants to appoint Mr. Vakharia as its Managing Director (MD) in the upcoming Annual General Meeting (AGM). Mr. Vakharia is already serving as the MD of other public company. Accordingly, for the appointment of Mr. Vakharia specific notice for the board meeting and the resolution to be moved thereat has been given to all the directors. The resolution for the appointment of Mr. Vakharia has been passed at the board meeting Out of 8 directors present, 6 directors voted in favour of the resolution and the remaining 2 directors refrained from voting. Thereafter, the company approved the appointment of Mr. Vakharia in the AGM. Here in the given instance, appointment of Mr. Vakharia is not valid in law as the resolution is not passed by all the directors present in the board meeting. (v) Filling of Vacancy of Key Managerial Personnel (KMP) [Section 203(4)]: If the office of any whole-time KMP is vacated, the resulting vacancy shall be filled-up by the Board at a meeting of the Board within a period of six months from the date of such vacancy. (vi) Penalty for non-compliance [Section 203(5)]: (a) Company: If any company makes any default in complying with the provisions of this section, such company shall be liable to a penalty of 5 Lakh rupees. (b) Director and KMP: Every defaulting director and KMP shall be liable to a penalty of 50,000 rupees. Where the default is a continuing one, they shall be liable with a further penalty of 1,000 rupees for each day after the first during which such default continues but not exceeding 5 Lakh rupees. Exemptions In case of Government companies, after sub-section (4) of Section 203, the following sub-section shall be inserted vide Notification No. G.S.R. 463(E), dated 5 th June, 2015 as amended by Notification No. G.S.R. 582 (E), dated 13 th June, 2017, namely: “(4A) The provisions of sub-section (1), (2), (3) and (4) of this section shall not apply to a managing director or Chief Executive Officer or manager and in their absence, a whole- time director of the Government company.” The sub-section (4A) shall be applicable to a Government company only if it has not committed a default in filing its financial statements under Section 137 or Annual Return under Section 92 with the Registrar. © The Institute of Chartered Accountants of India  APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL 2.13 In a decision given by National Company Law Tribunal, Kolkata Bench in Usha Martin Telematics Ltd., In re, it was held that where Tribunal had already compounded offences for company in respect of appointment of CFO and CS, application of Ex-Directors & Managers seeking compounding of offence, was to be allowed. In the said case in financial year 2014-15, company's paid up capital was Rs. 197.60 crores and still, company had not appointed CFO and CS and, thus, violated provisions of section 203(1)(iii). Subsequent to show cause notice, company appointed CFO and CS. Form DIR-12 was filed in relation to such appointment. Applicants ex-directors and ex-managers admitted offence and thus, filed instant application seeking compounding of offence under section 441 of the Companies Act, 2013. Here the Tribunal held liable to ex-directors and managers for alleged offence only for period for which such applicants were directors/officers in company. Even where tribunal had already compounded offence for company, application by ex-directors and managers of company seeking compounding of offence was also to be allowed. 4. FUNCTIONS OF COMPANY SECRETARY [SECTION 205] The provisions of Section 205 of the Act are stated as under: (i) Functions to be performed by Company Secretary: According to Section 205 (1) and Rule 10 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, a Company Secretary shall perform the following functions: (a) to report to the Board about compliance with the provisions of the Companies Act, 2013, the rules made thereunder and other laws applicable to the company; (b) to ensure that the company complies with the applicable secretarial standards; (c) to provide to the directors of the company, collectively and individually, such guidance as they may require, with regard to their duties, responsibilities and powers; (d) to facilitate the convening of meetings and attend Board, committee and general meetings and maintain the minutes of these meetings; (e) to obtain approvals from the Board, general meeting, the government and such other authorities as required under the provisions of the Companies Act, 2013; (f) to represent before various regulators, and other authorities under the Companies Act, 2013 in connection with discharge of various duties under the said Act; (g) to assist the Board in the conduct of the affairs of the company; (h) to assist and advise the Board in ensuring good corporate governance and in complying with the corporate governance requirements and best practices; and (i) to discharge such other duties as have been specified under the Companies Act, 2013 or the Rules made thereunder; and (j) such other duties as may be assigned by the Board from time to time. © The Institute of Chartered Accountants of India  a 2.14 CORPORATE AND ECONOMIC LAWS Functions performed by CS convening assist & report to guidance to ensure and represent advice board about directors company attending w.r.t assist board board in other duties compliance w.r.t.their obtains complies and discharge of in conduct complying as assigned of duties, approvals applicable maintaing various of affairs with by board Companies responsibilities SS's minutes of duties corporate Act and powers meetings governance Clarification: The expression “secretarial standards” means secretarial standards issued by the Institute of Company Secretaries of India constituted under section 3 of the Company Secretaries Act, 1980 and approved by the Central Government. Under Section 118 (10) of the Act, the Central Government has approved SS-1 (Secretarial Standard on Meetings of the Board of Directors) and SS-2 (Secretarial Standard on General Meetings). (ii) No effect on duties and functions of certain important functionaries: According to Section 205 (2), the provisions contained in Section 204 relating to the ‘secretarial audit for bigger companies’ and Section 205 relating to the ‘functions of company secretary’ shall not affect the duties and functions of the Board of Directors, Chairperson of the company, Managing Director or Whole-time Director under this Act, or any other law for the time being in force. In other words, these important functionaries of the company cannot be absolved of their duties and functions simply because a secretarial audit has been conducted or certain functions have been assigned to the company secretary. They shall always remain responsible to the company and in no way their responsibility shall be reduced. 5. COMPANY TO FIX LIMIT WITH REGARD TO REMUNERATION [SECTION 200] Section 200 of the Act is instructive in nature. According to this section, a company needs to take care of certain parameters and may adopt an administrative ceiling as it may deem fit within the statutory ceiling with regard to fixing of managerial remuneration where it has inadequate or no profits. However, effective from 12-09-2018 in such cases the company is not required to seek any approval from the Central Government. © The Institute of Chartered Accountants of India  APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL 2.15 Section 200 states that notwithstanding anything contained in this Chapter, a company may, while according its approval under Section 196 to any appointment or to any remuneration under Section 197 in respect of cases where the company has inadequate or no profits, fix the remuneration within the limits specified in this Act, at such amount or percentage of profits of the company, as it may deem fit. While fixing such remuneration the company shall have regard to: (a) the financial position of the company; (b) the remuneration or commission drawn by the individual concerned in any other capacity; (c) the remuneration or commission drawn by him from any other company; (d) professional qualifications and experience of the individual concerned; (e) any other matters as may be prescribed. Parameters for consideration of remuneration In this respect, Rule 6 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, prescribes that the company shall have regard to the following matters: (i) the Financial and operating performance of the company during the three preceding financial years. (ii) the relationship between remuneration and performance. (iii) the principle of proportionality of remuneration within the company, ideally by a rating methodology which compares the remuneration of directors to that of other directors on the board and employees or executives of the company. (iv) whether remuneration policy for directors differs from remuneration policy for other employees and if so, an explanation for the difference. (v) the securities held by the director, including options and details of the shares pledged as at the end of the preceding financial year. 6. OVERALL MAXIMUM MANAGERIAL REMUNERATION AND MANAGERIAL REMUNERATION IN CASE OF ABSENCE OR INADEQUACY OF PROFITS [SECTION 197] Section 197 of the Act lays down the provisions relating to overall maximum managerial remuneration payable by every public company and the managerial remuneration payable by it in case of absence or inadequacy of profits. Section 197 read with Schedule V to the Companies Act, © The Institute of Chartered Accountants of India  a 2.16 CORPORATE AND ECONOMIC LAWS 2013 defines maximum remuneration payable to KMPs and other directors. This section does not apply to a private company. These provisions are discussed as under: (i) Overall Maximum Managerial Remuneration [Section 197(1)] (a) Section I of Part II of Schedule V headed as ‘Remuneration Payable by Companies having Profits’ states that ‘subject to the provisions of Section 197, a company having profits in a financial year may pay remuneration to a managerial personnel or persons or other director or directors not exceeding the limits specified in this section’. Accordingly, the overall managerial remuneration to the Directors including managing director, whole time director and manager in respect of any financial year is summarized as below: S. Conditions Maximum When remuneration No. remuneration payable can be exceeded as by Public company to referred to in column directors, including (b) managing director and whole time director and manager in any financial year (a) (b) (c) (i) Overall limit applicable to 11% of the net profits of Subject to the provisions managerial remuneration the company for that of Schedule V, the financial year company in general Note: Net profits are to meeting may authorize be calculated in exceeding the overall accordance with limit of 11%. Section 198 except that the remuneration payable to the directors shall not be deducted from the gross profits. (ii) If there is one Managing 5% of the net profits of This limit of 5% may be director/ Whole time the company for that exceeded with the director/ manager i.e. financial year. approval of the company Remuneration payable to in general meeting by one managing passing a Special director/whole time Resolution. director/manager (iii) If there is more than one 10% of the net profits of This limit of 10% may be © The Institute of Chartered Accountants of India  APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL 2.17 Managing Director/ the company for that exceeded with the Whole time financial year. approval of the company director/manager i.e. in general meeting by Remuneration payable to passing a Special all such Managing Resolution. Director/Whole time Director/Manager taken together (iv) Remuneration payable to 1% of the net profits of This limit of 1% may be directors who are neither the company if there is a exceeded with the Managing Directors nor Managing Director or a approval of the company Whole time directors Whole time director in general meeting by passing a Special Resolution. (v) Remuneration payable to 3% of the net profits of This limit of 3% may be directors who are neither the company provided exceeded with the Managing Directors nor there is no Managing approval of the company Whole time directors Director or Whole time in general meeting by director passing a Special Resolution. Instances to obtain prior approval in case of default: It is to be noted that where the company has defaulted in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, prior approval of such person (as applicable) shall have to be obtained by the company before obtaining the approval in the general meeting. Exclusion of sitting fees: Section 197(2) provides that above percentages shall be exclusive of any fees payable to directors under section 197(5). (b) Section 197(8) provides that the net profits shall be computed in the manner laid down in section 198. This stipulation is already covered by Section 197 (1) which further provides that the remuneration of the directors shall not be deducted from the gross profits. (ii) No profits or inadequate profits [Section 197(3) & (11)] (a) If in any financial year, a company has no profits or its profits are inadequate, the company shall not pay by way of remuneration any sum (exclusive of sitting fees) to its directors, including any managing or whole- time director or manager or any other non-executive director including an independent director, except in accordance with the provisions of Schedule V. (b) In cases where Schedule V is applicable on grounds of no profits or inadequate profits, © The Institute of Chartered Accountants of India a 2.18 CORPORATE AND ECONOMIC LAWS any provision relating to the remuneration of any director which purports to increase or has the effect of increasing the amount thereof, shall not have any effect unless such increase is in accordance with the conditions specified in that Schedule. Accordingly the following provisions which purport to increase or has the effect of increasing the remuneration payable to directors shall not have any effect unless are in accordance with the conditions specified in that schedule:  the provision contained in the memorandum or articles of the company, or  in an agreement entered into by the company, or  in any resolution passed by the company in general meeting or its Board. SECTION II OF PART II OF SCHEDULE V- Remuneration payable by companies having no profit or inadequate profit Where in any financial year during the currency of tenure of a managerial person, a company has no profits or its profits are inadequate, it may pay remuneration to the managerial person or other director not exceeding the limits under (A) and (B) given below: Limits under (A): (1) (2) (3) Where the effective capital Limit of yearly Limit of yearly is (in any FY) remuneration payable remuneration payable shall not exceed (in shall not exceed (in any any FY ) in case of FY) in case of other managerial directors remuneration (i) Negative or less than 60 lakhs 12 lakhs 5 crores (ii) 5 crores and above 84 lakhs 17 lakhs but less than 100 crores (iii) 100 crores and above 120 lakhs 24 lakhs but less than 250 crores (iv) 250 crores and above 120 lakhs plus 0.01% 24 Lakhs plus 0.01% of the of the effective capital in effective capital in excess of excess of 250 crores 250 crores:]" © The Institute of Chartered Accountants of India  APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL 2.19 However, the remuneration in excess of above limits may be paid if the resolution passed by the shareholders is a special resolution. Explanation I.—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. Explanation 2. — 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. Explanation 3- It is hereby clarified that for a period less than one year, the limits shall be pro-rated. Thus, if a managerial person is employed for a part of the year, the remuneration payable to him shall be pro-rated. Limits under (B): In case of a managerial person or other director who is functioning in a professional capacity, remuneration as per item (A) may be paid, if such managerial person or other director:  is not having any interest in the capital of the company or its holding company or any of its subsidiaries directly or indirectly or through any other statutory structures (i.e. does not hold any shares subject to the deeming provision below); Note: “Statutory Structure” means any entity which is entitled to hold shares in any company formed under any statute.  is not having any, direct or indirect interest or related to the directors or promoters of the company or its holding company or any of its subsidiaries at any time during the last two years before or on or after the date of appointment;  possesses graduate level qualification with expertise and specialised knowledge in the field in which the company operates: © The Institute of Chartered Accountants of India a 2.20 CORPORATE AND ECONOMIC LAWS Deeming provision as to the holding of shares: It is provided that any employee of a company holding shares of the company not exceeding 0.5% of its paid-up share capital under any scheme formulated for allotment of shares to such employees including Employees Stock Option Plan or by way of qualification shall be deemed to be a person not having any interest in the capital of the company. Applicable conditions for payment of remuneration: The limits specified under items (A) and (B) above shall apply, if- (i) payment of remuneration is approved by a resolution passed by the Board and, in the case of a company covered under Section 178 (1), also by the Nomination and Remuneration Committee; (ii) the company has not committed any default in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, and in case of default, the prior approval of the bank or public financial institution concerned or the non-convertible debenture holders or other secured creditor, as the case may be, shall be obtained by the company before obtaining the approval in the general meeting; (iii) an ordinary resolution or a special resolution, as the case may be, has been passed for payment of remuneration as per item (A) or a special resolution has been passed for payment of remuneration as per item (B), at the general meeting of the company for a period not exceeding three years. (iv) a statement along with a notice calling the general meeting referred to in clause (iii) is given to the shareholders containing the following information, namely: I. General information: (1) Nature of industry (2) Date or expected date of commencement of commercial production (3) In case of new companies, expected date of commencement of activities as per project approved by financial institutions appearing in the prospectus (4) Financial performance based on given indicators (5) Foreign investments or collaborations, if any. II. Information about the appointee: (1) Background details (2) Past remuneration (3) Recognition or awards © The Institute of Chartered Accountants of India  APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL 2.21 (4) Job profile and his suitability (5) Remuneration proposed (6) Comparative remuneration profile with respect to industry, size of the company, profile of the position and person (in case of expatriates the relevant details would be with respect to the country of his origin) (7) Pecuniary relationship directly or indirectly with the company, or relationship with the managerial personnel or other director, if any. III. Other information: (1) Reasons of loss or inadequate profits (2) Steps taken or proposed to be taken for improvement (3) Expected increase in productivity and profits in measurable terms IV. Disclosures: The following disclosures shall be mentioned in the Board of Director’s report under the heading “Corporate Governance”, if any, attached to the Financial statement: (i) all elements of remuneration package such as salary, benefits, bonuses, stock options, pension, etc., of all the directors; (ii) details of fixed component and performance linked incentives along with the performance criteria; (iii) service contracts, notice period, severance fees; and (iv) stock option details, if any, and whether the same has been issued at a discount as well as the period over which accrued and over which exercisable. (iii) Determination of Remuneration [Section 197(4)] (a) The remuneration payable to the directors of a company, including any managing or whole-time director or manager, shall be determined, in accordance with and subject to the provisions of this section, either (i) by the articles of the company, or (ii) by a resolution or, (ii) if the articles so require, by a special resolution, passed by the company in general meeting, and (b) The remuneration payable to a director determined aforesaid shall be inclusive of the remuneration payable to him for the services rendered by him in any other capacity. © The Institute of Chartered Accountants of India  a 2.22 CORPORATE AND ECONOMIC LAWS (c) Any remuneration for services rendered by any such director in other capacity shall not be so included if— (1) the services rendered are of a professional nature; and (2) in the opinion of the Nomination and Remuneration Committee, if the company is covered under Section 178 (1), or in the opinion of the Board of Directors in other cases, the director possesses the requisite qualification for the practice of the profession. Simply stated, the Board of Directors cannot determine the remuneration payable to the directors. The remuneration shall be determined (subject to the provisions of Section 197) by the articles or by a resolution or if required by the articles, by passing a special resolution. However, besides remuneration, a director may be paid some other remuneration if he provides professional services to the company and further, in the opinion of the Nomination and Remuneration Committee (if the company has formed such committee) or in the opinion of the Board of Directors (where no such committee exists) the director possesses the requisite qualification for practicing his profession. Example 5: Star Health Specialties Ltd. owns a Multi-Specialty Hospital in Chennai. Dr. Hamilton, a practicing Heart Surgeon, has been appointed by the company as its director and it wants to pay him fee, on case to case basis, for surgery performed on the patients at the hospital. In the given example, as Dr. Hamilton has been appointed as a director. He has to be paid a fee for surgeries performed by him. It is to be noted that such payment is permissible under Section 197(4) which states that the remuneration payable to the directors including managing or whole-time director or manager shall be inclusive of the remuneration payable for the services rendered by him in any other capacity except the following: (a) the services rendered are of a professional nature; and (b) in the opinion of the Nomination and Remuneration Committee (if applicable) or the Board of Directors in other cases, the director possesses the requisite qualification for the practice of the profession. The company, therefore, can pay extra remuneration to Dr. Hamilton like professional fee for surgeries performed by him in his professional capacity; and such payment shall not be construed as managerial remuneration under the Act. (iv) Sitting Fees to Directors [Section (5)]: (a) Fees for attending meeting: A director may receive remuneration by way of fee for attending meetings of the Board or Committee thereof or for any other purpose whatsoever as may be decided by the Board subject to the conditions imposed by Rule © The Institute of Chartered Accountants of India  APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL 2.23 4 of the Companies (Appointment and Remuneration of Managerial personnel) Rules, 2014 as under:  The sitting fees shall not exceed one lakh rupees per meeting of the Board or committee thereof. [As per Rule 4]  The sitting fee payable to the Independent Directors and Women Directors shall not be less than that payable to other directors. [As per Proviso to Rule 4] Note: According to Section 197 (2), the percentages mentioned under Section 197 (1) shall be exclusive of any sitting fees payable to directors for attending meetings of the Board or committee thereof or for any other purpose whatsoever as may be decided by the Board. (b) Scale of fees may differ: Different fees for different classes of companies and fees in respect to independent directors may be such as may be prescribed. Example 6: The Articles of Association of a listed company have fixed payment of sitting fee for each Meeting of Directors subject to a maximum of 30,000. In view of the increased responsibilities of the independent directors of listed companies, the company proposes to increase the sitting fee to 45,000 per meeting. W.r.t. to the said proposal, Section 197(5) of the Companies Act, 2013 provides that a director may receive remuneration by way of fee for attending the Board/Committee meetings or for any other purpose as may be decided by the Board provided that the amount of such fees shall not exceed the prescribed amount. As per Rule 4 of the Companies (Appointment and Remuneration of Managerial personnel) Rules, 2014 the amount of sitting fees payable for attending meetings of the Board or Committees thereof may be decided by the Board but such sitting fees shall not exceed 1 lakh rupee per meeting. Further, the sitting fee payable to an independent director shall not be less than that payable to other directors. From the above, it is clear that sitting fees can be increased from 30,000 rupees to 45,000 rupees per meeting by passing a resolution in the Board Meeting and altering the Articles of Association by passing a Special Resolution. When sitting fees stands increased for other directors, it shall automatically be increased in case of independent directors because the latter cannot be paid less than that payable to former. (v) Mode of payment of Remuneration [Section 197(6)]: A director or manager may be paid remuneration in any of the following manner: © The Institute of Chartered Accountants of India  a 2.24 CORPORATE AND ECONOMIC LAWS at a specified percentage of the net profits of the company or by way of a monthly payment partly by one way or and partly by the other Mode of payment The term used in Section 197 (6) is ‘director’ which may be taken to mean all types of directors i.e. MD or whole-time director or executive/non-executive director. Further, remuneration can be paid on monthly basis or on the basis of specified percentage of the net profits. Even, a combination of both the methods may also be adopted. (vi) Refund of excess remuneration if paid to a director [Section 197(9) and (10)]: If any director draws or receives excess remuneration than the limit prescribed by Section 197 or without approval required under this section, such director shall: within two years or for Until such sum is refunded, refund such sums to the lesser period as may be he shall hold it in trust for company allowed by the company the company Waiver, whether possible: The company shall not waive the recovery of any sum refundable to it under Section 197 (9). However, the waiver is possible only if it is approved by the company by passing a special resolution within two years from the date the sum becomes refundable. Instances to obtain prior approval of waiver in case of default: It is to be noted that where the company has defaulted in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, the prior approval of such person respectively shall be obtained by the company before obtaining approval of such waiver by a special resolution. © The Institute of Chartered Accountants of India  APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL 2.25 (vii) Disclosure in Board’s Report by a Listed Company [Section 197(12) and Rule 5] ratio of the remuneration of each director to the median employee's remuneration other details given under rule 5 disclosure prescribed under section 197(12) % increase in remuneration of each director, CFO,CEO,CS or manager in FY % increase in the median remuneration of employees in the FY no. of permanent employees on rolls of company average percentile increase made in te salaries of employees other than managerial personnel in the last FY affirmation of remuneration as per remuneration policy Every listed company shall disclose in the statement showing top 10 employees in terms of remuneration Board’s report- employeed through out FY received remuneration in aggregate not less than 1.02 cr employed for part of the FY received remuneration in aggregate not less than 8.50 lakhs /month employed throughout FY/part thereof received remuneration aggregate not less than 2% of the equity shares of the company , or in excess of that drawn by MD/WTD/M +holds by himself/along his spouse +dependent children particulars of all the employees as per rule Rule 5(3) + whether such employee is a relative of any D/M (a) Every listed company shall disclose in the Board’s report, the ratio of the remuneration of each director to the median employee’s remuneration and other details as prescribed under Rule 5 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. (b) According to Rule 5 (1) every listed company shall disclose in the Board’s report: (i) the ratio of the remuneration of each director to the median remuneration of the employees of the company for the financial year; this disclosure is also prescribed by Section 197 (12). (ii) the percentage increase in remuneration of each director, Chief Financial Officer, Chief Executive Officer, Company Secretary or manager, if any, in the financial year; (iii) the percentage increase in the median remuneration of employees in the financial year; (iv) the number of permanent employees on the rolls of company; © The Institute of Chartered Accountants of India a 2.26 CORPORATE AND ECONOMIC LAWS (v) average percentile increase already made in the salaries of employees other than the managerial personnel in the last financial year and its comparison with the percentile increase in the managerial remuneration and justification thereof and point out if there are any exceptional circumstances for increase in the managerial remuneration; and (vi) affirmation that the remuneration is as per the remuneration policy of the company. Meaning of median: (i) The expression “median” means the numerical value separating the higher half of a population from the lower half and the median of a finite list of numbers may be found by arranging all the observations from lowest value to highest value and picking the middle one; (ii) if there is an even number of observations, the median shall be the average of the two middle values. (c) According to Rule 5 (2) the board’s report shall include a statement showing the names of the top ten employees in terms of remuneration drawn and the name of every employee, who- (i) if employed throughout the financial year, was in receipt of remuneration for that year which, in the aggregate, was not less than one crore and two lakh rupees i.e. rupees 1.02 crore; (ii) if employed for a part of the financial year, was in receipt of remuneration for any part of that year, at a rate which, in the aggregate, was not less than eight lakh and fifty thousand rupees per month; (iii) if employed throughout the financial year or part thereof, was in receipt of remuneration in that year which, in the aggregate, or as the case may be, at a rate which, in the aggregate, is in excess of that drawn by the managing director or whole-time director or manager and holds by himself or along with his spouse and dependent children, not less than two percent of the equity shares of the company. (d) According to Rule 5 (3), the statement referred to in Rule 5 (2) [refer para (c) above] shall also indicate some particulars of the above employees like designation, remuneration received, nature of employment, qualification and experience, date of commencement of employment, age, last employment held by such employee before joining the company, the percentage of equity shares held by the employee in the company within the meaning of clause (iii) of Rule 5 (2) [refer para (c) (iii) above], and whether any such employee is a relative of any director or manager of the company and if so, name of such director or manager. © The Institute of Chartered Accountants of India  APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL 2.27 (viii) Premium paid in respect of Insurance taken for indemnification [Section 197(13)]: Section 197 (13) deals with taking of insurance by a company on behalf of its MD, WTD, manager, CEO, CFO or CS and whether to treat the premium paid on such insurance as remuneration or not. premium paid on such insurance may be treated as remuneration No Yes Where any insurance is taken by a company on behalf of its MD, WTD, manager, CEO, CFO or CS for indemnifying any of if such personnel is proved to be guilty, them against any liability in respect of any negligence, default, misfeasance, breach of duty or breach of trust for which they may be guilty in relation to the company the premium paid on such insurance shall be the premium paid on such treated as part of the insurance shall not be treated remuneration. as part of the remuneration payable to any such personnel. (ix) Remuneration/Commission permissible from holding/subsidiary company [Section 197(14)]: If any director who is a managing or whole-time director receives any commission from the company, he shall not be disqualified from receiving any remuneration or commission from any holding company or subsidiary company of such company subject to the provisions of Section 197. However, the requirement is that such fact must be disclosed by the company in the Board’s report. (x) Penalty for non-compliance [Section 197(15)]: Non-compliance with the provisions of Section 197 gives rise to following penalty:  Defaulting person: liable to a penalty of rupees one lakh.  Company: liable to a penalty of rupees five lakhs. (xi) Auditors’ report to contain a statement regarding remuneration [Section 197(16)]: The auditor of the company shall, in his report under section 143, make a statement regarding remuneration as under: © The Institute of Chartered Accountants of India  a 2.28 CORPORATE AND ECONOMIC LAWS  whether the remuneration paid by the company to its directors is in accordance with the provisions of Section 197;  whether remuneration paid to any director is in excess of the limit laid down under Section 197; and  give such other details as may be prescribed. (xii) Application pending with Central Government as on 12-09-2018 [Section 197(17)]:On and from the commencement of the Companies (Amendment) Act, 2017, any application made to the Central Government under the provisions of Section 197 [as it stood before such commencement i.e. before 12-09-2018], which is pending with that Government shall abate, and the company shall, within one year of such commencement, obtain the approval in accordance with the provisions of this section, as so amended. In other words, in case of pendency of any application as on 12-09-2018, the company shall obtain the approval from the Central Government according to the amended Section 197 within one year from this date. Exemptions/Modifications (i) In case of Government Companies, Section 197 shall not apply. However, for availing the exemption, such Government Company must not have committed a default in filing its financial statements under Section 137 or Annual Return under Section 92 with the Registrar. (Notification No. G.S.R. 463(E) dated 5th June, 2015 as amended by Notification No. G.S.R. 582 (E), dated 13-06-2017). (ii) In case of Nidhi Company, second proviso to sub-section (1) of section 197 shall apply with the modification that the remuneration of a director who is neither managing director nor whole-time director or manager for performing special services to the Nidhis specified in the articles of association may be paid by way of monthly payment subject to the approval of the company in general meeting and also to the provisions of section 197: Provided that no approval of the company in general meeting shall be required where, (a) a Nidhi does not have a managing director or a whole-time director or a manager; (b) the remuneration payable during a financial year to all the directors of the Nidhi does not exceed ten per cent. of the net profits of such Nidhi or fifteen lakh rupees, whichever is less; and (c) a remuneration payable under clause (b) is approved by a special resolution passed in this behalf by the Nidhi. Note: while availing the above modification, the Nidhi Company shall ensure that the interests of their shareholders are protected. (Notification No. G.S.R. 465(e) dated 5 th June, 2015) © The Institute of Chartered Accountants of India  APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL 2.29 7. RECOVERY OF MANAGERIAL REMUNERATION IN CERTAIN CASES [SECTION 199] Section 199 of the Act provides for recovery of managerial remuneration in following case- the company will due to fraud or non- recover from any Where a company is compliance with past or present MD during the period for required to re-state any requirement or WTD or manager which the financial its financial under the or CEO who statements are statements for any Companies Act, received the excess required to be re- period 2013 and the rules remuneration stated thereunder (including stock option) The excess remuneration to be recovered shall be the difference between actual amount of remuneration received by such person and the remuneration that would have been payable to him as per restatement of financial statements. Liability of the defaulter: The recovery of remuneration does not prejudice (i.e. impair) any liability that may be incurred under the provisions of the Companies Act, 2013 or any other law for the time being in force. In other words, the defaulting person because of whom fraud or non-compliance took place and the financial statements were restated at that time, even though has repaid excess remuneration, shall not escape from any liability that may be incurred under the provisions of the Companies Act, 2013 or any other law. 8. CALCULATION OF PROFITS [SECTION 198] According to Section 198 of the Act, net profits for any financial year for the purpose of managerial remuneration payable under section 197 shall be calculated as follows: (i) Credit shall be given for the sums specified in Section 198(2) Add: 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. (ii) Credit shall not be given for those sums specified in Section 198(3) Less: (if credited to the P & L A/c for arriving at profit before tax) (a) profits, by way of premium on shares or debentures of the company, which are issued or sold by the company 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; © The Institute of Chartered Accountants of India  a 2.30 CORPORATE AND ECONOMIC LAWS (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 recognized 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 unrealized gains, notional gains or revaluation of assets. (iii) In making the computation aforesaid, the following sums specified under Section 198(4) shall be deducted, (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 debentures 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 (Company to contribute to bona fide and charitable funds); (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 © The Institute of Chartered Accountants of India  APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL 2.31 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. (iv) In making the computation aforesaid, the following sums specified under Section 198(5) shall not be deducted: (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. 9. FORMS OF, AND PROCEDURE IN RELATION TO, CERTAIN APPLICATIONS [SECTION 201] Section 201 of the Act contains provisions which need to be followed for seeking approval from the Central Government if an application is made under Section 196 for the appointment of a person as Managing Director who has attained the age of seventy years but in whose case the appointment could not be regularised by passing a special resolution though votes cast in favour of the motion exceeded the votes cast against the motion. Non-passing of special resolution as before also contravenes Schedule V. Accordingly, for regularizing the appointment the company would apply to the Central Government for approval based on the fact that majority of the shareholders are in favour of such appointment as they find this appointment to be most beneficial to the company. It may be noted that now no approval is required for managerial remuneration in any case. © The Institute of Chartered Accountants of India  a 2.32 CORPORATE AND ECONOMIC LAWS The process for seeking approval as given in Section 201 and Rule 7 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 is stated as under: Company shall file general notice to copy of notice application to CG members issued by such notice shall be attached with within 90 days from company before filing published application appointment of an application (i) Making of Application for Approval: Every application made to the Central Government under Section 196 shall be in Form No. MR-2 as prescribed by Rule 7 and shall be accompanied by the specified fee. Rule 7 also requires that every such application shall be made to the Central Government within a period of ninety days from the date of such appointment. (ii) General Notice to Members: Before any application is made by a company to the Central Government under section 196, a general notice to the members of the company shall be issued by or on behalf of the company, indicating the nature of the application proposed to be made. (iii) Publication of Notice: Such notice shall be published:  at least once in a newspaper in the principal language of the district in which the registered office of the company is situate and circulating in that district; and  at least once in English in an English newspaper circulating in that district. (iv) Attaching of Notice with the Application: The copies of the notices, together with a certificate by the company as to the due publication thereof, shall be attached to the application. 10. COMPENSATION FOR LOSS OF OFFICE OF MANAGING OR WHOLE-TIME DIRECTOR OR MANAGER [SECTION 202] Section 202 of the Act contains provisions for compensation for loss of office of Managing Director or Whole-time director or Manager as under: When payment to be made: Prohibition on payment of Quantum of compensation A company may make compensation: No payment payable to such Managing payment to a Managing of compensation shall be Director or Whole-time director Director (MD) or Whole-time made in the following cases- or manager: director (WTD) or Manager © The Institute of Chartered Accountants of India  APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL 2.33 (but not to any other director) by means of:  compensation for loss of  where the director shall not exceed the office, or resigns from his office as remuneration he would have  as consideration for a result of the earned if he would have been retirement from office, or reconstruction of the in office for the remainder of  in connection with such company, or of its his term or three years, loss or retirement. amalgamation and is whichever is shorter. appointed as the In other words, if the remaining managing or whole-time period of his term in the office director, manager or is more than three years the other officer of the compensation shall be reconstructed company restricted to three years only; or of the body corporate otherwise it is to be paid for the resulting from the remainder of his term. amalgamation;  where the director resigns from his office otherwise than on the reconstruction of the company or its amalgamation i.e. resigns on his own;  where the office of the director is vacated under section 167(1)6;  where the company is being wound up, (by an order of the Tribunal or voluntarily), due to the negligence or default of the director;  where the director has been guilty of fraud / breach of trust / of gross negligence /gross mismanagement in relation to the conduct of the affairs of the 6 Various grounds of vacation of office covered by Section 167 (1) are mentioned in an earlier Chapter. © The Institute of Chartered Accountants of India  a 2.34 CORPORATE AND ECONOMIC LAWS company or any subsidiary company or holding company thereof; and  where the director has instigated/ has taken part directly or indirectly in bringing about, the termination of his office. Calculation of compensation: The compensation shall be calculated on the basis of the average remuneration earned by him during a period of three years immediately preceding the date on which he ceased to hold such office, or where he held the office of less than three years, then for such shorter period. No compensation if company is being wound up: No such payment of compensation can be made if winding up of the company is commenced whether:  before the date on which he has ceased to hold office; or  within 12 months after the date on which he has ceased to hold office, if the assets on winding up (after deducting expenses on winding up) are not sufficient to repay the shareholders the share capital, including premiums if any, contributed by them. Note: Section 202 does not prohibit the payment to a managing director or whole-time director, or manager, of any remuneration for services rendered by him to the company in any other capacity. 11. SECRETARIAL AUDIT FOR BIGGER COMPANIES [SECTION 204] Section 204 of the Act contains provisions for secretarial audit for bigger companies. These provisions are discussed as under: (i) Which companies to get conducted secretarial audit: Section 204(1) requires the following types of companies to get conducted secretarial audit: (a) every listed company; and (b) a company belonging to the other prescribed class of companies. In this respect Rule 9(1) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 prescribes following companies for the purpose of secretarial audit: (a) Every public company having a paid-up share capital of 50 crore rupees or more; or © The Institute of Chartered Accountants of India  APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL 2.35 (b) Every public company having a turnover of 250 crore rupees or more; or (c) Every company having outstanding loans or borrowings from banks or public financial institutions of one hundred crore rupees or more. Explanation to Rule 9 : For the purposes of this sub-rule, it is hereby clarified that the paid up share capital, turnover, or outstanding loans or borrowings as the case may be, existing on the last date of latest audited financial statement shall be taken into account. (ii) Who is authorised to give secretarial audit report: According to Section 204 (1), a company secretary in practice is authorised to give Secretarial Audit Report. Such Report shall be in Form No.MR - 37. (iii) Annexing of secretarial audit report: A company shall annex the secretarial audit report so obtained with its Board’s report made in terms of section 134 (3). (iv) Duty of the company as regards secretarial audit: The company is duty-bound to give all assistance and facilities to the company secretary in practice, for auditing the secretarial and related records of the company Section 204(2)]. (v) Duty of the Board of Directors: The Board of Directors, in the Board’s Report prepared under section 134(3) shall explain in full any qualification or observation or other remarks made by the company secr