Remuneration paid to Whole Time Directors of Public unlisted Companies

  1. What is meant by remuneration?

Clause 78 of Section 2 of the Companies Act, 2013 defines “Remuneration” which 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.

  1. What is the Maximum Managerial Remuneration payable by a Public Company?

As per Section 197(1) the total managerial remuneration payable by a public company, to its directors, including managing director and whole-time director, and its manager in respect of any financial year shall not exceed 11% of the net profits of that company for that financial year computed in the manner laid down in section 198 of the Companies Act, 2013, except that the remuneration of the directors shall not be deducted from the gross profits.

  1. What is included in managerial remuneration?

Whole time director can be paid remuneration for their services as directors.  Also, if the directors have professional qualifications they can be paid for rendering professional services. Remuneration paid to directors for their professional services is not included as part of the remuneration if the services rendered are of a professional nature; and (b) the director possesses the requisite qualification for the practice of the profession in the opinion of the Nomination and Remuneration Committee if the company is covered under sub-section (1) of section 178, else in the opinion of the Board of Directors. So, a heart surgeon on the board of Fortis Hospitals does a bypass surgery at any of Fortis Hospitals in India or abroad and takes a fee for that will not form part of the director’s remuneration as the director here was not paid for performing his duties as a director but was paid for rendering professional services.

  1. Whether the above-referred remuneration is applicable for a private limited company that is a subsidiary of a public limited company?

A private company that is a subsidiary of a public limited company is also considered as a public limited company. In the Companies Act, 1956 there was a concept of a deemed public company. But under the Companies Act, 2013 there is no concept of Deemed Public Company.  So, there are only two types of companies viz. public companies and private companies. As per Section 2(71) of the Companies Act, 2013, a private company which is a subsidiary of a public company is also considered a public company. Hence, the above referred provisions pertaining to managerial remuneration are also applicable to private limited companies that are subsidiaries of public limited companies.

  1. Is there any limit on remuneration payable?
  • As per Section 197 of the Companies Act, 2013 total managerial remuneration payable to Whole time directors does not exceed 11% of the net profit of the company.
  • In the case of Managing Director, Whole-time Director or Manager-upto 5% of the net profits of the company, if there is only one such director. But if there is more than one such director, remuneration shall not exceed 10% of the net profits for all of them put together. (ii) In the case of directors who are neither Managing Director nor Whole-time Director-upto 1% of the net profits, if there is a managing director or whole time or manager. But up to 3% of the net profits if there is no Managing Director or Whole-time Director or Manager. 
  • However, by passing a Special Resolution in General Meeting, a company can pay: (i) More than 5% or 10% of Net Profits to its Whole-time Director, Managing Director or Manager. (ii) More than 1% or 3% of Net Profits to its Executive Directors (including independent Directors)
  • Further in case of a company having inadequate profits in any financial year then the maximum remuneration that can be paid would be as per limits specified in Schedule V, Part II of the Companies Act, 2013 which is dependent on effective paid-up share capital of the company. Further, in case the company wants to pay remuneration in excess of the limits of remuneration mentioned as per Part II of Schedule V of the Companies Act, 2013 then a special resolution is required to be passed.
  1. What all components are not included in the limits while calculating managerial remuneration?

The following components of the salary package are not considered part of managerial remuneration:

  • Payment of applicable retirement benefits to the director viz. gratuity, provident fund etc.
  • Sitting fees paid to director
  • An insurance premium paid by the company for and on behalf of director
  • Perquisites and perks given to him by the company for rendering service to the company
  • The value of stock options granted is also not part of director’s remuneration
  1. How is remuneration payable to the director decided by the company?

Remuneration payable to the director is either decided by Articles of Association or Agreement entered in with by Company or Resolution passed in General meeting of the company.

General practice :

It is seen that approval of directors’ remuneration is taken by way of ordinary resolution for scenarios wherein the company is making a profit.

But there may be a scenario due to unforeseen circumstances wherein the company might face loss or inadequate profits.

In such scenarios the resolution passed would not cater to the need of the company. 

According to schedule V of the Companies Act whenever there is a loss or inadequate profits company will not be able to pay remuneration to directors unless certain conditions are met as specified.

So does it mean that companies who have passed an ordinary resolution and not factored in the scenario wherein the company would be in loss or have inadequate profits can company still pay remuneration to WTD without complying with conditions as they could never envisage it? 

Would that not be violating the Companies Act,2013? 

Also, what does it mean by inadequate profits here as the term is not defined by the Companies Act nor any accounting standard? 

What if at the end of the year, the company understands that the remuneration paid to WTD is in excess or the company is in losses and we shouldn’t have paid remuneration? 

A few years back Mr Sunil Bharti Mittal had to seek a waiver of remuneration from shareholders as Airtel was into losses and after the end of the financial year, it realised we had paid excess remuneration.

So, companies must be careful in deciding salary structure and taking approval.

Series 2 : Remuneration payment to Non- Executive Directors of Public Company