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