Corporate & Economic Law

CA Mohit Sharma
Notes Prepared by Durgesh Jha
Chapter 3: Appointment and Remuneration of Managerial Person

Sec 196: Appointment of MD/WTD or Manager:

- No Company shall employ MD and Manager both. But can have MD & WTD.
- No MD/WTD/Manager be appointed for a term > 5 years at a time.
Reappointment at earliest be 1 year before expiry of term.

- No Company shall Appoint MD/WTD/Manager who is:

1. Age Below 21 or Attained 70
2. Insolvent
3. Defaulted payment to Creditors
4. Convicted and Sentenced for > 6 months

Note:
- To appoint person of age > 70 years [No such Provision for < 21 Years]
1. Either pass SR or,
2. Simple Majority (OR) & CG Satisfied its Beneficial to Company.

Additional Eligibility Conditions for MD/WTD/Manager

- Not Sentenced to Imprisonment or Fined > Rs. 1,000 under any Acts.
- Not been detained PMLA/FEMA
- Resident of India [N.A. to SEZ] Staying for Continuous > 12 months
And who has come to India:
1. For Employment or
2. For carrying Business/Vocation
- Terms Appointment and Remuneration to MD/WTD/Manager shall be:
a. approved by BOD at a meeting
b. approved by SH at the next GM
c. Approved by CG if, Terms are in Variance to Additional Conditions above In Form MR 2 within 90
days
- Return in Form MR 1 be filed with ROC within 60 days of appointment
- Where appointment not approved by SH in GM, Acts done before still Valid.
Sec 197: Max Managerial Remuneration & Managerial Remuneration in Case Inadequacy of
Profits:[N.A. to Private co and Govt. co]

Remuneration Payable To : Limit : To Pay Above Limit :

All Directors & Manager 11% of Net Profit OR and PFI Approval
One MD/WTD/Manager 5% of Net Profit
More than 1 MD/WTD/Manager 10% of Net Profit
Directors other than MD/WTD: SR and PFI approval
1. In case there is a MD/WTD/Manager 1% of Net Profit
2. In case there is no MD/WTD/Manager 3% of Net Profit

- Above % shall be exclusive of Sitting Fees, u/s 197(5)

- The Board has no power to fix remuneration.
- Remuneration Includes Rem. Payable in Other Capacity. However Not be Included Where :
a. Services are of professional nature.
b. Director possesses Qualification.

Sitting fees:
- Fees received for attending Meetings.
- Decided by BOD not exceeding Rs. 1 lakh.
- ID and WD shall not receive less than Other Directors.
- ID may receive more than WD or Vice-versa.
- Payable even for VC/AV Meetings.
- If Board Meeting is adjourned, Directors Present shall receive Sitting fees.
- Sitting fees cannot be paid twice in Adjourned Meeting.

Manner of payment of Remuneration:

a. Monthly or,
b. At a specified % of Net Profit or,
c. Partly one way and partly another.

Director receives Remuneration in excess:

- Shall refund within 2 years, Hold in trust until then.
- However, Company may Waive by SR Within 2 years Sub to Approval of Bank/PFI/Debenture
[CASE: Director not bound to disclose breach done by him, So that Company can dismiss himself.]

In case of a Nidhi Company:

- Remuneration to Director (other than MD/WTD/Manager) be Monthly Paid subject to Approval in GM
- No approval in GM if :
a. Nidhi does not have MD/WTD/Manager
b. Remuneration to all Directors < 10% of Net Profit or Rs. 15 lakhs, whichever is Lower.
 Listed Co. To Disclose following in Board Report:
a. Ratio of Remuneration of Director to the Median Remuneration of Employees
b. % increase in Remuneration of Director, CFO, CEO, CS or Manager
c. % increase in the Median Remuneration of Employees
d. No. of permanent Employees on Payrolls.
e. Avg. Percentiles increase in Salaries of Employees Other than Managerial persons &
Justification.
f. Affirmation that Remuneration is as per the Policy.

- The Board Report shall State Name of top 10 Highest Earning Employees&
Fees who earns:
a. If employed throughout the FY > = Rs. 1.02 crores p.a.
b. If employed for part of FY > = Rs. 8.50 lakhs p.m.
c. Receives Remuneration more than MD/WTD/Manager and holds > = 2% ESC of
Company.

- Insurance premium not be included in Remuneration.

However If such person is proved to be guilty, the premium paid shall be Remuneration.
- Contravention Fine: Rs. 1 lakh [Person] and Rs. 5 lakhs [Company].

Where Company has No/Inadequate Profit Rem. Be paid within Limit A & B:

Limit A:

Where the Effective Capital is: Limit of Yearly Remuneration payable Shall not exceed:
To Managerial Persons To Other Directors [ID/NED]
Upto Rs. 5 crores 60 Lakhs 12 Lakhs
5 to 100 crores 84 Lakhs 17 Lakhs
100 to 250 crores 120 Lakhs 24 Lakhs
Above 250 crores 120 lakhs 24 lakhs
+ 0.01% of Above 250 Cr. + 0.01% of Above 250 Cr.

- If period is Less than 1 year, Proportionate Remuneration be Limit.

- Remuneration in excess of above limit may be paid if SR passed.

Limit B:

- Where MP/Director is acting in Professional Capacity, Limit A be paid if they have :

1. No interest in Capital of CASH during last 2 years. [Above 0.5% of PUSC]
2. Possess Qualification/ Expertise/ Knowledge in field which co. operates.
Limit A & B be Approved by BoD + NRC.

Following Company may pay any amount of Remuneration:

a. Newly Incorporated Co. for 7 years.
b. Sick Company for whom Scheme of Revival ordered by BIFR for 5 years.
c. Company for which Resolution Plan is approved by NCLT under IBC for 5 years.
d. Where Remuneration Fixed by BIFR or NCLT.

Perquisites not included in Managerial Remuneration:

a. Contribution to PF, Super AF, AF (Include if taxable)
b. Gratuity Payable (Max Half Month Salary each year)
c. Leave Encashment.
d. Children Education Allowance (upto max Rs. 12,000 p.m per child for max 2 children)
e. Holiday Passage
f. Leave Travel Concession
g. HRA

Section 199: Recovery of Remuneration:

- If Company is required to Restate FS, due to Fraud, Company to recover Rem. From
KMP.

Section 200: Company to fix Limit with regard to Remuneration:

- While fixing Remuneration Company shall consider:
a. Financial Position.
b. Professional qualification and experience.

Section 202: Compensation for Loss of Office of MD/WTD/Manager:

- CFLO/CFRO [Loss/Retirement] be paid only to MD/WTD/Manager.

No payment of CFLO/CFRO if:

a. Director Resigns due to Amalgamation/Reconstruction & gets Appointed in New Co.

b. Director Resign Otherwise.
c. Office Vacated [u/s 167]
d. Company is wound up due to Negligence of Director.
e. Director is Guilty of Fraud or Breach of Trust.
f. Director has Role in bringing his Own Termination.
Tenure
Amount of Compensation: Remuneration that he would have earned:
Remaining
ooo or
steers x
a. For Remaining Term or,
Based on AugRem last
of year
Ithaca
b. 3 Years
Whichever is Shorter [Remuneration be Average of or
Lastshorter
3 Years] periodas the case
Efa
maybe
_t

- Provided No CFLO if WUP commence before/after 12 months after he ceases.

Section 203: Appointment of Key Managerial Personnel

- Following companies shall have “whole time KMP”:
a. Listed Co.
b. Private/Public Co. Having PUSC > = Rs. 10 crores

- Who are whole time KMP?

a. MD/WTD/Manager
b. CEO/CFO/CS

Individual can be Chairperson as well as MD/CEO if:

a. AoA provides
b. Company carries Single business.
c. Public Co. Having PUSC > = Rs. 100 Cr. & T/O > = Rs. 1,000 Cr.
Which Carries Multiple Business, Can appoint Multiple CEO’s who may also be
Chairperson

Vacancy of Whole Time KMP, be filled by BoD within 6 months.

Section 204: Secretarial Audit for

Bigger Companies:

- Following Companies to Annex Secretarial Audit Report [CS]

a. Listed Co.
b. Public Co. having PUSC >= Rs. 50 crores
c. Public Co. having T/O >= Rs. 250 crores
d. Every Co. having O/S Loan/Borrowings >= Rs. 100 crores
 - Secretarial Audit Report : Form MR 3
- Contravention Penalty : Rs. 2 Lakhs

Restriction
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