Managerial Remuneration as per the Companies Act, 1956

Definition:

The term remuneration covers the following types of expenditure incurred by the company for its Director or his family –

• Rent free accommodation;
• Any benefit or amenity in respect of accommodation free of charge;
• Any other benefit or amenity free of charge at a concessional rate;
• Any personal obligation; and
• Insurance on the life of, or to provide any pension, annuity or gratuity for, any of the director or his /her spouse or child.

But the definition is inclusive one. It covers every amount that the company pays or spends for or for the benefit of a Director, in whatever form and by whatever name.

Applicability:

Section 198 and 309 deals with the provisions relating to managerial remuneration. The term managerial remuneration mentioned in section 198 and 309 covers the remuneration of all Directors and also its manager. It is applicable to all public companies and private company which is a subsidiary of public company. Provisions of the above mentioned section are not applicable on government companies (within the meaning of section 619 of the Act).

Ceiling on Managerial Remuneration:

Section 198(1) lays down 11% of net profits of the company computed in the manner as laid down in section 349 and 350 as the overall ceiling on the total remuneration of the company. While computing the net profits the remuneration of the Directors shall not be deducted from the gross profits. The above mentioned limit shall be exclusive of sitting fees payable to the directors in terms of section 309 (2).

As per section 309 (3), Whole-time Director or Managing Director may be paid either by way of monthly payment or at a specified percentage of profits or partly by one way and partly by the other to the extent of 5% of net profit for one such director and 10% for all of such director. Remuneration in excess of the specified limit requires the approval of the Central Government.

Director other than the director who is in the whole-time employment of the company and Managing Director may be paid remuneration either –

• By way of monthly, quarterly or annual payment with the approval of the shareholders by way of ordinary resolution and with the approval of the Central Government; or
• By way of commission if such payment is authorized by special resolution. Such Special resolution shall not be effective for more than five years. It may be renewed from time to time not exceeding 5 years at a time.

Provided such payment shall not exceed 1% of net profits of the company where the company has managing or whole-time director or manager. 3% of the net profit in other cases.

Remuneration for professional service:

Proviso to section 309 (1) excludes any remuneration paid to directors for professional services rendered by them to the company, provided that director possesses the requisite professional qualification. Hence the benefit of this exception is available only to those directors who possess requisite qualifications for practicing the profession in respect of which they render special services.

Unauthorized or excess remuneration:

If any director draws directly or indirectly, by way of remuneration any sums in excess of the limit or without the prior sanction of the Central Government, where it is required, he shall refund such sums to the company and until such sum is refunded, hold it in trust for the company. The company shall not waive the recovery of such sum unless permitted by the Central Government.

Remuneration from Subsidiary:

Section 309 (6) provides that no director who is in receipt of any commission from the company and who is either in the whole-time employment of the company or a managing director shall be entitled to receive any commission or other remuneration from any subsidiary of such company. The operation of the restriction imposed by the sub-section is limited only in the case where a director is in receipt of commission from the holding company, and not in the case where he gets from the holding company remuneration in any other form.

Remuneration of an employee appointed as alternate director:

An employee appointed as alternate director does not necessarily become a whole-time director and that the provisions of section 198, 269,309, 314 and Schedule XIII are not applicable in such a case.