THE COMPANIES ACT, 2013

Managerial Remuneration

Governance & Compliance — Section 197 & Schedule V

— Statutory ceilings on director and KMP compensation —

Managerial Remuneration — Section 197 and Schedule V

Introduction

Few topics in contemporary corporate-governance discourse generate as much controversy as managerial remuneration. The compensation of top corporate executives — Managing Directors, Whole-Time Directors, and Managers — touches on fundamental questions of fairness, shareholder value, governance accountability, and the relationship between corporate performance and personal reward. When executive pay vastly outstrips the wages of ordinary workers, when directors approve their own remuneration packages without effective shareholder constraint, when bonuses are paid even as companies report losses, the legitimacy of the entire corporate enterprise comes under question.

The Companies Act, 2013 addresses these concerns through Section 197 read with Schedule V — a detailed regulatory regime that imposes ceilings on managerial remuneration, requires shareholder approval for higher payouts, mandates disclosure, and provides for recovery of excess remuneration in cases of inadequate profits. The framework reflects a clear policy choice: managerial remuneration is too important and too prone to abuse to be left to board discretion alone. Statutory ceilings, shareholder oversight, and Central Government approval mechanisms are required to maintain the legitimacy of executive pay.

This article examines the managerial-remuneration framework in comprehensive detail — the statutory ceiling under Section 197, the categories of managerial personnel covered, the calculation of 'net profit' for Section 197 purposes, the framework under Schedule V (Parts I, II, and III) for companies with inadequate or no profits, the disclosure requirements, the recent reforms (including the 2017 amendment dispensing with Central Government approval), and the case law. The article is essential reading for judicial aspirants because managerial-remuneration issues feature in oppression cases, shareholder-derivative actions, securities-law proceedings, and corporate-restructuring disputes.

Figure 1 — Managerial remuneration ceilings under Section 197 — overall, single managerial, multiple managerial, and non-executive limits.

Part I — Conceptual Foundation

What is 'Managerial Remuneration'?

'Managerial remuneration' refers to the total compensation paid to the managerial personnel of a company — primarily the Managing Director, Whole-Time Director, and Manager. It includes:

• Salary;
• Allowances and perquisites (housing, vehicle, medical, etc.);
• Commission (whether on profits, turnover, or other criteria);
• Bonuses and incentive payments;
• Stock options and other equity-based compensation;
• Pension and retirement benefits;
• Sitting fees (separate regime);
• Any other monetary value of the remuneration package.

Why Statutory Regulation Is Needed

Several considerations justify statutory regulation:

• Fiduciary conflict — directors set their own (and their colleagues') remuneration, creating an inherent conflict of interest;
• Shareholder protection — minority shareholders cannot effectively constrain remuneration through ordinary corporate-governance mechanisms;
• Performance alignment — without regulation, remuneration may be detached from performance;
• Public interest — excessive executive pay can undermine social legitimacy of capitalism;
• Corporate value preservation — uncontrolled remuneration depletes shareholder value;
• Cross-border consistency — Indian companies with foreign shareholders need predictable governance norms.

The Indian Approach — Three-Tier Architecture

The Indian framework operates on three tiers:

1. Statutory ceiling — Section 197(1) caps total managerial remuneration at 11% of net profit (with sub-ceilings for individual categories);Inadequate-profit framework — Schedule V provides specific limits for companies with no/inadequate profits;Disclosure and shareholder oversight — mandatory disclosure of remuneration in Board's report and audit committee/NRC oversight.

Part II — Section 197(1) — The Statutory Ceiling

The Overall 11% Limit

Section 197(1) provides that the total managerial remuneration payable by a public company to its directors (including any managing director or whole-time director) and its manager shall not exceed 11% of the net profits of the company for that financial year, computed in the manner laid down in Section 198.

The 11% limit is the overall cap. Within this cap, Section 197 prescribes sub-ceilings for different categories:

Application to Public Companies

The 11% ceiling and sub-ceilings under Section 197(1) apply only to public companies. Private companies are not bound by these statutory limits and have substantial flexibility in setting managerial remuneration. The reasoning is that:

• Private companies typically have closely-held shareholding;
• Shareholders directly negotiate management compensation;
• There is less risk of public-investor oppression;
• Excessive flexibility supports entrepreneurial growth.

Application to Listed Companies

Listed public companies are bound by Section 197(1) AND by SEBI LODR Regulation 17 framework, which requires:

• Disclosure of remuneration in the corporate-governance section of the annual report;
• Approval by the Nomination and Remuneration Committee (NRC);
• Shareholder approval for any remuneration that exceeds prescribed thresholds;
• Adoption of a formal remuneration policy.

Part III — Section 198 — Calculation of Net Profit

Why Special Calculation?

Section 198 prescribes a special method for calculating 'net profit' for purposes of managerial remuneration. The special calculation is necessary because, otherwise, the Section 197 ceiling could be manipulated by accounting-policy choices. Section 198 provides a uniform statutory formula that:

• Excludes profits/losses on capital/exceptional items;
• Excludes write-backs of provisions;
• Includes specific items like profit on sale of fixed assets but excludes others;
• Provides a normalised measure of profit that is suitable for remuneration calculation.

Section 198 Methodology

Section 198 prescribes:

1. Calculate operating profit per the audited financial statements;Add back items that should be included for remuneration purposes (subsidies received, profits on disposal of investments, etc.);Deduct items that should be excluded (capital profits, premiums on issue of shares, profits arising from amalgamation/reconstruction, etc.);Make adjustments for taxation, depreciation, etc., as specified;The resulting figure is the 'net profit' for Section 197 purposes.

Items to be Added

Section 198(2) lists items that shall be added to the operating profit to compute net profit:

• Subsidies received from any government or any government-controlled body or person, but not including the bounty allowed by any government on the export of goods;
• Profits, by way of premium on shares or debentures of the company, which are issued or sold by the company [excluded under Section 198(3)(a)];
• Other items of income that the Companies Act specifies as additions.

Items to be Deducted

Section 198(3) lists items that shall be deducted to compute net profit, including:

• Profits, by way of premium on shares or debentures of the company, which are issued or sold by the company;
• Profits on the sale by the company of forfeited shares;
• 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;
• Profits from the sale of any immovable property or fixed assets of a capital nature comprised in the undertaking, except where these are sold in the ordinary course of business;
• 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.

Items Not to be Deducted

Section 198(4) provides that certain items shall not be deducted in computing net profit:

• Income-tax and super-tax payable by the company;
• Compensation, damages, or payments made voluntarily, that is to say, otherwise than in pursuance of a legal liability;
• Loss of capital nature including loss on the sale of the undertaking;
• Such other items as may be prescribed.

Part IV — Schedule V — Companies With Inadequate or No Profits

The Schedule V Framework

Section 197(3) provides that if, in any financial year, a company has no profits or its profits are inadequate, the company shall not pay to its managerial personnel any remuneration except in accordance with the provisions of Schedule V. Schedule V is a comprehensive regime governing remuneration in such situations.

Structure of Schedule V

Schedule V is divided into three parts:

• Part I — Conditions for appointment of MD/WTD/Manager — qualifications, residence, employment status, etc.;
• Part II — Remuneration — limits and conditions for remuneration in companies with no/inadequate profits, with two sections:
• - Section I — Without Central Government approval (within prescribed limits);
• - Section II — With approval of Central Government (for higher remuneration; substantially relaxed since 2017);
• Part III — Provisions applicable to Parts I and II — common provisions.

Schedule V Part I — Conditions for Appointment

Schedule V Part I prescribes general conditions for appointment of MD/WTD/Manager:

• Must not be a person who has been sentenced to imprisonment for any period or fine exceeding ₹1,000 for offences under the Companies Act, IPC, Securities Contracts Regulation Act, FERA, FEMA, etc.;
• Must not have been detained under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act (COFEPOSA);
• Must not be an undischarged insolvent or person who has at any time been adjudged as insolvent;
• Must not have been suspended from practice as professional, if applicable;
• Must be a resident of India (resident as defined for this purpose);
• Specific qualifications by reference to the type of company.

Schedule V Part II Section I — Without Central Government Approval

Section I of Part II prescribes the maximum remuneration payable to MD/WTD/Manager in companies with no/inadequate profits, without requiring Central Government approval. The amounts are linked to the 'effective capital' of the company:

These limits may be doubled if approved by a special resolution of the shareholders. Effective capital is defined as the aggregate of the paid-up share capital, share premium, reserves and surplus (excluding revaluation reserve), long-term loans and deposits repayable after one year, less accumulated losses (and certain other adjustments).

Special Resolution Doubling

Schedule V Part II Section I provides that the limits prescribed may be doubled if a special resolution has been passed by the shareholders. This effectively means:

• With ordinary procedure: Schedule V limits apply;
• With special resolution: limits doubled;
• Beyond doubled limits: Central Government approval was previously required (now substantially relaxed through 2017 amendment).

Schedule V Part II Section II — Removal of Central Government Approval

Through the Companies (Amendment) Act, 2017, the requirement of Central Government approval for higher remuneration was substantially removed. Section II of Part II now prescribes:

• Companies must obtain shareholder approval through a special resolution;
• Approval should specify the term and amount of remuneration;
• Statement justifying the proposed remuneration must be circulated to members;
• Disclosure in financial statements;
• In specific cases (significant excess over Schedule V limits), Central Government approval may still be needed under specific conditions.

The 2017 Reform — A Major Liberalisation

Prior to the 2017 amendment, companies wishing to pay remuneration exceeding Schedule V limits had to apply to the Central Government for approval. This was a substantial bottleneck and a source of regulatory delay. The 2017 amendment substantially liberalised the regime by:

• Replacing CG approval with special-resolution requirement;
• Reducing administrative bottlenecks;
• Trusting shareholder oversight to constrain excessive remuneration;
• Aligning India with international practice.

The reform reflects a regulatory philosophy that shareholder voting is more effective than government discretion in constraining excessive executive pay. Whether this confidence is borne out by practice remains an empirical question.

Part V — Section 197 — Other Key Provisions

Section 197(2) — Exclusion of Sitting Fees

Section 197(2) provides that the remuneration payable to directors who are not MD/WTD/Manager shall not exceed 1% of net profits (where there is MD/WTD/Manager) or 3% (where there is no MD/WTD/Manager). However, sitting fees for attending Board meetings are excluded from this calculation. Sitting fees are governed separately by Section 197(5) and Rules.

Section 197(5) — Sitting Fees

A director may receive sitting fees for attending Board meetings or committee meetings, subject to:

• Maximum sitting fee per meeting prescribed by Rules — currently ₹1 lakh per meeting (subject to revision);
• Independent directors cannot receive sitting fees plus profit-linked commission, except in prescribed circumstances;
• Sitting fees are not part of the Section 197(1) ceiling calculation.

Section 197(7) — Independent Directors' Remuneration

Section 197(7) provides that independent directors shall not be entitled to any stock option but may receive:

• Sitting fees for attending Board/committee meetings;
• Reimbursement of expenses for participating in Board/committee meetings;
• Profit-related commission as may be approved by the members.

The exclusion of stock options for independent directors reflects the policy concern that equity-based compensation creates incentive misalignment with their independence.

Section 197(9) — Recovery of Excess Remuneration

Section 197(9) provides that if any director draws or receives, directly or indirectly, by way of remuneration any such sums in excess of the limit prescribed by this section, or without the prior sanction of the company, where it is required, he shall refund such sums to the company, within two years or such lesser period as the company may allow. Until such sum is refunded, he shall hold it in trust for the company.

The recovery provision is a critical safeguard:

• It applies regardless of the director's good faith;
• It applies retrospectively to amounts already paid;
• The company holds the excess as constructive trustee;
• The company can recover the excess even after years.

Section 197(10) — Insurance Cover

Section 197(10) permits a company to take insurance cover at its own cost on behalf of its KMP and directors for indemnifying any of them against liability — but the premium paid for such insurance shall not be treated as part of the remuneration unless an officer is found to be guilty (in which case, premium becomes remuneration). This is a significant provision because:

• It enables D&O insurance — a global corporate-governance practice;
• It does not initially count towards the remuneration ceiling;
• It provides reasonable protection to officers acting in good faith;
• It clawback applies if the officer is found guilty.

Section 197(12) — Disclosure of Ratio of Remuneration

Section 197(12) and Rule 5(1) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 require listed companies to disclose in the Board's report:

• The ratio of remuneration of each director to the median remuneration of the company's employees;
• Percentage increase in remuneration of each director, CFO, CEO, Company Secretary;
• Percentage increase in median remuneration of employees;
• Number of permanent employees on the rolls;
• Average percentage increase already made in the salaries of employees other than managerial personnel and its comparison with the percentage increase in the managerial remuneration;
• Justification of the ratio.

Part VI — SEBI LODR Regulations — Listed Company Overlay

Regulation 17(6) — Approval of Remuneration

Regulation 17(6) of SEBI LODR provides:

• Remuneration of executive directors shall be approved by the NRC and recommended to the Board;
• Remuneration policy shall be displayed on the company's website;
• Remuneration policy shall be disclosed in the Board's report;
• Maximum remuneration that can be paid to executive directors needs Board approval and, where required, shareholder approval.

Regulation 17(6A) — Approval of Non-Executive Director Remuneration

In 2018, Regulation 17(6A) was added to provide:

• Remuneration paid to a non-executive director (including independent director) by way of fee, commission or other forms of payment must be approved by the shareholders by special resolution if it exceeds 50% of the total remuneration paid to all non-executive directors;
• This applies to listed entities.

Disclosure under LODR

Listed companies must disclose:

• All material facts about managerial remuneration in the corporate-governance report;
• Specifically, the disclosures required under Section 197(12) and the Rules;
• Remuneration policy in detail on the company's website;
• Quarterly disclosures where applicable.

Part VII — Notable Case Law

Foundation Cases on Remuneration

Indian Application Cases

Recovery Cases

Independent Director Remuneration Cases

Following the 2018 LODR amendment, several listed-company general meetings have raised questions about non-executive-director remuneration. The shareholder voting record on such resolutions provides empirical evidence of how shareholder activism functions in this domain. Notable contestation has been observed in companies including Whirlpool, Mahindra, and Reliance Industries.

Part VIII — Practical Issues and Compliance

Calculating Net Profit for Section 197

Practical compliance with Section 197 requires:

• Maintaining clear distinction between net profit per audited statements and Section 198 net profit;
• Annual reconciliation between accounting profit and Section 198 net profit;
• Auditor verification of the Section 198 calculation;
• Disclosure in audit report of compliance with Section 197 limits.

Approval Documentation

Appropriate documentation:

• Board resolution approving remuneration package;
• NRC recommendation;
• Shareholder approval (where required);
• Schedule V justification (where applicable);
• Special resolution explanatory statement clearly disclosing remuneration components;
• Annual disclosure in Board's report and corporate-governance report (listed entities).

Variable and Performance-Linked Remuneration

Variable remuneration creates particular challenges:

• Annual bonuses must be approved within the relevant period;
• Performance-linked commissions require predefined formulas;
• Stock options follow ESOP scheme rules and Section 62 procedures;
• Share-based payments require fair-value calculation;
• Mid-year amendments to compensation packages need Board/shareholder approval.

D&O Insurance

Companies should:

• Maintain appropriate Directors and Officers insurance coverage;
• Document the policy terms, premium, and coverage scope;
• Track any claims that might trigger Section 197(10) clawback;
• Renew policies annually with appropriate adjustments.

Part IX — Comparative Aspects

Indian vs Global Approaches

Indian Specificity

Several features distinguish the Indian approach:

• Statutory ceiling (the 11% cap) is uncommon globally;
• Schedule V framework provides predictable benchmarks for distressed companies;
• Recovery provision (Section 197(9)) is rare;
• Independent-director equity-option restriction is comparatively unique;
• Mandatory ratio disclosure (median employee compensation) reflects social-equity concerns.

Part X — Practical Illustrations

Illustration 1 — Application of 11% Ceiling

ABC Ltd, a public company, has Section 198 net profit of ₹100 crores in FY 2024-25. It has one MD, two WTDs, and four other directors (non-executive). Issue: What is the maximum total managerial remuneration? Held: Section 197(1) ceiling: 11% of ₹100 crores = ₹11 crores. Sub-ceilings: (a) MD + WTDs combined: cannot exceed 10% (₹10 crores); (b) Non-executive directors combined: cannot exceed 1% (₹1 crore). Single MD/WTD cannot exceed 5% (₹5 crores) individually. Total of all categories: ₹11 crores.

Illustration 2 — Inadequate Profit Application

XYZ Ltd, a public company with effective capital of ₹150 crores, has reported a net loss for FY 2024-25. It wishes to pay ₹100 lakhs annually to its MD. Issue: Is this permissible? Held: Since XYZ has inadequate profits, Schedule V applies. For effective capital between ₹100 crore and ₹250 crore, the maximum remuneration without CG approval (Schedule V Part II Section I) is ₹120 lakhs per annum. ₹100 lakhs is within this limit. With special resolution, the limit could be doubled to ₹240 lakhs. The proposed ₹100 lakhs is permissible without special resolution.

Illustration 3 — Excess Remuneration Recovery

LMN Ltd had paid its MD ₹1.5 crores annual remuneration, exceeding the Schedule V limits applicable for its effective capital. Six months later, on review, the company finds the excess. Issue: What is the consequence? Held: Per Section 197(9), the MD must refund the excess (the amount above the permissible limit) to the company within two years. The MD holds the excess as constructive trustee. If the MD refuses to refund, the company can sue for recovery; the recovery action is not subject to ordinary civil-suit limitations because of the trust character of the obligation.

Illustration 4 — Independent Director Stock Options

PQR Ltd, a listed company, proposes to grant stock options to its independent directors as part of their compensation package. Issue: Is this permissible? Held: No. Section 197(7) explicitly prohibits independent directors from receiving stock options. The grant would be invalid. Independent directors can receive sitting fees and profit-related commissions (subject to approvals), but not equity-based compensation. The reasoning is that equity-based compensation creates incentive misalignment with independent oversight.

Illustration 5 — D&O Insurance and Clawback

DEF Ltd has taken D&O insurance covering its directors and KMPs at a premium of ₹50 lakhs per annum. During the year, one director is found guilty of fraud relating to a related-party transaction. Issue: How is the insurance treated? Held: Per Section 197(10), the premium is initially excluded from managerial remuneration. However, since the director has been found guilty, the insurance premium attributable to that director becomes part of his remuneration retroactively. This may push the remuneration above Section 197 limits, triggering Section 197(9) recovery.

Part XI — Recent Developments

Companies (Amendment) Act, 2017

Major reforms:

• Replacement of Central Government approval with special-resolution requirement (most cases);
• Liberalisation of Schedule V framework;
• Strengthening of disclosure obligations;
• Consolidation of various remuneration provisions.

Companies (Amendment) Act, 2019 and 2020

Subsequent amendments:

• Decriminalisation of certain remuneration-related offences;
• Refinement of penalty provisions;
• Clarifications regarding insurance and director compensation.

LODR Amendments

SEBI has periodically refined the LODR framework:

• Regulation 17(6A) — non-executive director remuneration approval;
• Enhanced disclosure of remuneration policy on company website;
• Stricter audit-committee oversight of remuneration matters;
• Disclosure of remuneration in BRSR (Business Responsibility and Sustainability Report);
• Voting-record disclosures on remuneration-related resolutions.

Stewardship and Shareholder Activism

Recent trends:

• Increased proxy-advisor scrutiny of executive pay (SES, IIAS);
• Institutional investor voting against excessive packages;
• Public-sector retirement funds' stewardship engagement;
• Foreign portfolio investor scrutiny via global proxy advisors;
• Civil society and media spotlight on CEO-employee pay ratios.

Part XII — Critical Evaluation

Strengths of the Indian Framework

• Statutory ceiling provides certainty and minimum standard;
• Schedule V framework offers predictable benchmarks for distressed companies;
• Recovery provision (Section 197(9)) provides a substantive remedy;
• Disclosure requirements are comprehensive;
• Audit committee and NRC oversight provides procedural rigour;
• Independent-director restrictions preserve oversight independence.

Areas of Concern

• Statutory ceiling may distort compensation packages (perverse compensation engineering);
• Effective capital threshold for Schedule V can be manipulated;
• Performance-linked remuneration may circumvent the ceiling through accounting choices;
• Recovery enforcement is administratively difficult;
• Independent-director sitting fees can be excessive in some companies;
• Disclosure of CEO-employee pay ratio remains an area of concern;
• Excessive flexibility for private companies (no Section 197 ceiling).

Direction of Future Reform

• Strengthening shareholder voting on remuneration (binding say-on-pay);
• Enhanced enforcement of recovery provisions;
• Better disclosure of beneficial ownership and remuneration paid to controlling shareholders;
• Integration with ESG/sustainability frameworks;
• Improved benchmarking against industry peers;
• Restrictions on excessive ratio of CEO-employee pay.

Part XIII — Exam-Focused Summary

Part XIV — Conclusion

Managerial remuneration regulation under Section 197 and Schedule V represents one of the most distinctive features of Indian corporate law. The 11% ceiling, the Schedule V framework for distressed companies, and the recovery provision under Section 197(9) collectively create a comprehensive regime that aims to constrain excessive executive pay while preserving sufficient flexibility to attract qualified managerial talent.

The 2017 amendment, by substantially replacing Central Government approval with special-resolution requirement, marked a significant liberalisation. The shift reflects a regulatory philosophy that shareholder oversight, supported by detailed disclosure, is more effective than government discretion in constraining remuneration excesses. Whether this confidence is justified — and whether the liberalised regime adequately protects minority shareholders from controlling-shareholder oppression through excessive related-party remuneration — remains an open empirical question.

For the judicial aspirant, mastery of the managerial-remuneration framework is essential. The framework intersects with multiple other areas — fiduciary duties, related-party transactions, disclosure obligations, shareholder rights, oppression and mismanagement. Cases involving Section 197(9) recovery, Schedule V applications, and LODR compliance form a substantial part of the practical jurisprudence. Key concepts — the 11% ceiling, the Section 198 calculation, Schedule V categorisations, recovery procedures, D&O insurance — are highly examinable. Combined with related thematic notes on Corporate Governance Framework, Director Duties, Related Party Transactions, and KMP Regime, this article provides comprehensive coverage of the contemporary managerial-remuneration jurisprudence in India.