THE LEGAL BRIDGE

Judiciary & Law Notes Series

THE COMPANIES ACT, 2013

CHAPTER XIII

Appointment and Remuneration of Managerial Personnel

Sections 196–205

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MD/WTD • 11% Ceiling • KMPs • Secretarial Audit

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Chapter XIII — Appointment and Remuneration of Managerial Personnel

Chapter XIII (Sections 196 to 205) addresses the apex layer of a company's human structure — the managing director, whole-time director, manager, and other key managerial personnel — including the conditions of their appointment, the ceiling on their remuneration, disclosures, and the functions of the company secretary. These provisions exist to balance three competing interests: to attract high-quality managerial talent, to protect shareholders from self-enrichment by insiders, and to ensure that every company has accountable officers for compliance.

Section 196 — Appointment of Managing Director, Whole-Time Director or Manager

(1) Two of Three Positions Prohibited

No company shall appoint or employ at the same time a managing director and a manager. No company shall appoint or re-appoint any person as its managing director, whole-time director, or manager for a term exceeding five years at a time. No re-appointment shall be made earlier than one year before the expiry of his term.

(3) Disqualifications for Appointment

No company shall appoint or continue the employment of any person as managing director, whole-time director, or manager who —

1. Is below the age of 21 years or has attained the age of 70 years — provided that appointment of a person who has attained the age of seventy years may be made by passing a special resolution in which case the explanatory statement annexed to the notice for such motion shall indicate the justification for appointing such person;Is an undischarged insolvent or has at any time been adjudged as an insolvent;Has at any time suspended payment to his creditors or makes, or has at any time made, a composition with them; orHas at any time been convicted by a court of an offence and sentenced for a period of more than six months.

(4) Procedure for Appointment

Subject to the provisions of Section 197 and Schedule V, a managing director, whole-time director, or manager shall be appointed and the terms and conditions of such appointment and remuneration payable be approved by the Board of Directors at a meeting which shall be subject to approval by a resolution at the next general meeting of the company and by the Central Government in case such appointment is at variance with the conditions specified in Part I of Schedule V.

A return in Form MR-1 in the prescribed form must be filed within sixty days of such appointment with the Registrar.

Section 197 — Overall Maximum Managerial Remuneration

(1) Ceiling for Public Companies

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.

The company in general meeting may, with the approval of the Central Government, authorise the payment of remuneration exceeding 11% of the net profits of the company, subject to the provisions of Schedule V. The company may by special resolution authorise the payment of remuneration exceeding 11% of the net profits of the company.

Sub-Ceilings

(3) Inadequate or No Profits

Notwithstanding anything contained in sub-sections (1) and (2), but subject to the provisions of Schedule V, if, in any financial year, a company has no profits or its profits are inadequate, the company shall not pay to its directors, including any managing or whole-time director or manager, by way of remuneration any sum exclusive of any fees payable to directors except in accordance with the provisions of Schedule V.

(5) Sitting Fees

A director may receive remuneration by way of fee for attending meetings of the Board or Committee thereof or for any other purpose whatsoever as may be decided by the Board — provided that the amount of such fees shall not exceed the amount as may be prescribed. Current ceiling: ₹1,00,000 per meeting per director. The sitting fees shall not form part of the overall ceiling of 11% of net profits.

(7) Independent Director — No Stock Options

Notwithstanding anything contained in this section, an independent director shall not be entitled to any stock option and may receive remuneration by way of fees provided under sub-section (5), reimbursement of expenses for participation in the Board and other meetings and profit related commission as may be approved by the members.

(10) Recovery of Excess Remuneration

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 Central Government, where it is required, he shall refund such sums to the company, within two years or such lesser period as may be allowed by the company, and until such sum is refunded, hold it in trust for the company.

Section 198 — Calculation of Profits

In computing the net profits of a company in any financial year for the purpose of Section 197 —

• Credit shall be given for the sums specified in sub-section (2) (bounties and subsidies received from any Government, or any public authority, unless directed otherwise by the Government);
• Credit shall not be given for sums specified in sub-section (3) (profits on premium on shares or debentures, profits on sale of undertaking, unrealised gain on revaluation, etc.);
• The sums specified in sub-section (4) shall be deducted (all usual working charges, director's remuneration, bonuses, tax on profits, interest on debentures issued, interest on loans, etc.);
• The sums specified in sub-section (5) shall not be deducted (income tax, capital loss on sale of undertaking, voluntary compensation paid to employees in excess of gratuity, debts considered bad, loss of capital nature).

Section 199 — Recovery of Remuneration in Certain Cases (Clawback)

Without prejudice to any liability incurred under the provisions of this Act or any other law for the time being in force, where a company is required to re-state its financial statements due to fraud or non-compliance with any requirement under this Act and the rules made thereunder, the company shall recover from any past or present managing director or whole-time director or manager or Chief Executive Officer (by whatever name called) who, during the period for which the financial statements are required to be re-stated, received the remuneration (including stock option) in excess of what would have been payable to him as per restatement of financial statements.

Section 200 — Central Government or Company to Fix Limit with Regard to Remuneration

Notwithstanding anything contained in this Chapter, the Central Government or a company may, while according its approval under Section 196, to any appointment or to any remuneration under section 197 in respect of cases where the company has inadequate or no profits, fix the remuneration within the limits specified in this Act, at such amount or percentage of profits of the company, as it may deem fit and while fixing the remuneration, the Central Government or the company shall have regard to —

1. The financial position of the company;The remuneration or commission drawn by the individual concerned in any other capacity;The remuneration or commission drawn by him from any other company;Professional qualifications and experience of the individual concerned;Such other matters as may be prescribed.

Section 201 — Forms of, and Procedure in Relation to, Certain Applications

Every application made to the Central Government under this Chapter shall be in such form as may be prescribed. Before any application is made by a company to the Central Government, there shall be issued, by or on behalf of the company, a general notice to the members thereof indicating the nature of the application proposed to be made. Such notice shall be published at least once in a newspaper in the principal language of the district in which the registered office of the company is situated and circulating in that district, and at least once in English in an English newspaper circulating in that district. Copies of the notices shall also be furnished to each of the stock exchanges in which the shares of the company are listed.

Section 202 — Compensation for Loss of Office of Managing or Whole-Time Director or Manager

A company may make payment to a managing or whole-time director or manager, but not to any other director, by way of compensation for loss of office, or as consideration for retirement from office or in connection with such loss or retirement.

No payment shall be made to such director in the following cases:

1. Where the director resigns from his office as a result of the reconstruction of the company, or of its amalgamation with any other body corporate or bodies corporate, and is appointed as the managing or whole-time director, manager, or other officer of the reconstructed company or of the body corporate resulting from the amalgamation;Where the director resigns from his office otherwise than on the reconstruction of the company or its amalgamation;Where the office of the director is vacated under sub-section (1) of section 167;Where the company is being wound up, whether by an order of the Tribunal or voluntarily, provided the winding up was due to the negligence or default of the director;Where the director has been guilty of fraud or breach of trust in relation to, or of gross negligence in or gross mismanagement of, the conduct of the affairs of the company or any subsidiary company or holding company thereof; andWhere the director has instigated, or has taken part directly or indirectly in bringing about, the termination of his office.

Ceiling: Any payment made under sub-section (1) to a managing or whole-time director or manager shall not exceed the remuneration which he would have earned if he had been in office for the remainder of his term, or for three years, whichever is shorter.

Section 203 — Appointment of Key Managerial Personnel (KMP)

Every company belonging to such class or classes of companies as may be prescribed shall have the following whole-time key managerial personnel:

1. Managing Director, or Chief Executive Officer or manager and in their absence, a whole-time director;Company Secretary; andChief Financial Officer.

Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 prescribes that every listed company and every other public company having paid-up share capital of ₹10 crore or more shall have the aforesaid whole-time KMPs. Further, every private company with paid-up share capital of ₹10 crore or more shall have a whole-time company secretary (Rule 8A).

Additional Provisions under Section 203

• Every whole-time KMP of a company shall be appointed by means of a resolution of the Board containing the terms and conditions of the appointment including the remuneration.
• A whole-time KMP shall not hold office in more than one company except in its subsidiary company at the same time.
• An individual cannot be appointed or reappointed as the Chairperson of the company as well as the managing director or Chief Executive Officer of the company at the same time (with exceptions).
• If the office of any whole-time KMP is vacated, the resulting vacancy shall be filled up by the Board at a meeting of the Board within a period of six months from the date of such vacancy.

Section 204 — Secretarial Audit for Bigger Companies

Every listed company and a company belonging to other class of companies as may be prescribed shall annex with its Board's report a secretarial audit report, given by a company secretary in practice, in such form as may be prescribed. Rule 9 prescribes the following companies must obtain secretarial audit:

• Every public company having a paid-up share capital of ₹50 crore or more; or
• Every public company having a turnover of ₹250 crore or more; or
• Every company having outstanding loans or borrowings from banks or public financial institutions of ₹100 crore or more.

The Board of Directors, in their report made in terms of sub-section (3) of section 134, shall explain in full any qualification or observation or other remarks made by the company secretary in practice in his report.

Section 205 — Functions of Company Secretary

The functions of the company secretary shall include, —

1. To report to the Board about compliance with the provisions of this Act, the rules made thereunder and other laws applicable to the company;To ensure that the company complies with the applicable secretarial standards;To discharge such other duties as may be prescribed.

The expression 'secretarial standards' means secretarial standards issued by the Institute of Company Secretaries of India constituted under section 3 of the Company Secretaries Act, 1980 and approved by the Central Government. Currently, SS-1 (Meetings of Board of Directors) and SS-2 (General Meetings) are mandatory.

Other Duties Prescribed (Rule 10 of MR Rules)

• To provide to the directors of the company, collectively and individually, such guidance as they may require, with regard to their duties, responsibilities, and powers;
• To facilitate the convening of meetings and attend Board, committee, and general meetings, and maintain the minutes of these meetings;
• To obtain approvals from the Board, general meeting, the government, and such other authorities as required;
• To represent before various regulators and other authorities under the Act in connection with discharge of various duties under the Act;
• To assist the Board in the conduct of the affairs of the company;
• To assist and advise the Board in ensuring good corporate governance and in complying with the corporate governance requirements and best practices; and
• To discharge such other duties as have been specified under the Act or Rules; and such other duties as may be assigned by the Board from time to time.