Section 197 of the Companies Act, 2013 ("the Act") constructs a three-tier ceiling on managerial remuneration. The ceiling is computed as a percentage of net profits, and the percentages are not uniform across categories of managerial personnel. The provision is not a mere disclosure requirement; it is a substantive limit, and payments in excess of the limit without the prescribed approval are liable to be refunded.
The Three Tiers of the Ceiling
The overall ceiling for a public company is eleven per cent of the net profits for the financial year, computed in the manner laid down in Section 198. Within this overall ceiling, the remuneration payable to any one managing director, whole-time director, or manager shall not exceed five per cent of the net profits. If there is more than one such director, the aggregate remuneration to all of them together shall not exceed ten per cent. The remuneration payable to non-executive directors—including independent directors—shall not exceed one per cent of the net profits if there is a managing or whole-time director, and three per cent if there is none.
These percentages are exclusive of the fees payable to directors for attending board or committee meetings, which are governed by Section 197(5) and are subject to the limits prescribed by the rules. A director may also receive remuneration for professional services rendered in a separate capacity, provided the services are of a professional nature and the Nomination and Remuneration Committee (or the Board, where the company is not covered by Section 178) is of the opinion that the director possesses the requisite qualification.
The Schedule V Route: No Profits or Inadequate Profits
Where a company has no profits or its profits are inadequate in any financial year, Section 197(3) prohibits the payment of remuneration to directors except in accordance with Schedule V. Schedule V prescribes the conditions, including the approval of the company in general meeting by a special resolution, and, in certain cases, the approval of the Central Government. The Schedule V route is not a blanket permission; it is a conditional exception, and the conditions must be satisfied on a year-to-year basis.
The most litigated issue is the distinction between the approval required for remuneration exceeding the Section 197(1) ceiling and the approval required for remuneration under Schedule V where there are no profits or inadequate profits. The former requires a special resolution; the latter requires compliance with Schedule V, which may itself require a special resolution and, in certain cases, Central Government approval.
The Refund Consequence
Section 197(9) provides that any remuneration paid in excess of the limits specified in Section 197, without the requisite approval, shall be refunded to the company. Section 197(10) makes the director or manager who received the excess remuneration liable to refund it, and the company may recover it as a debt. The refund obligation is not discretionary; it is a statutory consequence, and it applies even where the excess payment was made in good faith.
A compliant remuneration structure requires a net profit computation that is audited and documented, a board resolution that identifies the specific statutory basis for the payment, and a shareholder resolution that uses the correct threshold. A remuneration package that is structured without these elements is a contingent liability.
Call to Action
Anuj Desai & Associates advises boards, Nomination and Remuneration Committees, and managerial personnel on the Section 197 ceiling structure, the Schedule V route, and the refund consequences of excess payment. If your company is structuring a managerial remuneration package, seeking shareholder approval for an excess payment, or remediating a remuneration default, we can help you build a defensible record.
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