The Board of Directors of a Company play a vital role in managing the activities of a Company. As employees of an organisation are paid remuneration, the Directors of a Company are also paid remunertaion. But such remuneration paid to the Directors has certain limits and restrictions. The conditions to be followed and the compliances to be made by a Company for payment of managerial remuneration has been dealt with under various sections of the Companies Act like Section 198,269, 309,314, Schedule XIII etc.The Companies Act clearly describes the limits and the quantum of remuneration to be paid under various situations of the Company. For Eg:
- the maximum amount of remunertion payable, when a Company has profits
-When there are no profits or there are insufficient profits.
-remunertaion payable depending on the nature of Directorship ie Whole Time Director, Non Whole Time Director etc.
The managerial remuneration payable to the Directors of a Company in 2 situations has been explained briefly:
(i) When there are profits:
Limit on % of net profits payable to Whole time /Managing Director:
The total managerial remuneration payable by a public company or a private company which is a subsidiary of a public Company, to its directors in respect of any financial year shall not exceed 11% of the net profits of that Company for that financial year.
This percentage shall be exclusive of any fees payable to directors, by way of fee for each meeting of the Board or of a committee attended by him.
A director who is either in whole time employment of the Company or a managing director may be paid remuneration either by way of a monthly payment or at a specified percentage of the net profits of the Company or partly by one way and partly by the other.
If a Company pays remuneration by way of percentage of net profits, then such payment shall not exceed 5% of the net profits for one such director and if there is more than one such director, 10% for all of them put together.
Limit on % of net profits payable to Non whole Time Director:
A director who is neither in whole time employment of the Company nor a managing may be paid remuneration in 2 ways:
-by way of a monthly, quarterly or annual payment with the approval of the Central Government.
-by way of commission if the Company if the Company by special resolution authorizes such payment.
If the remuneration paid to such director is by way of commission on the net profits it shall not exceed-
-1% of the net profits of the Company (for all of them put together), if the Company, if the Company has a managing or whole Time Director;
-3% in any other case.
(This payment of 1% and 3% may be increased by the Company in general meeting and with the approval of the Central Government)
(ii) When there is no profit or inadequacy of profits:
If in any financial year ,the Company has no profits or its profits are inadequate, the Company shall not pay to its directors, including any managing or whole time director, by way of remuneration any sum (excluding sitting fees payable for any meeting), except with the previous approval of the Central Government. Every application seeking approval shall be made to the Central Government within a period of ninety days from the date of such appointment.
If the appointment of a person as a managing or whole time director is not approved by the Central Government, the person so appointed shall vacate his office as such Managing or whole time director on the date on which the decision of the Central Government is communicated to the Company.
However the Company need not obtain the previous approval of the Central Government, if the remuneration payable to the managerial personnel is within the limits specified in Schedule XIII of the Companies Act, 1956.
Part II of Schedule XIII specified the limits within which the remuneration shall be payable. This ceiling limit of remuneration payable depends upon the effective capital of the Company.
Effective capital means the aggregate of the paid up share capital, share premium if any, reserves and surplus (excluding revaluation reserve), long term loans and deposits payable after one year (excluding working capital loans, overdrafts, interest due on loans unless funded, bank guarantee, etc, and other short term arrangements) as reduced by the aggregate of any investments, accumulates losses and preliminary expenses written off.
The effective capital shall be calculated as on the last date of the financial year preceeding the financial year in which the appointment of the managerial person is made.
For eg: If the effective capital of the Company is Rs.100 crores or more, then it may pay a monthly remuneration of upto Rs.2,00,000/-, and approved by a resolution passed by the remuneration committee.