Summary:
MCA has issued Notification on March 18, 2021 in relation to amendment in Schedule V of Companies Act, 2013.
Schedule V, states about the Remuneration to ‘Remuneration to Managerial Person’. According to Schedule V, in case company has no profit or its profit are inadequate in such case Company can pay remuneration to managerial person as per provisions of Schedule V.
Managerial Person means, Managing Director, Whole Time Director and Manager.
There was no provisions under Companies Act 2013 for payment to Non-executive Director in case of company has no profit or inadequate profit. MCA took up this issue and made amendment in provisions of schedule V by this notification.
In this editorial, author shall discuss about the amendment made through this notification and impact of such amendment on Companies.
Provisions before amendment
PART II: – REMUNERATION
Section I.— Remuneration payable by companies having profits:
Subject to the provisions of section 197, a company having profits in a financial year may pay remuneration to a managerial person or persons not exceeding the limits specified in such section.
Section II.— Remuneration payable by companies having no profit or inadequate profit
without Central Government approval:
Where in any financial year during the currency of tenure of a managerial person, a company has no profits or its profits are inadequate, it may, without Central Government approval, pay remuneration to the managerial person not exceeding the higher of the limits as mentioned here in law ….
Amendment Made:
(a) in Section I, in the first para, after the words ―managerial person or persons‖, the words ―or other director or directors‖ shall be inserted;
(b) in Section II, (i) after the words ―managerial person‖, wherever occurred, the words ―or other director‖ shall be inserted;
Provisions after amendment
PART II: – REMUNERATION
Section I.— Remuneration payable by companies having profits:
Subject to the provisions of section 197, a company having profits in a financial year may pay remuneration to a managerial person or persons or other director not exceeding the limits specified in such section.
Section II.— Remuneration payable by companies having no profit or inadequate profit
without Central Government approval:
Where in any financial year during the currency of tenure of a managerial person or other director, a company has no profits or its profits are inadequate, it may, without Central Government approval, pay remuneration to the managerial person or other director not exceeding the higher of the limits as mentioned here in law ….
Question for discussion:
As per provisions of Section 197, 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 eleven per cent. of the net profits of that company for that financial year.
Therefore, if Company wants to give remuneration to Managerial Person more than 11% of net profit they have to follow process mentioned under Schedule V.
Till now, there was no provision in the Companies Act that allowed a remuneration for the non-executive director if the company was in loss or had inadequate profits. only the executive director was entitled for a remuneration in the event of a loss.
As corporates felt that due to the responsibilities of Non-executive directors, it was important that they were appropriately remunerated even in case of loss or inadequate profit.
Impact of Amendment
Note: Provisions relating to Part II of Schedule V is not applicable on Private Limited Company. Therefore, these amendments shall impact only to Public Limited Companies.
As per above mentioned amendment, following shall be impact:
Remuneration to Non-executive Director:
MCA has made amendment and cover non-executive directors also in Part II of Schedule V. As per this amendment, even if a company is in loss or having inadequate profit, they can pay remuneration to Non-executive Directors upto following limits:
The above-mentioned limits can be extended to any amount by passing of Share Holder special resolution in General Meeting.
Remuneration to Independent Director:
MCA has made amendment and cover Independent Director also in Part II of Schedule V.
As due to increase in responsibilities of independent directors, it was important that they were appropriately remunerated.
However, as per Rule 4 of the company’s appointment and remuneration of managerial personnel 2014 say that the sitting fees to an independent director or a director would not exceed for a sum of Rs 100,000 per meeting. At the lowest slab of Rs 12 lakh a year independent directors (in amended rules) could still draw thrice the amount that would have been payable for four board meetings in a year.
The limit of remuneration for ID shall be same as mentioned above for non-executive directors.
Conclusion:
Government has created a way to compensate non-executive or independent directors of companies, which are loss-making or have inadequate profits.
However, there is one issue in this amendment i.e. independent directors should not be treated as full time employees and be entitled to a remuneration other than the sitting fees. “The fees paid to independent directors for attending board meetings is fair compensation. Anything other than that means you are treating executive and non-executive in the same way