Schedule V under Companies Act, 2013

Schedule V under Companies Act, 2013

Conditions for Appointment and payment of remuneration of managerial personnel

PART – I (APPOINTMENTS)

Appointment of Managing Director or Whole Time Director or a manager without the approval of the Central Government.

Person shall not be appointed as a Managing Director or Whole Time Director or a Manager of a Company unless he satisfied the following conditions;

A.      He had not been sentenced to imprisonment for any period, or to a fine exceeding Rupees 1000/- for the conviction of an offence under any of the following Acts,

1.       The Indian Stamp Act, 1899

2.       The Central Excise Act, 1944

3.       IDRA, 1951

4.       The essential commodities Act, 1955

5.       The prevention of Food Adulteration Act, 1954

6.       The Companies Act, 2013

7.       The Competition Act, 2002

8.       The Customs Act, 1962

9.       The Income Tax Act, 1961

10.   SCRA, 1956

11.   FEMA, 1999

12.   The SICA, 1985

13.   The SEBI Act, 1992

14.   PMLA, 2002

B.      He had not been detained for any period under the conservation of foreign exchange and prevention of smuggling Act, 1974

Provided where the central Government has given its approval to the appointment of a person convicted or detained above (A or B), as the case may be, no further approval of Central Government shall be necessary for the subsequent appointment of that person if he had not been so convicted or detained  subsequent to such approval.

C.      At least 21 years old and has not attend the age of 70 Years.

But company by passing special resolution in General Meeting appoint a person who attained the age of 70 Years, no further approval of Central Government shall be necessary for such appointment;

D.      If he is a Managerial person in more than One Company, draw remuneration from one or more companies subject to the ceiling provided in section V of Part II

E.       He is resident of India

Resident is India Includes a person who has been staying in India for a continuous period of not less than 12 Month immediately preceding the date of his appointment as a managerial person and who has come to stay in India;

i)                    For taking up employment in India or;

ii)                   For carrying on a business or vacation in India

Note: This condition shall not apply to companies in SEZ as notified by DOC from time to time.

I would like to discuss the provision of section 197 of the Companies Act, 2013 before starting the Part II of Schedule V

Overall Managerial Remuneration and Managerial remuneration in case of absence or inadequacy of profits 197(1).

197(3); In any financial year Company has no profit or its profits are inadequate, the company shall not pay to its Directors, including any MD, WTD, or Manager by way of remuneration any sum exclusive of any fees payable to Directors under sub section 5 i.e Sitting fees hereunder except in accordance with the provisions of SCHEDULE V and if it s not able to company to such provisions with the previous approval of CG in Form No – (MR – 2).

(PART - II REMUNERATION)

Section: 1 – Remuneration Payable by companies having Profits:

Subject to the Provisions of Section 197, a company having profit in a Financial Year may pay remuneration to managerial Person not exceeding the limit specified in section 197 of the Companies Act, 2013.

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 the 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 limit given below:-

(A):

	1	2
	Where the effective Capital is: (Means of Effective Capital: Aggregate of the Paid up Share capital + Share premium Account + reserve and Surplus (excluding revaluation reserve) + long term loans and deposit repayable after one Year (excluding working capital loans, over drafts, interest due on loans unless funded, bank Guarantee, etc. And other short term arrangement) – aggregate of the Investment (except investment company whose principle business is acquisition of shares, stock, debenture, or other securities), + Accumulated Loss + Preliminary Expenses not written off.	Limit of yearly remuneration payable shall not exceed (Rs.)
1	Negative or Less than 5 Crores	30 Lakhs
2	5 Crores and above but less than 100 Crores	42 Lakhs
3	100 Crores and above but less than 250 Crores	60 Lakhs
4	250 Crores and above	60 Lakhs + 0.01% of the effective capital in excess of Rs. 250 Crores:

Provided above limits shall be doubled if the resolution passed by the shareholders in General Meeting by Special Resolution.

(B). In the case of Managerial Person who was not a security holder holding security of the company of Nominal value of Rs. 500000/- or more or an employee or a director of the Company or not related to any director or promoter at any time during the two years prior to his appointment as a managerial person, - 2.5 % of the Current relevant Profit ( profit calculated under section 198 but without deducting the excess of expenditure over income referred to in subsection 4(I) of section 198 of Act  thereof in respect of those years during which the managerial person was not an employee, Director or shareholder of the company or its holding or subsidiary Companies)

Provided above limits shall be doubled if the resolution passed by the shareholders in General Meeting by Special Resolution.

Means of inadequate profit:-

Suppose profit of a company in F.Y 2014-15 Was Rs. 10,000,000/-

Remuneration of two M.D is Rs. 10,00,000/- (i.e. 10%) then remuneration is within limit so, everything is fine

Suppose in F.Y 2015-16 is Rs. 90,00,000/-

Remuneration of Two MD is Rs. 10,00,000/-  (i.e. 11.25%) then its exceed the limit so, we can say profit is inadequate.

Provided further that the limits specified under this section shall apply, if—

(i) Payment of remuneration is approved by a resolution passed by the Board and, in the case of a company covered under sub-section (1) of section 178 also by the Nomination and Remuneration Committee;

(ii) the company has not made any default in repayment of any of its debts (including public deposits) or debentures or interest payable thereon for a continuous period of thirty days in the preceding financial year before the date of appointment of such managerial person;

(iii) a special resolution has been passed at the general meeting of the company for payment of remuneration for a period not exceeding three years;

(iv) a statement along with a notice calling the general meeting referred to in clause (iii) is given to the shareholders containing the following information, namely:—

I. General Information:

(1) Nature of industry

(2) Date or expected date of commencement of commercial production

(3) In case of new companies, expected date of commencement of activities as per project approved by financial institutions appearing in the prospectus

(4) Financial performance based on given indicators

(5) Foreign investments or collaborations, if any.

II. Information about the appointee:

(1) Background details

(2) Past remuneration

(3) Recognition or awards

(4) Job profile and his suitability

(5) Remuneration proposed

(6) Comparative remuneration profile with respect to industry, size of the company, profile of the position and person (in case of expatriates the relevant details would be with respect to the country of his origin)

(7) Pecuniary relationship directly or indirectly with the company, or relationship with the managerial personnel, if any.

III. Other information:

(1) Reasons of loss or inadequate profits

(2) Steps taken or proposed to be taken for improvement

(3) Expected increase in productivity and profits in measurable terms.

IV. Disclosures:

The following disclosures shall be mentioned in the Board of Director’s report under the heading “Corporate Governance”, if any, attached to the financial statement:—

i.                     All elements of remuneration package such as salary, benefits, bonuses, stock options, pension, etc., of all the directors;

ii.                   Details of fixed component and performance linked incentives along with the performance criteria;

iii.                  Service contracts, notice period, severance fees;

iv.                 Stock option details, if any, and whether the same has been issued at a discount as well as the period over which accrued and over which exercisable.

Section III. — Remuneration payable by companies having no profit or inadequate profit without Central Government approval in certain special circumstances:

In the following circumstances a company may, without the Central Government approval, pay remuneration to a managerial person in excess of the amounts provided in Section II above:—

(a)  where the remuneration in excess of the limits specified in Section I or II is paid by any other company and that other company is either a foreign company or has got the approval of its shareholders in general meeting to make such payment, and treats this amount as managerial remuneration for the purpose of section 197 and the total managerial remuneration payable by such other company to its managerial persons including such amount or amounts is within permissible limits under section 197.

(b)  Where the company—

(i) Is a newly incorporated company, for a period of seven years from the date of its incorporation, or

(ii) Is a sick company, for whom a scheme of revival or rehabilitation has been ordered by the Board for Industrial and Financial Reconstruction or National Company Law Tribunal, for a period of five years from the date of sanction of scheme of revival, it may pay remuneration up to two times the amount permissible under Section II.

(c) Where remuneration of a managerial person exceeds the limits in Section II but the remuneration has been fixed by the Board for Industrial and Financial Reconstruction or the National Company Law Tribunal:

Provided that the limits under this Section shall be applicable subject to meeting all the conditions specified under Section II and the following additional conditions:—

(i) Except as provided in Para (a) of this Section, the managerial person is not receiving remuneration from any other company;

(ii) The auditor or Company Secretary of the company or where the company has not appointed a Secretary, a Secretary in whole-time practice, certifies that all secured creditors and term lenders have stated in writing that they have no objection for the appointment of the managerial person as well as the quantum of remuneration and such certificate is filed along with the return as prescribed under sub-section (4) of section 196.

(iii) The auditor or Company Secretary or where the company has not appointed a secretary, a secretary in whole-time practice certifies that there is no default on payments to any creditors, and all dues to deposit holders are being settled on time.

(d) A company in a Special Economic Zone as notified by Department of Commerce from time to time which has not raised any money by public issue of shares or debentures in India, and has not made any default in India in repayment of any of its debts (including public deposits) or debentures or interest payable thereon for a continuous period of thirty days in any financial year, may pay remuneration up to Rs. 2,40,00,000/- pa

Section IV. — Perquisites not included in managerial remuneration:

1.  A managerial person shall be eligible for the following perquisites which shall not be included in the computation of the ceiling on remuneration specified in Section II and Section III:—

(a). Contribution to provident fund, superannuation fund or annuity fund to the extent these either singly or put together are not taxable under the Income-tax Act, 1961;

(b) Gratuity payable at a rate not exceeding half a month’s salary for each completed year of service; and

(c) Encashment of leave at the end of the tenure.

2. In addition to the perquisites specified in paragraph 1 of this section, an expatriate managerial person (including a non-resident Indian) shall be eligible to the following perquisites which shall not be included in the computation of the ceiling on remuneration specified in Section II or Section III—

a. Children’s education allowance: In case of children studying in or outside India, an allowance limited to a maximum of Rs. 12,000 per month per child or actual expenses incurred, whichever is less. Such allowance is admissible up to a maximum of two children.

(b) Holiday passage for children studying outside India or family staying abroad: Return holiday passage once in a year by economy class or once in two years by first class to children and to the members of the family from the place of their study or stay abroad to India if they are not residing in India, with the managerial person.

(c) Leave travel concession: Return passage for self and family in accordance with the rules specified by the company where it is proposed that the leave be spent in home country instead of anywhere in India.

Section V. —Remuneration payable to a managerial person in two companies:

Subject to the provisions of sections I to IV, a managerial person shall draw remuneration from one or both companies, provided that the total remuneration drawn from the companies does not exceed the higher maximum limit admissible from any one of the companies of which he is a managerial person.

PART III (Provisions applicable to Parts I and II of this Schedule)

1. The appointment and remuneration referred to in Part I and Part II of this Schedule shall be subject to approval by a resolution of the shareholders in general meeting.

2. The auditor or the Secretary of the company or where the company is not required to appointed a Secretary, a Secretary in whole-time practice shall certify that the requirement of this Schedule have been complied with and such certificate shall be incorporated in the return filed with the Registrar under sub-section (4) of section 196.

PART IV

The Central Government may, by notification, exempt any class or classes of companies from any of the requirements contained in this Schedule.