Background

Section 197 of the Companies Act, 2013 (2013 Act) prescribes the conditions for overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits.  The Schedule V to the 2013 Act provides certain conditions to be fulfilled by a company to pay managerial remuneration. Schedule V consists of following four parts:

• Part I – Conditions to be fulfilled for the appointment of a manager or whole-time director or a manager without the approval of the central government.
• Part II – Remuneration
• Part III – Provisions applicable to Parts I and II  
• Part IV – The central government may, by notification, exempt any class or classes of companies from any of the requirements contain in Schedule V.

On 30 June 2016, the Ministry of Corporate Affairs (MCA) amended certain provisions relating to the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. These amendments are based on the recommendations in Companies Law Committee (CLC) report.

New development

On 12 September 2016, the central government notified amendments to Section II of Part II of the Schedule V of the 2013 Act. The notification is effective from the date of its publication in the Gazette i.e. 12 September 2016.

This issue of First Notes aims to provide an overview of the key amendments in Schedule V relating to remuneration payable by companies having no profit or inadequate profit without central government approval.

Overview of the amendments in limits on remuneration payable by companies having inadequate/no profit without central government approval

Currently Section II of Part II of the Schedule V of the 2013 Act prescribes that the remuneration to managerial personnel should not be paid in excess of specified limits when a company that has no profits or inadequate profits, may without central government approval. These limits have been revised and following sections explain the new requirements. 

• Limits in Section II of Part II
  

The amended limits for the companies (having inadequate/no profit to pay remuneration to the managerial personnel (without central government approval)) are as follows:

* Limits specified can be doubled if a special resolution is passed.

• New provision for the managerial personnel functioning in a professional capacity

If the managerial personnel is functioning in a professional capacity and possesses graduate level qualification with an expertise and specialised knowledge in the field in which the company operates then approval of the central government is not required if such managerial person, at any time during the last two years before or on after the date of appointment, does not have

• any interest in the capital of the company/its holding company/any of its subsidiaries directly or indirectly or through any other statutory structures and
• any direct/indirect interest or related to the directors/promoters of the company or its holding company/any of its subsidiaries.
  

The notification specifies that any employee of a company holding shares of the company not exceeding 0.5 per cent of its paid up share capital under any scheme formulated for the allotment of shares to such employees including Employees Stock Option Plan (ESOP) or by way of qualification shall be deemed to be a person not having any interest in the capital of the company.

• Other conditions to be fulfilled to apply the above limits
  

Following are the conditions which a company needs to satisfy to apply the above mentioned limits (in (A) and (B) section above)

• Resolution to be passed – Payment of remuneration should be approved by a resolution passed by the board and in the case of a company covered under Section 178(1) of the 2013 Act also by the Nomination and Remuneration Committee.
• Default in payment of any debt - A company has not committed any default in repayment of any of its debts (including public deposits) or debentures/interest payable thereon for a continuous period of 30 days in the preceding financial year before the date of appointment of such managerial person. In case of default, the  company obtains prior approval from secured creditors for the proposed  remuneration and the fact of such prior approval has been obtained and is mentioned in the explanatory statement to the notice convening the general meeting.
• Type of resolution: An ordinary resolution would be required to be passed for payment of remuneration as per limits mentioned above in (A) and a special resolution is required to be passed, if the limits specified above in (A) are to be doubled, at the general meeting of the company for a period not exceeding three years A special resolution is required to be passed for payment of remuneration as specified in (B) above, at the general meeting of the company for a period not exceeding three years.      

• Notice: A statement along with a notice calling the general meeting should be given to the shareholders containing the information prescribed in the notification.

(Emphasis added to the amendments added by the recent notification)

• The MCA has removed one requirement

The MCA through its notification has removed the following requirement:

‘in the case of a managerial person who was not a security holder holding securities of the company of nominal value of INR5 lakh 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 per cent of the current relevant profit:

Provided that if the resolution passed by the shareholders is a special resolution, this limit shall be doubled:

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

• Payment of remuneration is approved by a resolution passed by the Board and in the case of a company under Section 187(1) also by the Nomination and Remuneration Committee    
• 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 30 days in the preceding financial year before the date of appointment of such managerial person
• A special resolution has been passed at the general meeting of the company for payment of remuneration for a period not exceeding three years
• A statement along with a notice calling the general meeting referred to in clause (iii) is given to the shareholders, containing the specified information.’

Our Comments

• International benchmarking

The Companies Law Committee (CLC) was constituted on 4 June 2015 to examine and make recommendations to the government on the issues arising out of implementation of the 2013 Act. The CLC submitted its report to the government on 1 February 2016 and recommended amendments to both the 2013 Act and the Rules to the 2013 Act. The CLC in its report
had made recommendations to amend the managerial remuneration limits specified in the Schedule V of the 2013 Act.  These recommendations were made after comparing managerial remuneration levels in other countries.  It also recommended to substitute special resolution by shareholders with an ordinary resolution in certain cases.

The MCA has considered these suggestions made by the CLC and has amended the Schedule V.

• Approval from secured creditors in case of default in repayment of debt

The revised Schedule V adds a new requirement for payment of managerial remuneration.  It requires a company with no profits or inadequate profits to obtain approval from secured creditors if the company defaults in repayment of its debts or interest payable, for a continuous period of 30 days in the preceding financial year before the date of appointment of such managerial person.

• Special resolution required only in two cases

Before amendment, managerial remuneration could be paid by a company, that does not have any profit or inadequate profit, within the limits specified in Schedule V if a special resolution was passed.

Now managerial remuneration within the limits specified can be paid by passing an ordinary resolution. However, to double the limit specified in Schedule V, a company would have to pass a special resolution.

In the case, managerial personnel is functioning in a professional capacity, then to pay managerial remuneration to such an individual, when company has no profits or inadequate profits, a special resolution has to be passed.

To access the text of the MCA notification, please click here.